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United States
Securities and Exchange Commission
Washington D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required) For the Fiscal Year Ended December
31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Not Required) For the Transition Period From
_________ to __________.
Commission File Number: 0-28402
ARADIGM CORPORATION
California 94-3133088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26219 Eden Landing Road, Hayward, CA 94545
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 783-0100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
As of January 31, 1997, there were 10,214,057 shares of common stock
outstanding. The aggregate market value of voting stock held by non-
affiliates of the Registrant was approximately $53,631,000 based upon the
closing price of the common stock on January 31, 1997 on The Nasdaq Stock
Market. Shares of common stock held by each officer, director and holder
of five percent or more of the outstanding Common stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for the 1997 Annual
Meeting of Shareholders to be filed with the Securities and Exchange
Commission not later than 120 days after the close of the Registrant's
fiscal year are incorporated into Part III of this Form 10-K.
PART I
Item 1. BUSINESS
This Report on Form 10-K contains forward-looking statements,
including, without limitation, statements regarding timing and results of
clinical trials, the establishment of corporate partnering arrangements,
the anticipated commercial introduction of the Company's products and the
timing of the Company's cash requirements. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those in such forward-looking statements. Potential
risks and uncertainties include, without limitation, those mentioned in
this report and in particular, the factors described below in Part II,
under heading "Risk Factors".
Overview
Aradigm Corporation (the "Company" or "Aradigm") is engaged in the
development of novel, hand-held pulmonary drug delivery systems designed to
enhance the delivery and effectiveness of a number of existing and
development stage drugs and reduce the need for injectable drug therapy.
Subject to applicable regulatory clearances and approvals, Aradigm plans to
commercialize its proprietary technologies on two product platforms: (i)
the SmartMist system, which is designed to improve the effectiveness of
metered dose inhalers, such as those used to deliver asthma medications,
and (ii) the AERx system, which creates aerosols from liquid drug
formulations for delivery locally to the lung or into the blood stream via
the lung. The Company believes that its systems, if successfully developed
and approved or cleared for marketing, can be used to deliver existing
drugs for a variety of applications, including the treatment of respiratory
diseases, pain management and diabetes management, as well as to deliver
imaging agents for certain lung diagnostic applications. In addition,
Aradigm's potential products may offer a promising means of delivery for
new drugs under development by pharmaceutical and biotechnology companies.
Aradigm's lead SmartMist product under development is the SmartMist
Asthma Management System. In May 1996, the Company obtained 510(k)
clearance from the FDA of the initial version of its SmartMist Asthma
Management System and expects to complete development and commence
marketing of the commercial version of the SmartMist Asthma Management
System during 1997. There can be no assurance that the Company will be able
to develop and market successfully the commercial version of the SmartMist
Asthma Management System or that changes made during such development will
not necessitate the submission of a second 510(k) notice. The Company's
lead AERx product under development is the AERx Pain Management System
which is designed to deliver morphine systemically by inhalation for the
treatment of pain. The Company filed an Investigational New Drug ("IND")
application for acute pain management with the FDA in February 1996 and
completed Phase I of the clinical process in December 1996. The Company
also has commenced early clinical studies of its AERx system for the
delivery of insulin and a pulmonary diagnostic imaging agent. The Company
believes that its products under development may improve the management of
certain diseases by reducing the cost of therapy, enhancing patient
management and compliance and providing an improved means to administer
drugs outside of the hospital setting.
The Company's plans and intentions with respect to the development and
commercialization of its technologies are subject to a number of risks and
uncertainties. There can be no assurance that the Company can obtain
required regulatory clearances and approvals or that the Company will be
able to develop and commercialize successfully any of its potential
products.
Background
Pulmonary Drug Delivery
Pulmonary drug delivery is widely used to treat respiratory diseases
by delivering pharmaceuticals locally to the lung and may have utility in
the delivery of drugs for systemic application by using the lung's natural
ability to transfer molecules into the blood stream. Pulmonary delivery of
drugs for the treatment of respiratory diseases has proven desirable
because topical application to affected lung tissues promotes a rapid
therapeutic effect and minimizes the side effects of several important
pulmonary drugs. The potential for pulmonary delivery to the blood stream
for systemic effect offers a non-invasive alternative to injection that may
achieve a more rapid speed of onset and superior bioavailability than has
been shown with other approaches, such as oral, transdermal or nasal
delivery. Speed of onset is an important therapeutic element for drugs such
as morphine for pain management and insulin for diabetes.
The respiratory system starts with the branching of the trachea into
two mainstream bronchi, which are further branched into large conducting
airways. The airways continue to branch through approximately 23
generations until they end in the deep lung with air sacs, known as the
alveoli, which are the site of gas exchange. The internal surface area of
the lung is approximately 1,000 square feet, most of which is available for
the free exchange of oxygen, carbon dioxide and other molecules between
ambient air and the blood stream. Because of its physiology and natural
function, the lung represents an attractive pathway for the non-invasive
delivery of drugs.
To deliver pharmaceuticals to or through the lungs, drugs must be
transformed into a low velocity aerosol (a suspension of drug particles in
air) which can be inhaled by the patient. Large particles (i.e., greater
than four microns in diameter) typically get deposited in the large
airways, where they may be useful in treating diseases of the lung. Smaller
particles (i.e., less than four microns in diameter), however, are more
likely to pass through the lung's airways and be dispersed in the alveoli,
where they may be absorbed by the alveolar membrane to enter the blood
stream for systemic effect.
To date, the pulmonary drug delivery market has consisted primarily of
drugs for the treatment of local diseases of the lung, such as asthma,
cystic fibrosis, emphysema and chronic obstructive pulmonary disease
("COPD"). Sales in the United States of drugs used in pulmonary delivery
products for the treatment of lung diseases exceeded $1.7 billion in 1995.
In recent years, pharmaceutical and drug delivery companies, recognizing
the potential benefits of utilizing the lung for systemic drug
administration, have increased efforts to develop products and systems for
pulmonary drug delivery. Industry sources estimate that the potential
worldwide market for pulmonary drug delivery products may exceed $9 billion
annually by the year 2000.
Existing Pulmonary Drug Delivery Technology
Three aerosol generating technologies currently are being used for
pulmonary drug delivery: nebulizers, metered dose inhalers ("MDIs"), and
dry powder inhalers ("DPIs"). Each of these systems was originally
developed to treat lung diseases and produces a local therapeutic effect by
depositing aerosolized medication on the large conducting airways of the
lung. The effectiveness of these devices depends upon proper inhalation
technique to produce a consistent, reproducible dose. In addition, the
ability of these technologies to improve the management of major pulmonary
diseases has been limited by their inability to compensate automatically
for poor patient technique or provide physicians with information on
patient inhalation and dosing patterns.
Nebulizers. Nebulizers are primarily used in hospitals for the
treatment of respiratory diseases, such as asthma. Liquid drug is loaded
into the nebulizer prior to each use, and the patient breathes through a
mouthpiece or mask as the continuous fog of drug particles is produced.
Because nebulizers require an external power source or compressed gas
supply, they are not easily portable. Although drugs in liquid form are
easily converted to an aerosol, nebulizers are inefficient and require
several minutes to administer a single dose of medication. Because
nebulizers produce a wide range of particle sizes, the majority of which
are too large to reach the alveoli, these devices are impractical for
systemic delivery.
MDIs. Metered dose inhalers, the most widely used system for
pulmonary drug delivery, have been in existence for over 40 years and are
used to deliver asthma drugs. The drug is packaged in a portable canister
as a suspension or solution in a volatile propellant, typically
chlorofluorocarbons ("CFCs"). To self-administer a drug, the patient must
depress the canister, releasing a high-velocity jet of aerosolized drug,
while inhaling slowly and evenly. Although widely used, there are certain
inherent problems with the use of MDIs. A patient must properly coordinate
inhalation and activation of the aerosol jet to optimize the effectiveness
of treatment. Several clinical studies have demonstrated that patients
routinely use MDIs improperly, resulting in ineffective therapy. Much of
the drug is deposited at the back of the throat and swallowed, rather than
reaching the desired location in the lung. Many leading asthma specialists,
however, believe that MDIs, when used properly, can effectively manage a
significant percentage of asthmatics. Although spacer devices have been
developed to address the problem of press-and-breathe coordination, these
devices do not fully address problems with inhalation technique and
compliance monitoring. Moreover, because MDIs produce a wide range of
particle sizes, only a small portion of which reach the alveoli, they are
not optimal for the delivery of systemic therapies.
DPIs. Dry powder inhalers, which are also used to deliver drugs
locally to the lung, have been and are being developed by pharmaceutical
companies to replace CFC-based MDI systems. DPI drugs are formulated in
solid form and packaged in portable containers. Patients self-administer
the drug by inhaling small, dry particles. Dry powder drug formulations
present a considerable challenge for pharmaceutical chemists because drugs
must be prepared as solids, must tolerate storage in a solid phase and must
facilitate rapid and complete dispersion as an aerosol at the point of
delivery. Although DPIs have been used for the delivery of some asthma
drugs, several companies are exploring the development of DPIs for the
systemic delivery of other compounds, including proteins and peptides.
Aradigm Technology
Existing systems for pulmonary drug delivery generally fail to achieve
precise, reproducible delivery of the desired drug dose, either locally or
systemically. Aradigm believes that its two product platforms, the
SmartMist system and the AERx system, may be capable of improving or
enabling a wide range of pulmonary drug delivery applications. Aradigm has
combined core competencies in physics, electrical engineering, mechanical
engineering and pharmaceutical sciences to overcome the limitations of
conventional pulmonary drug delivery systems. Through this integrated
approach, the Company has developed technologies which address each of the
four key elements which it believes are required for the development of
effective pulmonary drug delivery products:
* Ease of Drug Formulation: The Aradigm systems take
advantage of existing drug formulations, including standard MDI
formats and liquid drug formulations, thereby potentially
reducing formulation risks compared to other pulmonary delivery
technologies. In addition, liquid formulations facilitate the
generation of small particle aerosols necessary for efficient
delivery to the alveoli.
* Efficient Precision Aerosol Generation: Aradigm has
developed a proprietary aerosolization technology capable of
producing low velocity, small particle aerosols at the point of
delivery for efficient deposition of drug in the alveoli. Through
this technology, the Company believes it is able to overcome the
limitations of conventional pulmonary drug delivery systems in
which particle size and velocity cannot be optimized for systemic
delivery.
* Automated Breath-Controlled Delivery: Since proper
inhalation technique is needed to achieve effective pulmonary
drug delivery, Aradigm's systems are designed to guide the
patient to inhale slowly and evenly and to automatically deliver
a drug aerosol early in the breathing cycle.
* Patient Compliance Monitoring: Because patient adherence to
prescribed dosing regimens is an important determinant of
therapeutic benefit, Aradigm's systems are also being designed to
record drug administration, inhalation patterns and other
relevant physiological information for use by physicians to
analyze and optimize patient treatment regimens and improve
patient outcomes.
Aradigm is seeking to exploit various combinations of these four elements
to develop pulmonary drug delivery systems which overcome the limitations
of existing systems or enable pulmonary delivery of drugs which are
currently not deliverable systemically via the lung.
SmartMist System
The SmartMist system incorporates the Company's breath control and
compliance monitoring technologies for use with standard MDIs for the
treatment of asthma and other respiratory diseases. The initial SmartMist
product, which has been approved by the FDA and is expected to be launched
in the second half of 1997, is a hand-held, battery-operated aerosol drug
delivery system. The patient inserts a standard MDI into the SmartMist
device and inhales normally through the mouthpiece. Indicator lights on the
device switch from red to green to guide the patient to inhale slowly and
evenly within a predetermined range suitable for drug delivery. When the
desired flow rate is established early in the inspiratory cycle, the MDI is
automatically actuated by the SmartMist system. The delivery of the
medication is breath controlled, rather than manually activated,
eliminating the need for the patient to coordinate pressing and breathing
while using an MDI.
The microprocessor-controlled SmartMist system contains an electronic
air flow transducer and automatically calculates flow rate and volume.
Additionally, the SmartMist system incorporates an electronic peak flow
meter, which quantitatively measures the effect of therapy when the patient
exhales though a separate mouthpiece attached to the device. The peak flow
rate is displayed to the patient and recorded in the internal memory of the
product. Each system can store approximately 90 days worth of drug
administrations, inhalation patterns and pulmonary function data that can
be downloaded into a computer for review by the patient and the health care
professional to enhance patient management and compliance.
AERx System
The AERx system is a novel drug delivery system that is being
developed to enable pulmonary delivery of a wide range of liquid
pharmaceuticals for local or systemic effect. The AERx system is based on a
proprietary aerosol generation technology capable of producing low
velocity, small particles suitable for delivery to the alveoli. By also
incorporating the Company's proprietary breath control and compliance
monitoring technologies, the AERx system is designed to optimize the
delivery of aerosolized medications to the lung. The AERx system, which is
currently being tested in a clinical bench prototype form, will aerosolize
liquid drug formulations that are pre-packaged in proprietary unit dose
packages for inhalation. Each unit dose package is comprised of (i) a small
blister package which stores a liquid drug formulation and (ii) an
aerosolization nozzle consisting of a porous membrane incorporating an
array of micromachined holes.
The AERx system creates a respirable aerosol by releasing a mechanical
piston that is activated automatically when the patient's inhalation is
optimal for drug delivery. The piston compresses the blister package,
thereby forcing open the sealed channel and extruding the liquid drug
through the aerosolization nozzle. The aerosolized drug produced by this
process is then inhaled through the mouthpiece of the AERx device. The
extrusion of the liquid drug through the disposable nozzle takes
approximately one second and produces a low velocity, fine particle aerosol
for optimized deposition within the lung. The force applied to drive the
liquid through the nozzle and the diameter of the nozzle holes influence
the size of the droplets or particles that form the emitted aerosol. The
size of the micromachined holes within the single use nozzle can be
adjusted for each specific clinical application, including the creation of
larger particles for delivery of drug to the large conducting airways of
the lung for local effect or smaller particles for delivery of drug to the
deep lung for systemic effect.
Formulations developed for use in the AERx system are in liquid form,
typically using an aqueous-based solvent, similar to those employed with
nebulizers. No propellants, such as the CFCs used in MDIs, are required
since mechanical pressure is used to generate the aerosol. Moreover, since
the drug is stored in unit dose packages, preservatives may not be needed
for some applications, further simplifying the formulation process.
The AERx system employs the same patented technology used in the
SmartMist system to measure precisely the airflow through the device while
the patient is inhaling. Breath control ensures that the patient is
breathing the same way each time a dose of aerosolized drug is delivered.
As a result, essentially the same dose of medication is delivered each time
the product is used.
Compliance monitoring technology similar to that used in the SmartMist
system has been designed for the AERx system. Information about each drug
administration, including dosage, breathing technique and other relevant
physiological parameters are recorded automatically for later review by the
patient and health care professional. The Company expects to customize the
software embedded in the AERx device for the particular therapeutic
application in order to collect and present the data most relevant for
managing each patient type. The Company believes that the combined features
of the AERx product will make the AERx system an effective disease
management tool.
Strategy
Aradigm's goal is to become a leader in the development and
commercialization of pulmonary drug delivery products. The Company's
strategy incorporates the following principal elements:
Focus on Near-Term Product Opportunities: The Company is focusing its
initial commercial development efforts on product opportunities which have
the potential to reach the market quickly. The Company designed the
SmartMist Asthma Management System specifically to take advantage of the
shorter regulatory cycle for 510(k) approvable products. In addition, the
Company is developing a diagnostic application of its AERx technology which
may have a shorter regulatory approval process than therapeutic
applications of the AERx system. Many of the Company's initial therapeutic
development programs will target previously approved and widely used drugs.
For example, the first AERx therapeutic product for which an IND was filed
was the AERx Pain Management System for the delivery of morphine. Because
morphine is a well characterized drug with a demonstrated safety profile,
the Company believes the AERx Pain Management System carries less
development risk than new drug development projects and may require less
time for regulatory approval. Nevertheless, there can be no assurance that
the Company can secure regulatory approval for its potential products or
that the Company can successfully develop or market any such products.
Establish Broad Applicability: The Company believes that its AERx
technology can effectively deliver many pharmaceutical products. The
Company is conducting feasibility studies on a number of compounds to
demonstrate the applicability of the AERx system to a broad range of
molecule sizes and types, including proteins, peptides and small molecules.
The Company plans to publish results from these and other studies to
promote the acceptance of the AERx system as a viable pulmonary drug
delivery technology for a wide variety of compounds. The Company believes
this strategy will maximize the number of commercial product opportunities
for Aradigm and will increase the interest of potential partners to develop
drugs for the AERx system, thereby reducing the Company's dependence on any
single product.
Establish Collaborative Relationships: In order to enhance its
commercial opportunities and effectively leverage its core scientific
resources, Aradigm intends to enter into multiple collaborative
relationships for the development of new products and for the marketing and
sale of products utilizing its technologies. Through product development
collaborations, Aradigm will seek access to proprietary pharmaceutical
compounds as well as to the resources and expertise necessary to conduct
late stage clinical trials and obtain regulatory approvals. In addition,
the Company will pursue relationships with pharmaceutical and device
companies with established sales forces and distribution channels in the
Company's target markets. By establishing such collaborative relationships,
Aradigm intends to introduce multiple new products while avoiding the need
to establish drug discovery research and sales and marketing capabilities
for each target market. Nevertheless, the Company has not established any
corporate development collaborations and there can be no assurance that it
will be able to do so on reasonable terms, or at all.
Build Strong Proprietary Position: The Company believes that
establishing a strong proprietary position in pulmonary drug delivery could
provide an important competitive advantage in its target markets. The
Company has aggressively pursued patent protection of its technology and as
of March 1, 1997 has 19 issued United States patents and has more than 20
United States patent applications pending. When appropriate, the Company
also seeks international patent protection. While there can be no assurance
that any of the Company's patents will provide a significant commercial
advantage, these patents are intended to provide protection for important
aspects of the Company's technology, including aerosol generation, breath
control, compliance monitoring and unit dose formulation. In addition, the
Company is developing in-house manufacturing capability for the production
of certain components of its products, including the disposable unit dose
package for the AERx system, to further protect its core technologies.
Aradigm Product Applications
The SmartMist System
The Company is initially developing the SmartMist technology to be
applied to asthma management with the SmartMist Asthma Management System.
In the future, the SmartMist platform may be utilized to develop products
for other lung diseases, such as cystic fibrosis, emphysema and COPD.
SmartMist Asthma Management System
The Company has developed the SmartMist Asthma Management System to
ensure proper breath control and compliance by MDI-using asthmatics. By
improving the self-administration of MDIs, the Company believes that these
patients will be better managed, have fewer symptoms and will make fewer
visits to the emergency room, resulting in improved patient care and
reduced health care expenses.
Asthma is an inflammatory disease process characterized by abnormally
high responsiveness of the tracheobronchial tree to a multitude of stimuli,
such as dust, pollen and stress. The hallmark of the disease is reversible
airway obstruction, and the characteristic wheezing sounds are due to
narrowing of the airways.
Of the estimated 12 million asthmatics in the United States,
approximately one million severe asthmatics consume a majority of the
nearly $4.5 billion which is spent annually in the United States for direct
health care costs related to the treatment of asthma. Over half of those
dollars is spent on hospital care, including approximately 450,000
hospitalizations and 1.5 million emergency room visits occurring annually
in the United States for acute asthma incidents. Asthma is a chronic
disease which, if properly treated, should not progress to crisis stage. It
is believed that most hospitalizations for treatment of asthma represent
patient management and compliance failures. The Company believes that there
is a significant market opportunity to improve patient management and
compliance, thereby minimizing patient utilization of costly acute care and
overall reducing the cost of asthma management.
Studies have shown that up to 70% of patients use their MDIs
incorrectly and that nearly 50% of patients revert to incorrect technique
following retraining. Even patients who have good technique are
inconsistent in applying it, especially during an acute asthma attack.
Proper technique is particularly important for patients using topical
steroids, drugs which treat the underlying inflammation that causes asthma,
but do not act immediately or provide palliative benefits. Inhaled steroids
can take six to eight weeks to effect improvement noticeable to the
patient. With no immediate relief of symptoms providing feedback to the
patient, there is no way for patients to know if they have received the
intended drug dose.
The management of asthma can also be improved by monitoring patient
compliance with the prescribed therapy and recording the effect of the
therapy. Peak flow, defined as peak velocity achieved during maximum forced
exhalation, is a direct indicator of airway obstruction. Routine peak flow
measurement has been generally recommended by pulmonary specialists, but
many patients do not diligently take and record these measurements.
The Company believes that its SmartMist system is capable of
addressing MDI limitations, such as improper inhalation, improperly timed
release of the aerosol, and the lack of information regarding patient usage
and patient lung function following usage. Without modifying the MDI or the
drug itself, the SmartMist device is designed to assist the patient in self-
administering the drug while inhaling in an optimal manner, guided by the
breath indicator lights on the device. The built-in peak flow meter is
designed to allow patients to track their own lung function so that
patients can anticipate asthma exacerbations in time to modify their
therapy. In addition, the device is designed to compile data on drug
delivery events and lung function readings so that a complete record can be
reviewed by health care professionals.
Aradigm has completed a radiolabeled asthma drug study that
demonstrates the benefits of the breath control technology incorporated in
the SmartMist system. In addition, the Company has completed two clinical
studies to support market adoption of the SmartMist Asthma Management
System. The first study, which involved 40 patients with asthma, was
conducted at the University of California at San Francisco and the National
Jewish Hospital in Denver and compared the technique of patients using the
SmartMist system with the technique of other patients using MDIs equipped
with the Technique Assessor, a research device developed by Aradigm to
measure how patients actuate and inhale through conventional MDIs. This
study showed that patients in the SmartMist group had significantly more
MDI inhalations rated as "correct" (91% versus 46%). The second study was
conducted at Northwest Asthma and Allergy in Seattle and involved 13
steroid-dependent adolescent patients with asthma. The SmartMist was given
to all 13 patients and used to evaluate patient compliance with a
medication regimen and to accurately assess how reliably and accurately
patients recorded this information in peak flow diaries. Although patient
diaries indicated that all patients were at least 80% compliant, data
recorded by the SmartMist revealed that only five of the 13 patients
studied were 80% compliant with the prescribed medication regimen.
A prototype of the SmartMist Asthma Management System has been
developed for use in clinical testing and received 510(k) clearance from
the FDA in May 1996. While the Company has established its Respiratory
Products Business Unit to market the SmartMist product, there can be no
assurance that the Company can successfully market the product. Moreover,
there can be no assurance that the Company will be able to develop or
manufacture a version of the SmartMist Asthma Management System suitable
for commercialization that can be marketed without additional regulatory
filings or approvals.
Depending on manufacturing costs and other factors, the Company
believes that the price to consumers of the Company's SmartMist Asthma
Management System will be approximately $500 per unit.
The AERx System
The Company is developing the AERx platform based on a comprehensive
approach to pulmonary drug delivery that includes drug formulation, aerosol
generation, patient breath control and compliance monitoring technologies.
The Company believes that the AERx system will be broadly applicable to
drugs that are intended for systemic delivery, for local delivery to the
lung or for pulmonary diagnostics. The Company currently is developing AERx
products for pain management, diabetes management and pulmonary
diagnostics. In addition, the Company is planning to develop the AERx
system for the non-invasive delivery of certain other drugs, including
proteins and biotechnology drugs.
AERx Pain Management System
The Company is developing the AERx Pain Management System as a non-
invasive, patient-controlled pulmonary drug delivery product for treatment
of chronic and acute pain. In March 1996, the Company's IND application
covering the use of AERx to deliver morphine for the management of acute
pain cleared the FDA review period and the Company completed Phase I
clinical testing in December 1996. Preliminary results from Phase I
testing of a prototype AERx Pain Management System for the delivery of
morphine via the lung demonstrated that delivery of morphine to the blood
supply was as rapid as with intravenous administration. In addition, the
reproducibility of morphine delivery using the AERx system was comparable
to morphine delivered intravenously.
The pain management market includes patients with cancer, post-
operative and chronic persistent pain. Pharmaceutical care is the mainstay
of pain treatment and dominates the pain management market. The United
States market for drugs and devices used in pain management is estimated to
be more than $15 billion annually. The Company believes that non-invasive
rapid treatment of breakthrough pain is a major unmet medical need.
Aradigm has targeted cancer pain as one of the first indications for
the AERx Pain Management System. As of the end of 1995 there were
approximately 3,000,000 patients with active cancer in the United States.
Based on published reports, the Company believes that approximately 45% of
such patients report suffering from pain, with nearly half of those cancer
patients reporting that their pain was not alleviated by their pain
management therapy.
Conventional drug delivery methods for pain management include oral,
transdermal patch, intravenous ("IV"), intramuscular and subcutaneous
delivery. Patient controlled analgesia ("PCA") products allow patients to
self-administer pain medication on demand from a microprocessor controlled
intravenous infusion pump. PCA systems have proven to be a cost-effective
means of intravenous delivery in the hospital setting. Widespread adoption
of PCA outside of the hospital, however, has been limited by the
requirement for an intravenous delivery site that requires regular and
expensive maintenance. Home PCA can cost as much as $4,000 per month, due
partially to the home nursing required to maintain the needle site.
The Company believes that a patient controlled, non-invasive drug
delivery system that provides for rapid uptake of medication could
significantly expand the outpatient market for pain management. Features of
the Company's AERx Pain Management System are expected to be similar to
those of PCA products, but will not be limited by the necessity of
intravenous or subcutaneous access. The AERx product is being designed to
be programmed to allow for patient-activated delivery in accordance with a
physician-directed dosing program. Lock-out mechanisms being designed for
the product should eliminate the risk of inappropriate dosing, and a
patented electronic patient identification feature should prevent
unauthorized use of the device. An automatically maintained dosing event
diary to be embedded within the AERx device is designed to allow the
physician to closely monitor patient use. The Company believes that these
features of the AERx platform combined with the inherent speed of onset of
pulmonary delivery should provide a significant advance in ambulatory pain
management.
The Company has completed a phase I clinical trial of the AERx Pain
Management System for the delivery of morphine via the lung. The two
center study was conducted at Harris Laboratories in Lincoln, Nebraska and
at Massachusetts General Hospital in Boston. The studies, which involved
30 healthy volunteers, demonstrated that morphine delivered via AERx
reaches peak levels in the blood at approximately the same time as morphine
delivered via the intravenous route to the same subjects. In addition, the
variability in measured morphine blood levels observed following the
delivery of morphine via AERx was shown to be the same as the variability
following IV administration to the same volunteers. The Company is pursuing
corporate partners to collaborate on further development and testing of the
AERx Pain Management System.
AERx Diabetes Management System
The Company is developing the AERx Diabetes Management System to
permit diabetes patients to non-invasively self-administer insulin. The
Company believes that when provided with a non-invasive delivery
alternative to injection, patients are more likely to self-administer
insulin as often as needed to keep tight control of their blood glucose
levels. The Company has completed two clinical feasibility studies
delivering insulin with the AERx Diabetes Management System. The studies
demonstrated that insulin delivered via a prototype of the AERx Diabetes
Management System achieved maximum blood glucose reductions in healthy
fasting volunteers in half the time required for subcutaneous insulin
injections. The reductions in blood glucose levels were also at least as
reproducible in both magnitude and time to maximum reduction as
subcutaneous injections. Clinical testing will continue in 1997.
In healthy individuals, the pancreas secretes insulin, which helps the
body to regulate blood glucose levels. Patients with Type I diabetes do not
have the ability to produce their own insulin and must self-inject insulin
regularly to control their disease. Patients with Type II diabetes are
unable to use efficiently the insulin that their body produces. While they
may have some impairment in their ability to produce insulin as well, it is
the defect in their ability to use insulin efficiently that leads to the
addition of insulin to their treatment program. By increasing the
circulating insulin concentration, the inefficiency can be partially
overcome. The Diabetes Control and Complications Trial ("DCCT") study
sponsored by National Institutes of Health from 1983 to 1993 indicated that
insulin should be given throughout the day in response to frequently
measured blood glucose levels. The DCCT study showed that keeping blood
glucose levels as close to normal as possible slows the onset and
progression of eye, kidney and nerve diseases often caused by diabetes. In
fact, the DCCT study demonstrated that any sustained lowering of blood
glucose levels is beneficial, even if the person has a history of poor
blood glucose control.
The Company believes that approximately 700,000 Americans suffer from
Type I diabetes. Virtually all of them are on daily insulin injection
therapy, and most are currently monitoring their own blood glucose level.
It is believed that more than 13 million Americans suffer from Type II
diabetes, of which approximately 50% are not yet diagnosed. Although most
of this Type II population does not currently use insulin as part of their
therapy, in aggregate they consume the majority of insulin used in the
United States, due to their larger numbers. The insulin market in the
United States was expected to exceed $850 million in 1996. The direct costs
associated with diabetes are estimated to be greater than $45 billion
annually.
Patients with diabetes often avoid or limit the amount of insulin
therapy because of the pain and inconvenience of administering the drug by
injection. The Company believes that its AERx Diabetes Management System
can provide a non-invasive method for delivery of insulin that would be
efficacious and reproducible. Such a system should support diabetics in
complying with their insulin therapy, thereby lessening the risk of long-
term complications.
AERx Diagnostic System
The Company believes that the same technologies that may make the AERx
system a precision pulmonary drug delivery system can be applied to more
safely deliver radiolabeled imaging agents to diagnose certain lung
conditions than currently available methods. In an early clinical study,
the Company demonstrated that the AERx Diagnostic System was effective in
delivering technetium DTPA ("(99m)Tc-DTPA"), a commonly used agent for lung
imaging.
Radiolabeled imaging agents ("radiopharmaceuticals") are widely used
for the diagnosis of a variety of cardiopulmonary conditions, such as
pulmonary embolism. The radiopharmaceutical is imaged by a gamma camera in
a process called ventilation lung scanning. Ventilation lung scans require
that patients inhale either radioactive gas or radiolabeled aqueous
solution of aerosol delivered to the lung via conventional nebulizers.
Because nebulizers are inefficient and result in inconsistent deposition of
particles in the lung, they often require a relatively higher amount of
radiopharmaceutical to produce an adequate scan. Additionally, the
nebulization process can take several minutes, which increases the risk of
undesirable radiation exposure for the patient and attending staff.
The Company estimates that approximately 800,000 ventilation lung
scans are performed in the United States each year at a cost of about $200
million. The radioactive materials used in ventilation lung scans in the
United States are prepared at radiopharmacies located throughout the
country which supply these materials to hospitals and clinics.
The Company believes that its AERx technology can provide an effective
and safe alternative to nebulizers for supplying radiopharmaceuticals for
ventilation lung scans. The Company intends to supply its unit dose
packaging equipment to radiopharmacies to allow the pharmacies to fill and
seal single-use doses of (99m)Tc-DTPA to be used with the AERx Diagnostic
System for ventilation lung scans. The Company believes that the AERx
Diagnostic System will use less radioactive material and will provide
better image quality for diagnosis. Moreover, because the
radiopharmaceutical is self-contained and does not need to be nebulized,
the amount of ambient radiation can be substantially reduced, thereby
minimizing staff exposure to radiation.
The AERx Pulmonary Diagnostic System has been shown in multiple
clinical feasibility studies to deliver efficiently and reproducibly the
same radiolabeled aqueous solution to the lungs of healthy volunteers as is
currently used with nebulizers for ventilation lung imaging, and the images
produced were of the same high quality as those generated using krypton
gas, the "gold standard" for nuclear imaging. One study demonstrated that
the quality of lung images produced with the AERx system in patients known
to have COPD was also equivalent to existing methods. The Company is
currently investigating the regulatory path for approval of the AERx
Diagnostic System for sale in the United States and abroad and is exploring
development partnerships with contract research and development
organizations.
Additional Potential AERx Applications
The Company is evaluating the use of the AERx system to deliver other
pharmaceutical compounds including three compounds which are proprietary to
the Company's two corporate partners. Two of these compounds are entering
clinical evaluation with the AERx system. The Company has successfully
evaluated a number of compounds in in vitro and in vivo feasibility
studies. The Company has approved protocols with the Royal North Shore
Hospital in Sydney, Australia for the clinical evaluation of additional
drugs often used for pain management. Aradigm is considering further
feasibility studies with anti-infectives, peptides, proteins and gene
vectors for the treatment of asthma, other severe chronic diseases of the
respiratory tract, and systemic diseases.
The Company believes that the AERx system may have applicability for a
range of compounds developed by biotechnology companies that cannot be
delivered orally. Due to their large size and poor oral bioavailability,
macromolecules developed by the biotechnology industry are typically
developed in liquid formulation and delivered by injection. The Company
believes that the AERx platform can potentially provide for improved
delivery and broader applications of these therapies or potential
therapies. The Company is currently conducting two clinical feasibility
studies, under the sponsorship of two pharmaceutical companies, for two
proteins currently marketed for systemic delivery. The Company is also
conducting a clinical feasibility study, under the sponsorship of a second
pharmaceutical company, for a small molecule for systemic delivery.
The Company believes that its technology can be applied to many new or
approved pharmaceutical and biological compounds in addition to morphine
and insulin. A partial list of compounds that have been evaluated or may be
evaluated appears below (asterisks indicate compounds which the Company has
successfully aerosolized in preliminary in vitro tests).
Pharmaceutical Biologicals
Albuterol* Midazolam* Alpha Interferon Gamma Interferon
Beclomethasone* NSAIDs Calcitonin Growth Hormone
Cromolyn* Pentamidine DNAse* IGF-1
Fentanyl* Sumatriptan Erythropoietin*
Levorphanol Triamcinolone
The Company has not acquired rights to develop applications for any of the
proprietary compounds listed above and may not pursue or be successful in
acquiring such rights.
Manufacturing
The Company plans to build manufacturing facilities for the production
of certain components of its drug delivery systems that it considers to be
key to its core technologies. These may include the production of the
disposable aerosol generating nozzles, the assembly of the disposable unit
dose packages and the sterile filling of drug into the unit dose packages.
The Company also may complete the final calibration, assembly and packaging
of the AERx and SmartMist systems to control both quality and cost.
The Company may seek to have many key components, assemblies and
subassemblies completed by contract manufacturers. These may include the
assembly of printed circuit boards, the production of application specific
integrated circuits ("ASICs"), the production of mechanical assemblies and
the production of specific plastics and laminates for the disposable unit
dose packages. In some cases, the Company may choose to license commercial
partners to produce some of the disposable unit dose packages in the
partner's own facilities.
The Company is in the process of scaling up the production of the
SmartMist Asthma Management System with the assistance of contract
manufacturers. Significant additional work must be completed prior to
commercialization. In addition, the Company is in the early stages of
producing clinical supplies of disposable unit dose packages for clinical
trials of the AERx system. The Company is building a sterile pharmaceutical
packaging production line sufficient to meet the capacity requirements for
clinical trials and initial product sales, if any. The Company anticipates
making significant expenditures to provide for the high volume manufacturing
required for multiple AERx products, if such products are successfully
developed. Although the Company is working with contract manufacturers that
are experienced in medical device manufacturing, there can be no assurance
that the Company will be able to complete the scale-up process in a timely
manner or that significant problems will not be discovered during the scale-
up process.
Although the majority of the materials to be used in Aradigm's
potential products are readily available from multiple sources, certain
materials, including the ASICs, microprocessors, plastics and plastic
laminates, are or will be available initially only from single sources.
While the Company has contingency plans for alternate suppliers, there can
be no assurance that the Company could find alternate manufacturers for such
components. Even if new suppliers are secured, there can be no assurance
that this would not significantly reduce the Company's ability to supply
product during any transition.
Competition
The Company faces intense competition. Several companies are developing
and marketing nebulizer, MDI and DPI devices as well as other drug delivery
approaches. Aradigm is aware that a number of pharmaceutical and
biotechnology companies and research institutions are working on the
pulmonary delivery of peptide and protein dry powders. There can be no
assurance that competitors will not introduce products or processes
competitive with, or superior to, those under development by the Company.
The Company faces intense competition to develop a solution to non-invasive
delivery from a number of drug delivery and pharmaceutical companies,
including: Astra AB, Boehringer Ingelheim, Dura Pharmaceuticals, Inc., Fluid
Propulsion Technologies, Inc., Forest Labs, Glaxo Wellcome, Inc., Inhale
Therapeutic Systems, Ivax (Norton), Medeva Ltd., Rhone-Poulenc Rorer (Fisons
Limited), Schering Plough and 3M. Many of these companies are much larger
and have far greater resources than Aradigm. This list includes companies
working on developing systems for other non-invasive routes of delivery,
such as oral, transdermal and intranasal administration, as well as
companies working on pulmonary delivery systems. New drugs or further
developments in alternative drug delivery methods may provide greater
therapeutic benefits for a specific drug or indication or may offer
comparable performance at lower cost, than the Company's pulmonary drug
delivery systems under development.
Intellectual Property and Other Proprietary Rights
The Company's business and competitive position is dependent upon its
ability to protect its proprietary technology and avoid infringing the
proprietary rights of others.
The Company relies on patents, patent applications and trade secret law
to protect its proprietary technology. As of March 1, 1997 the Company has
19 United States patents and presently has more than 20 United States patent
applications pending. There can be no assurance that any of the Company's
patent applications will issue or, if issued, will later be found valid if
challenged. Further, there can be no assurance that any issued patents, or
applications which might later issue as patents, will provide the Company
with a degree of market exclusivity sufficient for the Company to compete
profitably against its competitors. Patents can not prevent others from
developing alternative technologies which are used for aerosolized drug
delivery and patent applications do not provide any exclusivity until and if
they are issued as a patent. Because the general idea of aerosolized drug
delivery is well established, no entity may obtain patent protection
covering all forms of aerosolized delivery of all types of drugs. There can
be no assurance that others have not independently developed or will not
develop devices, components and methods of aerosolized drug delivery, and
obtained or will obtain patents on such, which patents could be used to
prevent the Company from making, using or selling its patented technology.
The Company's success will depend on its ability to obtain patents,
maintain trade secrets and operate without infringing upon the proprietary
rights of others. A substantial number of patents have been issued to
competitors in the field of aerosolized drug delivery. These and other
competitors and institutions may have applied for other patents and may
obtain additional patents and proprietary rights relating to products or
processes similar to those of the Company. The Company may not be able to
obtain a license under any such patent and therefore could be prevented from
making products or carrying out processes that may be important to the
business of the Company.
The Company has carried out and continues to carry out searches of
publications, including patents and scientific papers relating to the
business of the Company. These searches are supplemented by searches done by
examiners in the United States Patent Office and other patent offices
reviewing patent applications of the Company. Many entities are obtaining
patents and publishing papers in the field of aerosolized delivery and there
can be no assurance that the searches carried out by the Company have found
the most relevant publications. Thus, patents may exist which would provide
competitors with the ability to prevent the Company from making or selling
its products. Further, existing and future patents or other publications may
hinder or prevent the Company from obtaining patents or draw into question
the validity of patents already issued to the Company.
The Company's current policy is to file patent applications on what it
deems to be important technological developments which might relate to
products of the Company or methods of using such products. To date all
inventions have originated in the United States and all patent applications
were originally filed in the United States. The Company also seeks to
protect these inventions through foreign counterpart applications in
selected other countries. The Company currently has National Phase
applications pending in patent offices outside of the United States.
Statutory differences in patentable subject matter may limit the protection
the Company can obtain on some of its inventions outside of the United
States. For example, methods of treating humans are not patentable in many
countries outside of the United States. These and other issues may prevent
the Company from obtaining patent protection outside of the United States.
Further, competitors may have obtained or could later obtain patent
protection outside of the United States which would prevent the Company from
making, using or selling products or processes of its business in countries
other than the United States.
The Company pursues a policy of having its officers, employees,
consultants and advisors execute proprietary information and invention
agreements upon commencement of their relationships with the Company. These
agreements provide that all confidential information developed or made known
to the individual during the course of the relationship shall be kept
confidential except in specified circumstances. These agreements also
provide that all inventions developed by the individual on behalf of the
Company shall be assigned to the Company and that the individual will
cooperate with the Company in connection with securing patent protection on
the invention if the Company wishes to pursue such protection. There can be
no assurance, however, that these agreements will provide meaningful
protection for the Company's inventions, trade secrets or other proprietary
information in the event of unauthorized use or disclosure of such
information.
Government Regulation
All medical devices and drugs, including the Company's products under
development, are subject to extensive and rigorous regulation by the federal
government, principally the FDA, and by state and local governments. If
these products are marketed abroad, they also are subject to export
requirements and to regulation by foreign governments. The regulatory
clearance process is generally lengthy, expensive and uncertain. The Federal
Food, Drug, and Cosmetic Act (the "FDC Act"), and other federal statutes and
regulations, govern or influence the development, testing, manufacture,
labeling, storage, approval, advertising, promotion, sale and distribution
of such products. Failure to comply with applicable FDA and other regulatory
requirements can result in sanctions being imposed on the Company or the
manufacturers of its products, including warning letters, fines, product
recalls or seizures, injunctions, refusals to permit products to be imported
into or exported out of the United States, refusals of the FDA to grant
premarket clearance or premarket approval of medical devices and drugs or to
allow the Company to enter into government supply contracts, withdrawals of
previously approved marketing applications and criminal prosecutions.
The FDA and other regulatory agency requirements for manufacturing,
product testing and marketing can vary depending upon whether the product is
a medical device or a drug. Sales of the Company's products outside of the
United States are subject to foreign regulatory requirements that may vary
from country to country. The time required to obtain clearance from a
foreign country may be longer or shorter than that required by the FDA, and
clearance or approval or other product requirements may differ. There can be
no assurance that the Company will be able to obtain necessary regulatory
clearances or approvals on a timely basis, if at all, for any of its
products under development, and delays in receipt or failure to receive such
clearances or approvals, the loss of previously received clearances or
approvals, or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the Company.
Regulation of Medical Devices
The Company is required to file a premarket notification ("510(k)
notification") submission or premarket approval ("PMA") application or
supplement with the FDA before it begins marketing a new medical device or
changes or modifies an existing device in a manner that could significantly
affect the device's safety or effectiveness or changes the device's intended
use.
The FDA categorizes medical devices into one of three regulatory
classifications -- Class I, II or III -- on the basis of controls deemed by
the FDA to be necessary reasonably to assure their safety and effectiveness.
Generally, Class I devices are subject to general controls (e.g., labeling,
premarket notification, and adherence to the current good manufacturing
practice ("cGMP") regulations for medical devices). Class II devices are
subject to general and special controls (e.g., performance standards, post-
market surveillance, patient registries and FDA guidelines). Class III
devices, which typically are life-sustaining or life-supporting and
implantable devices, or new devices that have been found not to be
substantially equivalent to a legally marketed predicate device, are subject
to general controls and also require clinical testing to assure safety and
effectiveness before FDA approval is obtained. The FDA also has the
authority to require clinical testing of Class I and II devices.
If a company can establish that a new device is "substantially
equivalent" to a legally marketed Class I or II medical device, or to a
preamendment Class III medical device (i.e., a Class III device in
commercial distribution prior to enactment of the Medical Device Amendments
of 1976) for which the FDA has not called for PMA applications, the company
may seek clearance to market the device by filing a 510(k) notification. The
510(k) may need to be supported by appropriate data, including clinical
study data, establishing substantial equivalence to the FDA's satisfaction.
The FDA recently has been requiring a more rigorous demonstration of
substantial equivalence.
The Company may not place the device into commercial distribution until
an order of substantial equivalence is issued by the FDA. No law or
regulation specifies the time by which the FDA must respond to a 510(k)
notification. At this time, the FDA typically responds to a 510(k)
notification within 90 to 180 days, although some submissions take
considerably longer. An FDA order may declare that the device is
substantially equivalent and allow the proposed device to be marketed in the
United States. The FDA may determine, however, that the proposed device is
not substantially equivalent or may require further information, such as
additional test data, before it can make a final determination.
If a company cannot establish that a proposed device is substantially
equivalent to a legally marketed predicate device, the company must seek
premarket approval from the FDA through the submission of a PMA application.
A PMA application must be supported by extensive data, including preclinical
and clinical trial data, to demonstrate the safety and effectiveness of the
device. If human clinical trials are required and the device presents a
"significant risk," the company must file an investigational device
exemption ("IDE") application prior to commencing clinical trials. The IDE
application must be supported by data, typically including the results of
animal and mechanical testing. If the IDE application is not disapproved by
the FDA, human clinical trials may begin at the specified investigational
sites and with the specified number of patients 30 days after the FDA
receives the application. Sponsors of clinical trials are permitted to sell
study devices, provided compensation does not exceed the cost of
manufacture, research, development and handling. The clinical trials must be
conducted under the auspices of an independent institutional review board
("IRB") established pursuant to FDA regulations. If the device does not
present a significant risk, the study may be conducted under IRB authority
as a nonsignificant risk study.
Following receipt of the PMA application, if the FDA determines that
the application is sufficiently complete to permit a substantive review, the
agency will "file" the application. Once the submission is filed, the FDA
begins a review of the PMA application. The FDA has 180 days to review a PMA
application, although reviews more often occur over a significantly
protracted time period, and the FDA generally takes two years or more from
the date of filing to complete its review.
The PMA process can be expensive, uncertain and lengthy. A number of
devices for which premarket approval has been sought by other companies have
never been approved. Review time is often significantly extended by the FDA,
which may require more information or clarification of information provided
in the submission. During the review period, an advisory committee likely
will be convened to review and evaluate the application and provide
recommendations to the FDA as to whether the device should be approved. In
addition, the FDA will inspect the manufacturing facility to ensure
compliance with the cGMP regulations for medical devices prior to approval
of the PMA application. If granted, the premarket approval may include
significant limitations on the indicated uses for which the product may be
marketed, and the agency may require post-marketing studies of the device.
There can be no assurance that any required FDA or other governmental
clearance or approval will be granted, or, if granted, will not be
withdrawn. Governmental regulation may prevent or substantially delay the
marketing of the Company's proposed products and cause the Company to
undertake costly procedures. In addition, the extent of potentially adverse
government regulation that might arise from future administrative
regulations or policy or from legislation cannot be predicted. Any failure
to obtain or delay in obtaining such clearances or approvals could
materially and adversely affect the Company's ability to market its proposed
products.
The FDA's Medical Device Reporting regulation requires medical device
manufacturers, distributors, and user facilities to provide information to
the agency on deaths or serious injuries or illnesses alleged to have been
associated with the use of its devices, as well as product malfunctions that
would likely cause or contribute to death, serious injury or serious illness
if the malfunction were to recur. In addition, the FDA prohibits a company
from promoting a cleared or approved device for an indication for use not
approved by the FDA.
In May 1996, the Company obtained 510(k) clearance from the FDA for the
initial version of its SmartMist Asthma Management System to guide patient
self-administration of asthma medications and compile data on drug delivery
events and lung function, and the Company expects to complete development
and commence marketing of the commercial version of the SmartMist Asthma
Management System during 1997. There can be no assurance that the Company
will be able to fully develop and market successfully the commercial version
of the SmartMist Asthma Management System, or whether changes to the
commercial version of the SmartMist Asthma Management System will
necessitate the submission of a second 510(k) notice. If the submission of a
second 510(k) notice is required, there can be no assurance that clearance
can be obtained in a timely manner or at all. Delays in receipt of market
clearance or restrictions on the types of asthma drugs with which the
SmartMist Asthma Management System can be used or failure to comply with
existing or future regulatory requirements could have a material adverse
effect on the Company.
Regulation of Drugs
Different types of FDA regulations apply to various drug products,
depending upon whether they are marketed only upon the order of a physician
(i.e., they are prescription drugs) or over-the-counter, are biological,
insulin or antibiotic drugs or are controlled drugs, such as narcotics.
Product development and approval within this regulatory framework takes a
number of years, involves the expenditure of substantial resources and is
uncertain. Many drug products ultimately do not reach the market because
they are not found to be safe or effective or cannot meet the FDA's other
regulatory requirements. In addition, there can be no assurance that the
current regulatory framework will not change or that additional regulation
will not arise at any stage of the Company's product development that may
affect approval, delay the submission or review of an application or require
additional expenditures by the Company.
The activities required before a new drug product may be marketed in
the United States includes pre-clinical and clinical testing. Preclinical
tests include laboratory evaluation of product chemistry and other
characteristics and animal studies to assess the potential safety and
efficacy of the product as formulated. Many preclinical studies are
regulated by the FDA under a series of regulations called the current Good
Laboratory Practice regulations. Violations of these regulations can, in
some cases, lead to invalidation of the studies, requiring such studies to
be replicated.
The preclinical work necessary to administer investigational drugs to
human subjects is summarized in an IND application to the FDA. FDA
regulations provide that human clinical trials may begin 30 days following
submission of an IND application, unless the FDA advises otherwise or
requests additional information. There is no assurance that the submission
of an IND will eventually allow a company to commence clinical trials. Once
trials have commenced, the FDA may stop the trials by placing them on
"clinical hold" because of concerns about, for example, the safety of the
product being tested.
Clinical testing involves the administration of the drug to healthy
human volunteers or to patients under the supervision of a qualified
principal investigator, usually a physician, pursuant to an FDA reviewed
protocol. Each clinical study is conducted under the auspices of an IRB at
each of the institutions at which the study will be conducted. An IRB will
consider, among other things, ethical factors, the safety of human subjects,
informed consent requirements and the possible liability of the institution.
Human clinical trials typically are conducted in three sequential phases,
but the phases may overlap. Phase I trials consist of testing the product in
a small number of patients or normal volunteers, primarily for safety, at
one or more dosage levels, as well as characterization of a drug's
pharmacokinetic and/or pharmacodynamic profile. In Phase II clinical trials,
in addition to safety, the efficacy of the product is usually evaluated in a
patient population. Phase III trials typically involve additional testing
for safety and clinical efficacy in an expanded population at geographically
disperse sites. All of the phases of clinical studies must be conducted in
conformance with FDA's bioresearch monitoring regulations.
A company seeking FDA approval to market a new drug, including insulin
and controlled substances, must file a new drug application ("NDA") with the
FDA pursuant to the FDC Act. In addition to reports of the preclinical and
clinical trials conducted under an effective IND application, the NDA
includes information pertaining to the preparation of the drug substance,
analytical methods, drug product formulation, details on the manufacture of
finished products and proposed product packaging and labeling. Submission of
a NDA does not assure FDA approval for marketing. The application review
process generally takes several years to complete, although reviews of
treatments for cancer and other life-threatening diseases may be accelerated
or expedited. However, the process may take substantially longer if, among
other things, the FDA has questions or concerns about the safety or efficacy
of a product. In general, FDA requires at least two properly conducted,
adequate and well-controlled clinical studies demonstrating efficacy with
sufficient levels of statistical assurance.
Notwithstanding the submission of safety and efficacy data, the FDA
ultimately may decide that the application does not satisfy all of its
regulatory criteria for approval. The FDA also may require additional
clinical tests (i.e., Phase IV clinical trials) following NDA approval to
confirm safety and efficacy.
In addition, the FDA may in some circumstances impose restrictions on
the use of the drug that may be difficult and expensive to administer.
Product approvals may be withdrawn if compliance with regulatory
requirements are not maintained or if problems occur after the product
reaches the market. The FDA also requires reporting of certain safety and
other information that becomes known to a manufacturer of an approved drug.
The product testing and approval process is likely to take a substantial
number of years and involves expenditure of substantial resources. There can
be no assurance that any approval will be granted on a timely basis, or at
all. Upon approval, a prescription drug may only be marketed for the
approved indications in the approved dosage forms and at the approved
dosage.
Among the other requirements for drug product approval is the
requirement that the prospective manufacturer conform to the FDA's and cGMP
regulations for drugs. In complying with the cGMP regulations, manufacturers
must continue to expend time, money and effort in production, record keeping
and quality control to assure that the product meets applicable
specifications and other requirements. The FDA periodically inspects
manufacturing facilities in the United States to assure compliance with
applicable cGMP requirements. Failure of the Company to comply with the cGMP
regulations or other FDA regulatory requirements could have a material
adverse effect on the Company.
The Company is developing applications of its AERx technology for the
delivery of morphine, insulin and lung imaging agents via inhalation. The
Company believes that the use of its AERx technology for insulin and
morphine delivery via inhalation will be subject to the drug regulations,
including conducting clinical studies pursuant to an IND and the submission
and approval of an NDA before marketing can occur. If the Company obtains
FDA approval to market the AERx Diabetes Management System for the delivery
of insulin, each batch of unit-dose insulin-containing packages used in the
AERx Diabetes Management System will be subject to the insulin certification
requirements.
The Company has not yet been able to determine whether the AERx
Diagnostic Imaging System will be regulated as a device or a drug. In
either case, the FDA likely will require substantial clinical data for
market clearance or approval under the medical device or drug regulatory
framework or both. There can be no assurance that the use of the AERx
platform for insulin or lung imaging agent delivery will prove to be viable
or that any necessary regulatory clearance approvals will be obtained in a
timely manner, if at all.
The Company also will be subject to certain user fees that the FDA is
authorized to collect under the Prescription Drug User Fees Act of 1992 for
certain drugs, including insulin and morphine. User fees also pertain to the
establishments where the products are made and to the marketed prescription
drug products. In addition to these FDA requirements, the Company is subject
to foreign regulatory authorities governing clinical trials and drug sales.
Unapproved new drugs can be exported from the United States to certain
countries for commercialization only after FDA authorization is obtained.
In addition, due to limited experience with chronic administration of
drugs delivered via the lung for systemic effect, the FDA may require
clinical data to demonstrate that such chronic administration is safe. There
can be no assurance that the Company will be able to present such data in a
timely manner, or at all.
Other Regulations
Products marketed outside the United States that are manufactured in
the United States are subject to certain FDA regulations, as well as
regulation by the country in which the products are to be sold. The Company
also would be subject to foreign regulatory requirements governing clinical
trials and medical device and drug product sales if products are marketed
abroad. Whether or not FDA approval has been obtained, approval of a product
by the comparable regulatory authorities of foreign countries usually must
be obtained prior to commencement of marketing of the product in those
countries. The approval process varies from country to country and the time
required may be longer or shorter than that required for FDA approval.
The Company is subject to numerous federal, state and local laws
relating to such matters as controlled drug substances, safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances. For
example, the United States Drug Enforcement Agency ("DEA") regulates
controlled drug substances, such as morphine and other narcotics.
Establishments handling controlled drug substances such as morphine must,
for example, be registered and inspected by the DEA, and may be subject to
export, import, security and production quota requirements. In addition,
advertising and promotional materials relating to medical devices and drugs
are, in certain instances, subject to regulation by the Federal Trade
Commission or the FDA. There can be no assurance that the Company will not
be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have a
material adverse effect upon the Company's business, financial condition or
results of operations.
Scientific Advisory Board
The Company has assembled an International Scientific Advisory Board
comprised of scientific and development advisors that provide expertise, on
a consulting basis, in the areas of pain management, allergy and immunology,
pharmaceutical development and drug delivery, but are employed elsewhere on
a full time basis. As a result, they can only spend a limited amount of time
on the Company's affairs. The International Scientific Advisory Board
assists the Company on issues related to potential product applications,
product development and clinical testing. Its members, and their
affiliations and areas of expertise, include:
Name Affiliation Area of Expertise
Peter Byron, Ph.D Medical College of Virginia, Aerosol Science/
Virginia Commonwealth Pharmaceutics
University
Michael Cousins, M.D University of Sydney, Australia Pain Management
Peter Creticos, M.D The Johns Hopkins University Allergy/
School of Medicine Immunology/
Asthma
Stanley S. Davis, Ph.D. Lord Trent Professor of Drug Delivery
Pharmacy, University of
Nottingham
Jeffrey Drazen, M.D. Harvard University Medical Pulmonary
School Medicine
Lorne Eltherington, Sequoia Hospital Pain Management
M.D., Ph.D.
Richard Kitz, M.D Harvard University Medical Anesthesiology
School, Massachusetts General
Hospital
Lawrence M. The Johns Hopkins University Allergy/
Lichtenstein, School of Medicine Immunology
M.D., Ph.D.
Leigh Thompson, M.D., CEO, Profound Quality Pharmaceutical
Ph.D. Resources, former Chief Product
Scientific Officer, Eli Lilly Development
and Company
Employees
As of December 31, 1996, the Company had 55 employees, of whom 45 were in
product development and 10 were in administration. The Company believes that its
future success is dependent on attracting and retaining highly-skilled
scientific, sales and marketing and senior management personnel. Competition for
such skills is intense, and there is no assurance that the Company will continue
to be able to attract and retain high-caliber employees. The Company's employees
are not represented by any collective bargaining agreement. The Company
considers its relations with its employees to be good.
Executive Officers of the Company
The following table sets forth certain information with respect to the
executive officers of the Company as of December 31, 1996:
Name Age Position
Richard P. Thompson 45 President, Chief Executive
Officer and Director
Reid M. Rubsamen, M.D. 40 Vice President, Medical
Affairs, Secretary and
Director
R. Ray Cummings 40 Vice President, Business
Development
Max D. Fiore 41 Vice President, Engineering
Igor Gonda, Ph.D. 49 Vice President, Research &
Development
Mark A. Olbert 41 Vice President, Finance &
Administration and
Chief Financial Officer
Richard P. Thompson has been a director of the Company and has served as
the Company's President and Chief Executive Officer since 1994 and Chief
Financial Officer from April 1996 to December 1996. From 1991 to 1994, he was
President of LifeScan, Inc., a Johnson & Johnson Company, a medical device
manufacturing and development company. Mr. Thompson was a founder of LifeScan
and between 1981 and 1991 he held the positions of Vice President, Operations,
and later Vice President, Sales and Marketing, at LifeScan. Mr. Thompson holds a
B.S. in biological sciences from the University of California at Irvine and an
M.B.A. from California Lutheran College.
Reid M. Rubsamen, M.D., a founder of the Company, has been a director of
the Company and has served as the Company's Vice President of Medical Affairs
and Secretary since 1991. Dr. Rubsamen is a Board Certified anesthesiologist
having received his medical training at Pacific Medical Center, San Francisco
and Massachusetts General Hospital, where in 1989 he served as Chief Resident in
Anesthesia. He was also a doctoral candidate in the computer science department
at the Massachusetts Institute of Technology, leaving in 1990 to found the
Company. Dr. Rubsamen holds an A.B. in biochemistry and computer science from
the University of California, Berkeley, and an M.S. in computer science and an
M.D. from Stanford University.
R. Ray Cummings has served as the Company's Vice President of Business
Development since 1995. From 1994 to 1995, he served as Vice President, Business
Development of Celtrix Pharmaceuticals. From 1992 to 1994, Mr. Cummings was
employed as Director, Corporate Licensing of G. D. Searle and Company, a
pharmaceutical company. From 1990 to 1992, he was the Director of New Business
Development and Licensing of Immunex Corporation, another pharmaceutical
company. Mr. Cummings holds a B.S. in biological sciences from Stanford
University, an M.S. in biochemistry and molecular biology from Harvard
University and an M.B.A. from University of California, Berkeley.
Max D. Fiore has served as the Company's Vice President of Engineering
since 1994. From 1991 to 1994, Mr. Fiore served as Director of Engineering at
Lifescan, Inc. From 1990 to 1991, Mr. Fiore was the IMX(TM) Business Unit
Research & Development Manager for Abbott Laboratories, a pharmaceuticals and
medical device company. Mr. Fiore holds a B.S.E.E. and a B.S. in engineering
from Northwestern University and an M.S.E.E. in bio-medical/microprocessor-based
instrument design from University of Wisconsin.
Igor Gonda, Ph.D. has served as the Company's Vice President of Research
and Development since 1995. From 1992 to 1995, Dr. Gonda was a Senior Scientist
and Group Leader at Genentech, Inc., a pharmaceutical company. Prior to joining
Genentech, Inc., Dr. Gonda was a Senior Lecturer in the Department of Pharmacy
at University of Sydney, Australia. Dr. Gonda holds a B.Sc. in chemistry and a
Ph.D. in physical chemistry from the University of Leeds, United Kingdom.
Mark A. Olbert joined the Company in late 1996 as Chief Financial Officer
and Vice President of Finance and Administration. He was previously with Amgen
Inc., where he spent six years in finance operations and was most recently the
Director of Mergers & Acquisitions. Prior to Amgen, Mr. Olbert held financial
management positions at Ashton-Tate and Atlantic Richfield. Mr. Olbert holds a
B.A. in molecular biology from the State University of New York at Buffalo and
an M.B.A. from the Amos Tuck School of Business Administration at Dartmouth
College.
Item 2. PROPERTIES
Aradigm currently leases approximately 22,000 square feet of office space in
three buildings in an office park at 26219 Eden Landing Road, Hayward,
California. The Company's lease for such office space expires in February 1999.
Minimum annual payments under these leases will be approximately $217,000,
$144,000 and $70,000 in 1997, 1998 and 1999, respectively. The Company uses this
space for general administrative, product development, clinical, manufacturing
and research and development purposes. The Company believes that its existing
facilities are adequate to meet its requirements for the near term and that
additional space will be available on commercially reasonable terms if needed.
Item 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1996.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's common stock trades on The Nasdaq National Market under the
symbol "ARDM". The high and low sales prices (excluding retail markup,
markdowns and commissions) for the six months in the period beginning June 20,
1996, the date of the Company's initial public offering, and ending December 31,
1996 are as follows:
HIGH LOW
YEAR ENDED DECEMBER 31, 1996
Second quarter (beginning June 20, 1996) $ 11.250 $ 9.516
Third quarter $ 10.250 $ 7.750
Fourth quarter $ 11.500 $ 9.625
As of December 31, 1996, there were approximately 189 stockholders of
record and approximately 800 beneficial holders of the Company's common stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does
not anticipate paying cash dividends in the foreseeable future, but intends to
retain its capital resources for reinvestment in its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and other such factors as the Board of
Directors deems relevant.
Item 6. SELECTED FINANCIAL DATA
Years Ended December 31,
(In thousands, except per
share amounts) 1996 1995 1994 1993 1992
Statements of Operations
Data:
Contract and license $ 730 $ 155 $ 125 $ - $ -
revenues
Operating expenses:
Research and development 7,981 3,440 2,198 926 435
General and administrative 2,958 2,334 1,664 741 385
Total operating expenses 10,939 5,774 3,862 1,667 820
Loss from operations (10,209) (5,619) (3,737) (1,667) (820)
Interest income 1,179 206 38 13 8
Interest expense (52) (20) (34) (1) (19)
Net loss (9,082) (5,433) (3,733) (1,655) (831)
Net loss per share (1) (1.22) (1.06) (0.48) (0.23) (1.47)
Shares used in computing
net loss per share (1) 7,442 3,692 3,537 3,468 3,587
Balance Sheet Data:
Cash, cash equivalents and
investments $28,534 $12,114 $6,087 $1,932 $1,283
Working capital 23,486 11,594 5,739 1,781 1,168
Total assets 30,733 13,306 6,343 2,055 1,367
Deficit accumulated during
development stage (21,144) (12,069) (6,636) (2,903)(1,248)
Total shareholders' equity 27,886 12,121 5,960 1,888 1,241
(1) See Note 1 of Notes to Financial Statement for an explanation of shares
used in computing net loss per share.
Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the related Notes thereto included elsewhere in this Form 10-K.
Except for historical information contained herein, the discussion in this
section contains forward-looking statements, including, without limitation,
statements regarding timing and results of clinical trials, the establishment of
corporate partnering arrangements, the anticipated commercial introduction of
the Company's products and the timing of the Company's cash requirements. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in such forward-looking
statements. Potential risks and uncertainties include, without limitation,
those mentioned in this report and in particular, the factors described in Part
II, under heading "Risk Factors".
Overview
Since its inception in 1991, Aradigm has been a development stage company
engaged in the advancement of pulmonary drug delivery systems. As of December
31, 1996, the Company had an accumulated deficit of $21.1 million. The Company
has been unprofitable each year and expects to incur further significant and
increasing operating losses over the next several years primarily due to the
expansion of research efforts and the establishment of manufacturing
capabilities to support clinical trials and, if any of its products are
successfully developed and receive necessary regulatory approvals, the
commercialization of such products. To date, Aradigm has not sold any products
and does not anticipate receiving significant revenue from products in 1997.
Results of Operations
Years Ended December 31, 1996, 1995 and 1994
Contract Revenues. The Company reported revenues from contracts and license
fees of $730,000 in 1996 compared to $155,000 in 1995 and $125,000 in 1994.
Included in 1996 revenues was a $500,000 license fee from a human clinical
feasibility testing agreement and $230,000 contract research revenues recognized
from an agreement that provided for a payment of $260,000 upon execution in
December 1995. 1995 revenues were derived entirely from contract research
agreements. In 1994, the Company recorded its initial revenues of $125,000 from
a feasibility research contract.
Research and Development Expenses. Research and development expenses have
increased each year since the Company's inception; these expenses were $8.0
million in 1996 compared to $3.4 million in 1995 and $2.2 million in 1994.
Research and development expenses in 1996, 1995 and 1994 represented 73%, 60%
and 57%, respectively, of total expenses. Research and development expenses in
1996 increased by 132% over 1995, attributable primarily to increased staffing
and costs associated with the expansion of research and development efforts on
the AERx system, the initiation of additional clinical testing of the AERx
system and the expansion of the SmartMist system program. Research and
development expenses in 1995 increased by 57% over 1994, attributable primarily
to the expansion of the research and development efforts on the AERx system,
which began preliminary clinical testing during the year. The Company expects
research and development spending to increase significantly over the next few
years as the Company expands its development efforts.
General and Administrative Expenses. General and administrative expenses were
$3.0 million in 1996 compared to $2.3 million in 1995 and $1.7 million in 1994.
General and administrative expenses increased by 27% in 1996 compared to 1995
and 40% in 1995 compared to 1994, primarily due to increases in staffing,
administrative and facilities expenses related to general corporate activities.
The Company expects general and administrative costs to continue to increase
over the next several years as it expands its operations, increases its efforts
to develop collaborative relationships with corporate partners and meets its
obligations as a public company.
Interest Income. Interest income increased significantly in 1996 compared to
1995 and 1994, primarily due to increased average cash balances in 1996 compared
to 1995 and 1994. The increased average cash balances in 1996 resulted from the
sales of preferred stock in December 1995 and common stock in June 1996 in
conjunction with the Company's initial public offering.
Interest Expense. Interest expense was $52,000 in 1996 compared to $20,000 in
1995 and $33,000 in 1994. Interest expense increased primarily as a result of
higher outstanding capital lease balances in 1996 under the Company's equipment
line of credit.
Net Operating Loss Tax Carryforwards. As of December 31, 1996, the Company had
federal net operating loss tax carryforwards of approximately $18 million. These
carryforwards will expire beginning in the year 2006. Utilization of net
operating loss carryforwards may be subject to substantial annual limitation due
to the ownership change limitation provided for by the Internal Revenue Code of
1986. The annual limitation may result in the expiration of net operating loss
carryforwards before utilization.
Liquidity and Capital Resources
The Company has financed its operations since inception primarily through
public and private placements of its capital stock, proceeds from financings of
equipment acquisitions, contract revenue and interest earned on investments. As
of December 31, 1996, the Company had realized approximately $48.8 million in
net proceeds from sales of its capital stock. The Company also has a $1.75
million equipment line of credit, of which $770,000 remains available for
purchases through June 1997. As of December 31, 1996, the Company had cash,
cash equivalents and investments of approximately $28.5 million.
Net cash used in operating activities in 1996 was $7.1 million compared to
$5.2 million in 1995. The increase resulted primarily from the increase in the
net loss of $3.6 million partially offset by an increase in accrued liabilities
and accounts payable reduced by a net increase in current assets. Net cash used
in operating activities in 1995 increased by $1.8 million compared to 1994 due
to the increase in the net loss.
Net cash used in investing activities in 1996 was $10.8 million compared to
$535,000 in 1995. The increase resulted primarily from the Company's net
purchase of available-for-sale investments and additional capital expenditures.
Net cash used in investing activities in 1995 and 1994 related solely to capital
expenditures by the Company.
Net cash provided by financing activities in 1996 was $24.3 million,
primarily as a result of the Company's completion of its initial public offering
of common stock, which resulted in net proceeds of $24.6 million. Net cash
provided by financing activities for 1995 was $11.7 million, primarily as a
result of $11.6 million in net proceeds from the issuance of preferred stock.
From inception through December 31, 1996, the Company's cash utilized for
operating activities totaled approximately $18.4 million. The net cash utilized
was approximately $7.1 million in 1996, $5.2 million in 1995 and $3.4 million in
1994 and differed from the Company's net loss in those periods principally as a
result of depreciation expense and increases in accounts payable and accrued
liabilities. The Company expects that its cash requirements will increase due to
expected increases in expenses related to research and development activities,
the scale up of manufacturing processes and increases in general and
administrative costs. The Company's cash requirements will also be affected by
the extent and duration of the foreign and domestic regulatory approval
processes for its potential products. Although there can be no assurance that
the Company will receive regulatory approval for any of its products, if the
Company does so, its cash requirements may increase due to the significant
expenses associated with initial commercial production and marketing efforts.
These expenses include, but are not limited to, increases in personnel and
related costs, capital expenditures, product prototype development expenses and
the costs of facilities expansion.
The Company expects that its existing capital resources, existing contract
research and development revenue, interest income and equipment financing
capability will enable the Company to maintain current and planned operations
through the first half of 1998. The Company's cash requirements, however, may
vary materially from those now planned because of results of research and
development efforts, including capital expenditures and funding preclinical and
clinical trials, manufacturing process development in connection with the
commercialization of the SmartMist system, and manufacturing capacity for
preclinical, clinical and full scale manufacturing requirements of the AERx
system. The Company may seek additional funding through collaborations or
through public or private equity or debt financings. The Company has not yet
established any corporate development collaborations and there can be no
assurance that it will be able to do so on reasonable terms, or at all. Nor can
there be any assurance that additional financing can be obtained on acceptable
terms, or at all. If additional funds are raised by issuing equity securities,
dilution to shareholders may result. If adequate funds are not available, the
Company may be required to delay, to reduce the scope of, or to eliminate one or
more of its research and development programs, or to obtain funds through
arrangements with collaborative partners or other sources that may require the
Company to relinquish rights to certain of its technologies or products that the
Company would not otherwise relinquish.
Risk Factors
Except for historical information contained herein, the discussion in this
section contains forward-looking statements, including, without limitation,
statements regarding timing and results of clinical trials, the establishment of
corporate partnering arrangements, the anticipated commercial introduction of
the Company's products and the timing of the Company's cash requirements. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in such forward-looking
statements.
Early Stage Of Development
Aradigm, a development stage company incorporated in January 1991, has a
limited history of operations and has generated only limited revenues to date,
primarily from two short-term research and feasibility agreements and interest
income. No revenues have been generated by sales of products or product
royalties. The Company has no products other than the initial version of its
SmartMist Asthma Management System approved for commercial sale, and all of its
potential products are in various stages of research or development. There can
be no assurance that the Company's research and development efforts will be
successful or that regulatory clearance for the sale of any of its potential
products will be obtained or that its potential products can be manufactured at
an acceptable cost.
History of Losses; Anticipated Future Losses
The Company has not been profitable since inception and, through December
31, 1996, had incurred a cumulative deficit of approximately $21.1 million. The
Company expects to continue to incur substantial and increasing losses over at
least the next several years as the Company's research and development efforts,
pre-clinical and clinical testing activities and manufacturing scale-up efforts
expand and as the Company plans and builds its late stage clinical and early
commercial production capabilities.
Uncertainty of Successful Product Development
The Company's SmartMist and AERx systems are still in the prototype stage
and will require further development and regulatory approvals before they can be
commercialized. While the Company is developing a commercial version of the
SmartMist Asthma Management System that has received 510(k) clearance from the
United States Food and Drug Administration ("FDA"), there can be no assurance
that such commercial version of the device can be successfully developed or
marketed without further design modifications. There also can be no assurance
that any such modifications of the approved device will not necessitate the
submission of a second 510(k) notice. The Company's AERx platform is at an
earlier stage of development than the SmartMist device and is being tested using
a clinical bench prototype. The AERx system will require substantial additional
development, preclinical and clinical testing and investment. To further develop
its AERx system, the Company must address many engineering and design issues,
including ensuring that the device has the ability to deliver a consistent and
predictable amount of drug into the blood stream and can be manufactured
successfully as a hand-held system. No assurance can be made that the Company
will be successful in addressing these design, engineering and manufacturing
issues. Additionally, the Company may need to formulate and will need to package
drugs for delivery by its AERx system. There can be no assurance that the
Company will be able to successfully formulate and package such drugs. The
Company will need to demonstrate that drugs delivered by its AERx system remain
safe and efficacious and that over time and under differing storage conditions,
such drugs will not be subject to physical or chemical instability or other
problems that would prohibit the AERx system from being a commercially viable
product. While development efforts are at different stages for different
products, there can be no assurance that the Company will be successful in any
of its product development efforts, or that the Company will not abandon some or
all of its proposed products. Failure by the Company to successfully develop its
potential products in a timely manner could have a material adverse effect on
the Company.
Uncertainty Of Successful Product Commercialization
Even if the Company successfully develops and obtains necessary regulatory
approvals for a product, the Company's success in commercializing such product
will be dependent upon many factors, including acceptance by health care
professionals and patients. Acceptance of the Company's products by health care
professionals and patients will largely depend on demonstrating that the
Company's products are competitive with alternate delivery systems with respect
to safety, efficacy and price. The Company believes that market acceptance of
its SmartMist system will depend largely upon health care professionals and
third party payors determining that the SmartMist system offers medical and
economic benefits over existing asthma therapies. In addition, the SmartMist
Asthma Management System, is specifically designed for the canisters currently
used by some of the leading manufacturers of MDIs. If, among other things, these
manufacturers exit from this business or decide to change the dimensions of
their canisters, the Company could be materially and adversely affected.
Moreover, MDIs use CFCs, as a propellant for the medication. The Company is
aware of initiatives and international agreements to ban CFCs, which if extended
to MDIs, could have a material adverse effect on the Company. No assurance can
be made that the Company's products will prove competitive or that the Company
will be successful in taking products from their current state of development to
commercial introduction or success. Failure by the Company to successfully
commercialize its potential products in a timely manner would have a material
adverse effect on the Company.
Dependence Upon Entering Into Collaborations
The Company currently lacks the marketing and sales experience, personnel,
distribution channels and other infrastructure needed to successfully
commercialize the SmartMist Asthma Management System. Through its Respiratory
Products Business Unit, the Company is currently establishing such capability.
The Company's ability to successfully develop and commercialize products based
on its AERx system is largely dependent upon the Company entering into
collaborative arrangements with corporate partners willing to make available to
the Company resources to assist with such areas as product development,
preclinical and clinical trials, regulatory processes, marketing, sales and
distribution. In addition, the Company's ability to apply the AERx system to any
proprietary drugs, including new drugs, biotechnology drugs or established drugs
in proprietary formulations, will depend upon the Company's ability to establish
and maintain partnering or collaborative arrangements with the holders of
proprietary rights to such drugs. The Company also has no collaborative
agreements with corporate partners for products based on its AERx system. There
can be no assurance that the Company will enter into such partnering or
collaborative arrangements or, even if entered into, that such arrangements will
be successful. The failure of the Company to enter into collaborative or
partnering arrangements would have a material adverse effect on the Company.
Limited Manufacturing Experience; Risk Of Scale-up Failure
To date, the Company has manufactured components of its systems under
development only on the small scale needed for early stage trials. To achieve
the levels of production necessary to support late stage human clinical trials
and for commercialization of Aradigm's potential products, the Company will need
to scale up its current manufacturing capabilities. Significant additional work
must be completed prior to commercialization of the SmartMist Asthma Management
System. There can be no assurance such work will be completed successfully. In
addition, the Company is in the early stages of scaling-up the production of
clinical trial supplies of disposable drug packages for the AERx system. The
Company anticipates making significant expenditures to attempt to provide for
the high volume manufacturing required for multiple AERx system products, if
such products are successfully developed. There can be no assurance that
manufacturing and quality control problems will not arise as the Company
attempts to scale up or that such scale up can be achieved in a timely manner or
at a commercially reasonable cost. Any failure to surmount such problems could
delay or prevent late stage clinical testing and commercialization of the
Company's products. The Company's manufacturing facilities and those of its
contract manufacturers will be subject to periodic regulatory inspections by the
FDA and other federal and state regulatory agencies and such facilities will be
subject to cGMP requirements of the FDA. There can be no assurance the Company
will satisfy such regulatory requirements and any failure to satisfy cGMP and
other requirements could have a material adverse effect on the Company.
The Company has engaged certain contract manufacturers in connection with
production of its prototype inhalation devices and the Company intends to use
one or more contract manufacturers to produce key components, assemblies and
subassemblies for its clinical trials and commercialization. There can be no
assurance that Aradigm will be able to enter into or maintain satisfactory
contract manufacturing arrangements. Certain components of Aradigm's potential
products are or will be available initially only from single sources. While the
Company has contingency plans for alternate suppliers, there can be no assurance
that the Company could find alternate suppliers for such components. Even if new
suppliers are secured, there can be no assurance that this would not
significantly reduce or eliminate the Company's ability to supply product during
any transition. A delay of or interruption in production could have a material
adverse effect on the Company.
Future Capital Needs; Uncertainty Of Additional Funding
The Company's operations to date have consumed substantial and increasing
amounts of cash. The negative cash flow from operations is expected to continue
and to accelerate in the foreseeable future. The development of the Company's
technology and proposed products will require a commitment of substantial funds
to conduct the costly and time-consuming research and preclinical and clinical
testing activities necessary to develop and refine such technology and proposed
products, to establish a late stage clinical and early commercial production
facility and to bring any such products to market. The Company's future capital
requirements will depend on many factors, including continued progress in the
research and development of the Company's technology and drug delivery systems,
the ability of the Company to establish and maintain favorable collaborative
arrangements with others, progress with preclinical and clinical trials, the
time and costs involved in obtaining regulatory approvals, the cost of
development and the rate of scale up of the Company's production technologies,
the timing and cost of its late stage clinical and early commercial production
facility, the cost involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and the need to acquire licenses or other rights to new
technology.
The Company will need to raise substantial additional capital to fund its
operations. There can be no assurance that additional financing will be
available on acceptable terms or at all. If additional funds are raised by
issuing equity securities, substantial dilution to shareholders may result. If
adequate funds are not available, the Company may be required to delay, reduce
the scope of, or eliminate one or more of its research or development programs
or obtain funds through arrangements with collaborative partners or others that
may require the Company to relinquish rights to certain of its technologies,
product candidates or products that the Company would not otherwise relinquish.
Dependence Upon Proprietary Technology; Uncertainty Of Patents and Proprietary
Technology
The field of aerosolized drug delivery is crowded and a substantial number
of patents have been issued in this field. Competitors and institutions may have
applied for other patents and may obtain additional patents and proprietary
rights relating to products or processes competitive with those of the Company.
Patents or other publications may hinder or prevent the Company from obtaining
patent protection being sought or draw into question the validity of patents
already issued to the Company. In addition, patents issued to others might
provide competitors with the ability to prevent the Company from making its
products or carrying out processes necessary for use of its products. The
Company may not be able to obtain a license under any such patent and may
thereby be prevented from making products or carrying out processes which are
important or essential to the business of the Company. Although issued patents
are presumed valid under federal law, none of the patents of the Company has
been challenged in litigation. There can be no assurance that any of such
patents will be found valid if challenged. There also can be no assurance that
any of the applications will issue or if issued will later be found valid if
challenged. Further, there can be no assurance that any issued patents or
applications which might later issue as patents will provide the Company with a
degree of market exclusivity sufficient for the Company to profitably compete
against its competitors. Pending United States applications are maintained in
secret until they are issued as patents and as such can not be searched by the
Company. There may be pending applications which will later issue as patents
which will create infringement issues for the Company. Further, patents already
issued to the Company or applications of the Company which are pending may
become involved in interferences and interferences could be resolved in favor of
competitors of the Company and involve the expenditure of substantial financial
and human resources of the Company.
The Company pursues a policy of having its officers, employees, consultants
and advisors execute proprietary information and invention agreements upon
commencement of their relationships with the Company as officers, employees or
consultants, which agreements provide that all confidential information
developed or made known to the individual during the course of the relationship
shall be kept confidential, except in specified circumstances. These agreements
also provide that all inventions developed by the individual on behalf of the
Company shall be assigned to the Company and that the individual will cooperate
with the Company in connection with securing patent protection on the invention
if the Company wishes to pursue such protection. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's inventions, trade secrets or other proprietary information in the
event of unauthorized use or disclosure of such information. Violation of such
agreements are difficult to police.
Government Regulation; Uncertainty with Preclinical and Clinical Testing
All medical devices and new drugs, including the Company's products under
development, are subject to extensive and rigorous regulation by the federal
government, principally the FDA, and by state and local governments. Such
regulations govern the development, testing, manufacture, labeling, storage,
premarket clearance or approval, advertising, promotion, sale and distribution
of such products. If medical devices or drug products are marketed abroad, they
also are subject to regulation by foreign governments.
The regulatory process for obtaining FDA premarket clearances or approvals
for medical devices and drug products is generally lengthy, expensive and
uncertain. Securing FDA marketing clearances and approvals often requires the
submission of extensive clinical data and supporting information to the FDA.
Product clearances and approvals, if granted, can be withdrawn for failure to
comply with regulatory requirements or upon the occurrence of unforeseen
problems following initial marketing.
There can be no assurance that the Company will be able to obtain necessary
regulatory clearances or approvals on a timely basis, if at all, for any of its
products under development, and delays in receipt or failure to receive such
clearances or approvals or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the Company. Moreover,
regulatory clearances or approvals for products such as medical devices and new
drugs, even if granted, may include significant limitations on the uses for
which such products may be marketed. Certain material changes to medical devices
and new drugs also are subject to FDA review and clearance or approval. There
can be no assurance that any clearances or approvals that are required, once
obtained, will not be withdrawn or that compliance with other regulatory
requirements can be maintained. Further, failure to comply with applicable FDA
and other regulatory requirements can result in sanctions being imposed on the
Company or the manufacturers of its products, including warning letters, fines,
product recalls or seizures, injunctions, refusals to permit products to be
imported into or exported out of the United States, refusals of FDA to grant
premarket clearance or premarket approval of medical devices and drugs or to
allow the Company to enter into government supply contracts, withdrawals of
previously approved marketing applications and criminal prosecutions.
There can be no assurance that the Company will be able to develop or
manufacture a version of the SmartMist Asthma Management System suitable for
commercialization. Any changes made to the initial version of the SmartMist
Asthma Management System that has been cleared by the FDA will require the
Company to evaluate whether such changes could significantly affect the safety
or effectiveness of the device and, therefore, require the submission of a
second 510(k) notice. The Company has yet to determine whether changes it may
make to the SmartMist Asthma Management System will require the submission of a
second 510(k) notice. If the submission of a second 510(k) notice is required,
there can be no assurance that clearance can be obtained in a timely manner or
at all.
Before the Company can file for regulatory approvals for the commercial
sale of the Company's potential AERx products, the FDA will require extensive
preclinical and clinical testing to demonstrate the safety and efficacy of such
potential products. To date, the Company has only tested an early prototype
bench-mounted version of the AERx Pain Management System with morphine on a
limited number of healthy volunteers in Australia and in Phase I clinical trials
in the United States. There can be no assurance that the Phase I study results
will support additional clinical trials of the AERx system, that the Company
will be able to manufacture sufficient quantities of the disposable nozzle
packages to support any future clinical trials of the AERx system, or that the
design requirements of the AERx system will make it amenable to development
beyond the early design stage prototype currently being used. Failure of the
Company to progress to Phase II clinical studies or otherwise to advance beyond
the current early design stage prototype of the AERx system would have a
material adverse effect on the Company.
The timing of completion of clinical trials is dependent upon, among other
factors, the enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment in the
Company's current trials or future clinical trials may result in increased
costs, program delays or both, which could have a material adverse effect on the
Company.
The Company also is developing applications of its AERx system for the
delivery of insulin and imaging agents via inhalation. These applications are in
an early stage of development and the regulatory requirements associated with
obtaining the necessary marketing approvals from the FDA and other regulatory
agencies are not known. Potentially, the FDA could regulate the lung imaging
product as a medical device, as a drug, or as a device/drug combination product.
There can be no assurance that these applications of the AERx system will prove
to be viable or that any necessary regulatory approvals will be obtained in a
timely manner, if at all. Although the Company believes the data regarding the
Company's potential products is encouraging, the results of initial preclinical
and clinical testing of the products under development by the Company are not
necessarily predictive of results that will be obtained from subsequent or more
extensive preclinical and clinical testing. Furthermore, there can be no
assurance that clinical trials of products under development will demonstrate
the safety and efficacy of such products at all or to the extent necessary to
obtain regulatory approvals. Companies in the medical device, pharmaceutical and
biotechnology industries have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. The failure to
demonstrate adequately the safety and efficacy of a therapeutic product under
development could delay or prevent regulatory approval of the product and would
have a material adverse effect on the Company.
In addition, due to limited experience with chronic administration of drugs
delivered via the lung for systemic effect, the FDA may require clinical data to
demonstrate that such chronic administration is safe. There can be no assurance
that the Company will be able to present such data in a timely manner, or at
all.
The FDA and other regulatory agency requirements for manufacturing, product
testing and marketing can vary depending upon whether the product is a medical
device or a drug. Manufacturers of medical devices and drugs also are required
to comply with the applicable FDA and cGMP regulations, which include
requirements relating to product testing and quality assurance as well as the
corresponding maintenance of records and documentation. There can be no
assurance that the Company will be able to comply with the applicable cGMP
regulations and other FDA regulatory requirements as it scales up its
manufacturing operations. Such failure could have a material adverse effect on
the Company.
Because the Company's AERx Pain Management System clinical studies involves
morphine, the Company is registered with the DEA and its facilities are subject
to inspection and DEA export, import, security and production quota
requirements. There can be no assurance that the Company will not be required to
incur significant costs to comply with DEA regulations in the future or that
such regulations will not have a material adverse effect on the Company.
Highly Competitive Markets; Risk of Alternative Therapies
The medical device, pharmaceutical and biotechnology industries are highly
competitive and rapidly evolving and significant developments are expected to
continue at a rapid pace. The Company's success will depend on its ability to
successfully develop products and technologies for pulmonary drug delivery. If a
competing company were to develop or acquire rights to a better pulmonary
delivery device, the Company could be materially and adversely affected.
The Company is in competition with pharmaceutical, biotechnology and drug
delivery companies and other entities engaged in the development of alternative
drug delivery systems or new drug research and testing, as well as with entities
producing and developing injectable drugs. The Company is aware of a number of
companies currently seeking to develop new products and non-invasive
alternatives to injectable drug delivery, including oral, intranasal and
transdermal delivery systems and colonic absorption systems. The Company also is
aware of other companies currently engaged in the development and
commercialization of pulmonary drug delivery systems and enhanced injectable
drug delivery systems. Competitors in this field include: Astra AB, Boehringer
Ingelheim, Dura Pharmaceuticals, Inc., Fluid Propulsion Technologies, Inc.,
Forest Labs, Glaxo Wellcome, Inc., Inhale Therapeutic Systems, Ivax (Norton),
Medeva Ltd., Rhone-Poulenc Rorer (Fisons Limited), Schering Plough and 3M. Many
of these companies and entities have greater research and development
capabilities, experience, manufacturing, marketing, sales, financial and
managerial resources than the Company and represent significant competition for
the Company. Acquisitions of competing drug delivery companies by large
pharmaceutical companies or partnering arrangements between such companies could
enhance competitors' financial, marketing and other resources. The Company's
competitors may succeed in developing competing technologies, obtaining FDA
approval for products more rapidly than the Company and gaining greater market
acceptance of their products than the Company's products. There can be no
assurance that developments by others will not render some or all of the
Company's proposed products or technologies uncompetitive or obsolete, which
could have a material adverse effect on the Company.
Dependence On Key Personnel; Managing Growth
The Company is dependent upon a limited number of key management and
technical personnel. The loss of the services of one or more of such key
employees could have a material adverse effect on the Company. In addition, the
Company's success will depend upon its ability to attract and retain additional
highly qualified sales, management, manufacturing and research and development
personnel. The Company faces intense competition in its recruiting activities,
and there can be no assurance that the Company will be able to attract or retain
qualified personnel. Through at least the end of 1997, the Company expects to
experience rapid growth in employee headcount and operations. The Company's
expected growth and development and commercialization efforts will require the
implementation of improved or new systems for financial control and management.
The failure to properly implement such systems and to effectively manage growth
could have a material adverse effect on the Company.
Exposure To Product Liability
The research, development and commercialization of medical devices and
therapeutic products entails significant product liability risks. If the Company
succeeds in commercializing products using the SmartMist system or the AERx
system and if it succeeds in developing additional devices and new products, the
use of such products in clinical trials and the commercial sale of such products
may expose the Company to liability claims. These claims might be made directly
by consumers or by pharmaceutical companies or others selling such products.
Companies often address the exposure of such risk by obtaining product liability
insurance. Although the Company currently maintains limited product liability
insurance, there can be no assurance that the Company will be able to continue
to obtain such insurance on acceptable terms in amounts sufficient to protect
the Company.
Uncertainty Related To Health Care Reform
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Although Congress has
failed to pass comprehensive health care reform legislation to date, the Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative health care delivery and payment
systems. Market forces are expected to demand reduced costs. Aradigm cannot
predict what impact the adoption of any federal or state health care reform
measures or future private sector reform may have on its business.
Uncertainty Related to Third-Party Reimbursement
In both domestic and foreign markets, sales of the Company's potential
products, if any, will depend in part on the availability of reimbursement from
third-party payors such as government health administration authorities, private
health insurers and other organizations. Third-party payors are increasingly
challenging the price and cost-effectiveness of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products. There can be no assurance that any of the Company's
potential products will be reimbursable by third parties. In addition, there can
be no assurance that the Company's proposed products will be considered cost-
effective or that adequate third-party reimbursement will be available to enable
Aradigm to maintain price levels sufficient to realize a profit. Legislation and
regulations affecting the pricing of pharmaceuticals may change before the
Company's proposed products are approved for marketing and any such changes
could further limit reimbursement for medical products and services.
Hazardous Materials
The Company's research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal 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.
Control By Officers, Directors And Principal Shareholders
Executive officers and directors of the Company, together with entities
affiliated with them, own or control approximately 42% of the outstanding shares
of Common Stock and are able to significantly influence the election of the
Company's Board of Directors and other corporate actions requiring stockholder
approval, as well as significantly influence the direction and policies of the
Company.
Possible Volatility of Stock Price
The market prices for securities of many companies engaged in
pharmaceutical development activities historically have been highly volatile.
Prices for the Company's Common Stock may be influenced by many factors,
including the depth of the market for the Common Stock, investor perception of
the Company, fluctuations in the Company's operating results and market
conditions relating to the pharmaceutical industry. In addition, announcements
of technological innovations or new commercial products by the Company or its
competitors, delays in the development or approval of the Company's product
candidates, developments or disputes concerning patent or proprietary rights,
publicity regarding actual or potential developments relating to products under
development by the Company or its competitors, regulatory developments in both
the United States and foreign countries, public concern as to the safety of drug
technologies and economic and other external factors, as well as period-to-
period fluctuations in financial results, may have a significant impact on the
market price of the Common Stock. Finally, future sales of substantial amounts
of Common Stock by existing stockholders could also adversely affect the
prevailing price of the Common Stock.
Potential Adverse Impact Of Shares Eligible For Future Sale
Sales of shares of Common Stock (including shares issued upon the exercise
of outstanding options) in the public market could adversely affect the market
price of the Common Stock. Such sales also might make it more difficult for the
Company to sell equity securities or equity-related securities in the future at
a time and price that the Company deems desirable. As of January 31, 1997, the
Company had approximately 10,214,000 shares of Common Stock outstanding and has
reserved approximately 1,379,000 shares of its Common Stock for the exercise of
an outstanding warrant and for issuances under its 1996 Stock Option Plan, the
1996 Non-Employee Directors' Stock Option Plan and Employee Stock Purchase Plan
Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Aradigm Corporation
We have audited the accompanying balance sheets of Aradigm Corporation (a
development stage company) as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity, and cash flows for the years
then ended and for the period from January 30, 1991 (inception) through December
31, 1996. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements for the year ended
December 31, 1993, were audited by other auditors whose report dated February
22, 1994 expressed an unqualified opinion on those statements. The financial
statements for the period from January 30, 1991 (inception) through December 31,
1993 include total revenues and net loss of $0 and $2.9 million, respectively.
Our opinion on the statements of operations, shareholders' equity, and cash
flows for the period from January 30, 1991 (inception) through December 31,
1996, insofar as it relates to amounts for periods ended through December 31,
1993, is based solely on the report of other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Aradigm Corporation (a development stage company) at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 and for the
period from January 30, 1991 (inception) through December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 7, 1997
REPORT OF BREGANTE + COMPANY LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Aradigm Corporation
We have audited the accompanying statements of operations, shareholders'
equity, and cash flows of Aradigm Corporation (a company in the development
stage) for the year ended December 31, 1993 and for the period from inception
(January 30, 1991) through December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Aradigm
Corporation for the year ended December 31, 1993 and for the period from
inception (January 30, 1991) through December 31, 1993, in conformity with
generally accepted accounting principles.
BREGANTE & COMPANY LLP
San Francisco, California
February 22, 1994
Aradigm Corporation
(A development stage company)
Balance Sheets
December 31,
1996 1995
Assets
Current assets:
Cash and cash equivalents $18,553,831 $12,117,355
Short-term investments 6,977,331 -
Contract receivable - 260,000
Other current assets 451,220 74,127
Total current assets 25,982,382 12,451,482
Investments 3,002,445 -
Property and equipment, net 1,452,968 636,351
Notes receivable from officers 219,739 150,444
Other assets 75,657 68,099
Total assets $30,733,191 $13,306,376
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $601,230 $174,854
Accrued clinical and other
studies 898,635 -
Accrued compensation 279,985 217,643
Other accrued liabilities 278,985 68,448
Deferred revenue 169,500 230,000
Current portion of capital lease
obligations 268,514 167,003
Total current liabilities 2,496,849 857,948
Noncurrent portion of capital
lease obligations 350,171 327,407
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value;
5,000,000 shares authorized
(10,000,000 in 1995); issued and
outstanding shares: 1996 - none; - 24,119,060
1995 - 5,611,910; aggregate
liquidation preference of
$25,284,342 at December 31, 1995
Common stock, no par value,
40,000,000 shares authorized
(20,000,000 in 1995); issued and 49,821,157 267,158
outstanding shares: 1996 -
10,214,054; 1995 - 1,327,025
Notes receivable from
shareholders (482,805) (196,664)
Deferred compensation (308,239) -
Deficit accumulated during the
development stage (21,143,942) (12,068,533)
Total shareholders' equity 27,886,171 12,121,021
Total liabilities and
shareholders' equity $30,733,191 $13,306,376
Aradigm Corporation
(A development stage company)
Statements of Operations
Period from
January 30,
1991(inception)
through
Years ended December 31, December 31,
1996 1995 1994 1996
Contract and license
revenues $ 730,000 $155,000 $125,000 $1,010,000
Expenses:
Research and
development 7,981,419 3,440,181 2,197,708 15,283,945
General and
administrative 2,957,467 2,333,372 1,664,596 8,189,140
Total expenses 10,938,886 5,773,553 3,862,304 23,473,085
Loss from operations (10,208,886) (5,618,553) (3,737,304) (22,463,085)
Interest income 1,178,800 205,863 38,050 1,443,611
Interest expense (52,075) (20,078) (33,423) (131,220)
Net loss $(9,082,161) $(5,432,768) $(3,732,677) $(21,150,694)
Net loss per share $ (1.22) $ (1.47) $ (1.06)
Shares used in computing
net loss per share 7,442,016 3,692,088 3,536,510
Aradigm Corporation
(A development stage company)
Statement of ShareholdersO Equity
Period from January 30, 1991 (Inception) through December 31, 1996
Notes
Receiv- Deficit
Preferred Common able From Deferred During the Share-
Stock Stock Share- Compensa- Development holders'
Shares Amount Share Amount holders tion Stage Equity
Balances at - $ - - $ - $ - $ - $ - $ -
January 30,1991
(inception)
Issuance of
common stock
in exchange for - - 805,400 30,270 - - - 30,270
equipment and cash
at $0.03 and
$0.05 per share,
respectively
Issuance of Series
A convertible 149,594 99,730 - - - - - 99,730
preferred stock
for cash at $0.67
per share
Net loss - - - - - - (416,551) (416,551)
Balances at 149,594 99,730 805,400 30,270 - - (416,551) (286,551)
December 31,
1991
Issuance of
common stock and - - 97,500 5,625 - - - 5,625
for cash at $0.05
and $0.10
per share
Issuance of
Series A
convertible 49,998 33,332 - - - - - 33,332
preferred stock
for cash and in
exchange for
debt at
$0.67 per share
Issuance of Series
B convertible
preferred stock for
cash and in
exchange for debt 803,441 2,320,862 - - - - - 2,320,862
at $2.90 per share,
net of issuance
costs of $9,129
Net loss - - - - - - (831,928) (831,928)
Balances at 1,003,033 2,453,924 902,900 35,895 - - (1,248,479) 1,241,340
December 31,
1992
Issuance of
Series C
convertible
preferred
stock for cash
and in exchange 45,831 2,308,331 - - - - - 2,308,331
for debt at $3.60
per share, net
of issuance costs
of $16,673
Repurchase of
common stock at - - (197,221) (6,574) - - - (6,574)
$0.03 per share
Net loss - - - - - - (1,654,609) (1,654,609)
Balances at 1,648,864 4,762,255 705,679 29,321 - - (2,903,088) 1,888,488
December 31,
1993
Issuance of
common stock - - 231,000 84,700 (84,700) - - -
in exchange
for notes receivable
at $0.37 per
share
Repayment of - - - - 220 - - 220
notes receivable
Issuance of
Series D
convertible
preferred
stock for cash
and in 1,854,594 7,803,638 - - - - - 7,803,638
exchange for
debt plus
accrued
interest at
$4.23 per share,
net of issuance
costs of
$35,195
Net loss - - - - - - (3,732,677) (3,732,677)
Balances at 3,503,458 12,565,893 936,679 114,021 (84,480) - (6,635,765) 5,959,669
December 31,
1994
Issuance of
common stock
in exchange - - 397,375 155,714 (142,544) - - 13,170
exchange for
cash and a
note receiv-
able at
prices from
$0.33 to $0.43
per share
Repurchase of
common stock at - - (7,029) (2,577) 2,577 - - -
$0.37 per share
Repayments of - - - - 27,783 - - 27,783
notes receivable
Issuance of
Series E
convertible 2,108,452 11,553,167 - - - - - 11,553,167
preferred
stock for
cash at $5.50
per share,
net of issuance
costs of $43,347
Net loss - - - - - - 5,432,768) (5,432,768)
Balances at 5,611,910 24,119,060 1,327,025 267,158 (196,664) - (12,068,533) 12,121,021
December 31,
1995
Issuance of
common stock in
exchange for - - 662,629 349,647 (287,330) - - 62,317
cash and notes
receivable at
prices from
$0.10 to $5.33
per share
Repurchase of - - (2,766) (1,189) 1,189 - - -
common stock at
$0.43 per share
Issuance of
common stock (5,611,910) (24,119,060) 5,727,166 24,119,060 - - - -
upon conversion
of preferred
stock and
warrants, net
Issuance of
common stock in
exchange for - - 2,500,000 24,591,588 - - - 24,591,588
cash at $11.00
per share , net
of issuance
costs of
$983,412
Deferred - - - 494,893 - (494,893) - -
compensation
Amortization
of deferred - - - - - 186,654 - 186,654
deferred
compensation
Net change in - - - - - - 6,752 6,752
unrealized gain
(loss) on
available-for
sale investments
Net loss - - - - - - (9,082,161) (9,082,161)
Balances at - - $10,214,054 $49,821,157 $(482,802) $(308,239) $(21,143,942) $27,886,171
December 31, 1996
Aradigm Corporation
(A development stage company)
Statements of Cash Flows
Period from
January 30,
1991
Years ended December 31, (inception)
through
December 31
,
1996 1995 1994 1996
Cash flows used in
operating activities
Net loss $(9,082,161) $(5,432,768) $(3,732,677) $(21,150,694)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and 389,703 192,495 87,678 719,459
amortization
Amortization of deferred 186,654 - - 186,654
compensation
Accrued interest on note - - 32,622 32,622
exchanged for preferred
stock
Loss on disposal of - 18,467 - 37,666
property and equipment
Loss on sale-leaseback - 95,294 - 95,294
transaction
Changes in operating
assets and liabilities:
Contract receivable 260,000 (260,000) - -
Other current assets (377,093) (38,334) (20,237) (451,220)
Other assets (7,558) (59,779) (5,520) (75,657)
Accounts payable 426,376 (41,145) 87,824 601,230
Accrued liabilities 1,171,514 118,262 129,103 1,457,605
Deferred revenue (60,500) 230,000 - 169,500
Net cash used in (7,093,065) (5,177,508) (3,421,207) (18,377,541)
operating activities
Cash flows used in
investing activities
Capital expenditures (811,583) (535,230) (195,077) (1,695,744)
Purchases of available (190,666,647) - - (190,666,647)
for sale investments
Proceeds from maturities of 180,693,623 - - 180,693,623
available for sale
investments
Net cash used in (10,784,607) (535,230) (195,077) (11,668,768)
investing activities
Cash flows provided by
financing activities
Proceeds from issuance of - - 1,500,000 2,111,395
notes payable to
shareholders
Repayment of notes payable - - - (298,972)
to shareholders
Proceeds from issuance of - 11,553,167 6,271,016 22,274,014
preferred stock
Proceeds from issuance of 24,653,905 40,953 220 24,710,973
common stock, net
Repurchase of common stock - - - (6,574)
Proceeds from sale of
equipment in sale- - 389,621 - 389,621
leaseback transaction
Notes receivable from (69,295) (150,444) - (219,739)
officers
Payments on lease (270,462) (90,116) - (360,578)
obligations
Net cash provided by 24,314,148 11,743,181 7,771,236 48,600,140
financing activities
Net increase in cash and 6,436,476 6,030,443 4,154,952 18,553,831
cash equivalents
Cash and cash equivalents 12,117,355 6,086,912 1,931,960 -
at beginning of period
Cash and cash equivalents $ 18,553,831 $12,117,355 $6,086,912 $18,553,831
at end of period
Supplemental investing
and financing activities
Common stock issued in $ - $ - $ - $ 20,000
exchange for equipment
Common stock issued in $ 286,141 $ 142,544 $ 84,700 $ 513,385
exchange for notes
receivable
Preferred stock issued in $ - $ - $1,500,000 $ 1,812,423
exchange for debt
Acquisition of equipment $ 394,737 $ 584,526 $ - $ 979,263
under capital leases
1. Organization and Summary of Significant Accounting Policies
Organization and Description of Business
Aradigm Corporation (the OCompanyO) was incorporated in the State of
California on JanuaryE30, 1991. Since inception, the Company has been
engaged in the development of non-invasive pulmonary drug delivery
products. The CompanyOs principal activities to date have been conducting
research and development, recruiting personnel, focusing on business
development, raising capital and acquiring assets. Accordingly, it is
considered a development stage company.
Basis of Presentation
The Company expects increasing losses over the next several years as
development efforts continue. Management plans to continue to finance the
Company primarily through issuances of equity securities, research and
development contract revenue, capital lease financing, and in the longer
term, revenue from product sales. If the financing arrangements
contemplated by management are not consummated, the Company may have to
seek other sources of capital or re-evaluate operating plans.
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.
Depreciation and Amortization
The Company records property and equipment at cost and calculates
depreciation using the straight-line method over the estimated useful
lives of the respective assets, generally four to seven years. Machinery
and equipment acquired under capital leases is amortized over the useful
lives of the assets. Leasehold improvements are amortized over the
remaining term of the lease.
Revenue Recognition
Contract revenues consist of revenue from collaboration agreements and
feasibility studies. The Company recognizes revenue ratably under the
agreements as costs are incurred. Deferred revenue represents the portion
of research payments received that has not been earned. Non-refundable
signing or license fee payments that are not dependent on future
performance under collaborative agreements are recognized as revenue when
received.
Net Loss Per Share
Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding. Common equivalent
shares from stock options and warrants are excluded from the computation
as their effect is antidilutive, except that, pursuant to the Securities
and Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares issued at prices below the Company's June 20, 1996
initial public offering price during the 12-month period prior to the
offering have been included in the calculation as if they were
outstanding for all periods through the offering (using the treasury
stock method and the initial public offering price).
As described above, the antidilutive effect of certain stock options is
included in the calculation of loss per share for all periods through
June 20, 1996, but is excluded from the calculation after that date. The
following pro forma per share data is provided to show the calculation on
a consistent basis for 1996 and 1995. It has been computed as described
above, but includes the retroactive effect from the date of issuance of
the conversion of convertible preferred stock to common shares upon the
closing of the Company's initial public offering.
Per share information calculated on the above basis is as follows:
Years ended December 31,
1996 1995
Pro forma net loss pershare $(1.02) $(0.76)
Shares used in computing
pro forma net loss per share 8,917,246 7,195,556
2. Financial Instruments
Cash Equivalents and Investments
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
Company places its cash and cash equivalents in money market funds,
commercial paper, corporate master notes, and market auction preferreds.
The Company's short-term investments consist of corporate notes with
maturities ranging from 3 to 12 months. Other investments consist of
corporate notes with maturities greater than 12 months.
The Company classifies its investments as available-for-sale. Available-
for-sale investments are recorded at fair value with unrealized gains and
losses reported in the statement of shareholders' equity. Fair values of
investments are based on quoted market prices, where available. Realized
gains and losses, which have been immaterial to date, are included in
interest and other income and are derived using the specific
identification method for determining the cost of investments sold.
Dividend and interest income is recognized when earned.
The following summarizes available-for-sale investment at December 31,
1996:
Estimated Fair Value
December 31, 1996
Cash and cash equivalents:
Money market fund $ 17,036
Commercial paper 16,938,517
Market auction preferreds 1,100,000
$18,055,553
Short-term investments:
Corporate notes $6,977,331
Investments:
Corporate notes $3,002,445
As of December 31, 1996, the difference between the estimated fair value
and the amortized cost of available-for-sale securities was immaterial,
the average portfolio duration was approximately four months, and the
contractual maturity of any single investment did not exceed 17 months.
3. Property and Equipment
Property and equipment is comprised of the following:
December 31,
1996 1995
Machinery and equipment $600,668 $340,469
Furniture and fixtures 272,384 153,992
Lab equipment 594,168 222,845
Computer equipment and software 495,700 240,725
Leasehold improvements 201,431 -
2,164,351 958,031
Less accumulated depreciation and (711,383) (321,680)
amortization
$1,452,968 $636,351
Property and equipment at December 31, 1996 includes assets under
capitalized leases of approximately $980,000 ($585,000 in 1995).
Accumulated amortization related to leased assets was approximately
$344,000 at December 31, 1996 ($99,000 in 1995).
4. Leases and Commitments
In June 1995, as part of a sale-leaseback transaction, the Company
entered into a $1,750,000 capital lease line of credit for financing of
equipment. At December 31, 1996 and 1995 approximately $770,000 and
$1,165,000, respectively, was available under the lease line of credit
arrangement. The drawdown period under the lease line of credit expires
in June 1997. Amounts borrowed under the line of credit bear interest at
10.4% and are collateralized by the equipment purchased. Under the terms
of the lease agreement, the Company will have the option to purchase the
leased equipment at a negotiated price at the end of the 42-month lease
term.
Future minimum lease payments under operating and capital leases at
December 31, 1996 are as follows:
Operating Capital
Leases Leases
Years ending December 31:
1997 $217,278 $319,052
1998 143,652 324,552
1999 70,485 114,866
2000 - 4,614
Total minimum lease payments $431,415 763,084
Less amount representing interest (144,399)
Present value of future lease payments 618,685
Current portion of capital lease
obligations (268,514)
Noncurrent portion of capital lease
obligations $ 350,171
The Company occupies three facilities under operating leases. Rent
expense under these operating leases totaled $197,341, $76,320 and
$61,357 for the years ended December 31, 1996, 1995 and 1994,
respectively, and $417,127 for the period from inception (January 30,
1991) through December 31, 1996.
5. Shareholders Equity
Capital Stock
On June 20, 1996, the Company completed the initial public offering of
its common stock. The Company issued 2,500,000 shares for net proceeds
of $24,591,588. Prior to the closing of the initial public offering, the
Company effected a three-for-two split of its outstanding capital stock.
Concurrent with the closing of the initial public offering, previously
outstanding shares of Series A, B, C, D and E preferred stock were
converted into 5,611,911 shares of common stock. All share and per share
data in the accompanying financial statements has been adjusted
retroactively to give effect to the stock split.
Stock Warrants
In June 1995, in connection with a master lease agreement, the Company
issued a warrant that entitles the holder to purchase 37,500 shares of
common stock at an exercise price of $4.23 per share. This warrant is
exercisable through June 20, 1998.
In June 1996, in connection with the closing of the Company's initial
public offering, warrants to purchase convertible preferred stock were
automatically converted and exercised for 115,256 shares of common stock.
At December 31, 1996, the Company has reserved 37,500 shares of its
common stock for issuance upon exercise of common stock warrants. No
amounts have been recorded for the above warrant issuances as the amounts
were determined to be immaterial at the time of issuance.
1996 Equity Incentive Plan
In April 1996 the Company's board of directors adopted and the Company's
shareholders approved the 1996 Equity Incentive Plan (the "Plan"), which
amended and restated the 1992 Stock Option Plan. Options granted under
this Plan may be either incentive or nonstatutory stock options. At
December 31, 1996 the Company had authorized 1,980,000 shares of common
stock for issuance under the Plan. Options granted under the Plan expire
no later than ten years from the date of grant. For incentive and
nonstatutory stock option grants, the option price shall be at least 100%
and 85%, respectively, of the fair value on the date of grant, as
determined by the board of directors. If at any time the Company grants
an option, and the optionee directly or by attribution owns stock
possessing more than 10% of the total combined voting power of all
classes of stock of the Company, the option price shall be at least 110%
of the fair value and shall not be exerciseable more than five years
after the date of grant.
Options granted under the 1996 Equity Incentive Plan are immediately
exercisable and generally vest over a period of four years from the date
of grant. Under the Plan, employees may exercise options in exchange for
a note payable to the Company. As of December 31, 1996 and 1995, notes
receivable from shareholders of $482,805 and $196,664, respectively, were
outstanding. These notes generally bear interest at 6% and are due and
payable in regular installments over a five year period. Any unvested
stock issued is subject to repurchase agreements whereby the Company has
the option to repurchase unvested shares upon termination of employment
at the original issue price. The common stock has voting rights but does
not have resale rights prior to vesting. During 1996, the Company granted
options to purchase 523,520 shares of common stock of which 183,809, with
a weighted average fair value of $1.28, were exercised and are subject to
repurchase. In 1996 and 1995, the Company repurchased 2,766 and 7,029
shares, respectively, in accordance with these agreements. As of
December 31, 1996, 411,156 shares of the Company's common stock remained
subject to repurchase and 966,495 shares were reserved for issuance upon
exercise of options.
The following is a summary of activity under the Plan:
Options Outstanding
Shares Weighted
Available Average
for Grant Number of Price Per Exercise
of Options Shares Share Price
Balance at December
31, 1993 300,000 285,000 $0.10-$0.33 $0.24
Shares authorized 225,000 - $ - $ -
Shares granted (254,175) 254,175 $0.10-$0.37 $0.36
Balance at December
31, 1994 270,825 539,175 $0.10-$0.37 $0.29
Shares authorized 150,000 - $ - $ -
Shares granted (290,550) 290,550 $0.33-$0.43 $0.43
Shares exercised - (335,876) $0.33-$0.43 $0.38
Shares forfeited 41,607 (41,607) $0.33-$0.43 $0.39
Balance at December
31, 1995 171,882 452,242 $0.10-$0.43 $0.30
Shares authorized 1,005,000 - $ - $ -
Shares granted (523,520) 523,520 $0.57-$9.88 $3.66
Shares exercised - (662,629) $0.10-$5.33 $0.53
Balance at December
31, 1996 653,362 313,133 $0.10-$9.88 $5.45
Options Outstanding and Exercisable
Weighted
Average Weighted Average
Exercise Remaining Contractual
Exercise Price Number Price Life(in years)
Range
$0.10-$2.00 69,033 $0.46 7.62
$4.00-$5.67 156,600 $5.23 9.40
$9.75-$9.88 87,500 $9.79 9.83
$0.10-$9.88 313,133 $5.45 9.12
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and the
related Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting
provided for under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), requires use of
option pricing valuation models that were not developed for use in
valuing employee stock options. Under APB 25, the Company generally
recognizes no compensation expense with respect to such awards.
Pro forma information regarding net loss and loss per share is required
by SFAS 123, which also requires that the information be determined as if
the Company had accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method prescribed by
this statement. The fair value for these options was estimated at the
date of grant using the Black-Scholes option pricing model with the
following assumptions: a risk-free interest rate ranging from 5.1%-6.6%
and 5.5%-7.9% for the years ending December 31, 1996 and 1995,
respectively; a dividend yield of 0.0%; a volatility factor of the
expected market price of the Company's common stock of 0.7; and a
weighted average expected option life of four years. Options granted
prior to the Company's initial public offering in June 1996 have a
volatility factor of 0.0.
The Company has recorded deferred compensation of approximately $495,000
for the difference between the grant price and the deemed fair value of
certain of the Company's common stock options granted in 1996. This
amount is being amortized over the vesting period of the individual
options, generally a 48-month period. Deferred compensation expense
recognized in the period ended December 31, 1996 was approximately
$187,000. The weighted average fair value of options granted during 1996
with an exercise price below the deemed fair value of the Company's
common stock on the date of grant was $2.15. The weighted average fair
value of options granted during 1996 with an exercise price equal to the
fair value of the Company's common stock on the date of grant was $5.60.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the vesting period of the options
using the straight-line method. Pro forma information on the above basis
is as follows:
Year ended December 31,
1996 1995
Pro forma net loss $(9,117,000) $(5,437,000)
Net loss - as reported $(9,082,000) $(5,433,000)
Pro forma net loss per share $ (1.23) $ (1.47)
Net loss per share - as reported $ (1.22) $ (1.47)
The effects of applying SFAS 123 for pro forma disclosures are not likely
to be representative of the effects on reported net loss for future
years. Pro forma net loss for the year ended December 31, 1996 reflects
compensation expense for two years' vesting, while the year ending
December 31, 1997 will reflect compensation expense for three years'
vesting of outstanding stock options.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (the "Purchase Plan") 150,000
shares of common stock have been authorized for issuance. Shares may be
purchased under the Purchase Plan at 85% of the lesser of the fair market
value of the common stock on the grant or purchase date. No shares have
been issued under the Purchase Plan as of December 31, 1996.
1996 Non-Employee Directors' Stock Option Plan
The 1996 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") authorizes the grant of 225,000 options for the Company's common
stock. No options have been granted under the Directors' Plan as of
December 31, 1996.
6. Collaborative Agreements
In December 1996, the Company entered into a feasibility agreement with a
pharmaceutical company to determine the feasibility of using the
Company's AERx(TM) Pulmonary Drug Delivery System for the delivery of a
specified drug. The agreement provides for a $169,500 research and
development payment and a $237,500 payment upon acceptance by the
pharmaceutical company of certain specified deliverables. Under this
agreement, no revenues were recognized as no work was performed in 1996.
In December 1995, the Company entered into a feasibility agreement with a
pharmaceutical company to determine the feasibility of using the
Company's AERx(TM) Pulmonary Drug Delivery System for the delivery of a
specified drug. The agreement provided for a $260,000 research and
development payment. Under this agreement, revenues of $30,000 and
$230,000 were recognized in 1995 and 1996, respectively. In November
1996, the Company entered into a second such agreement with the
pharmaceutical company that provided for a $140,000 research and
development payment. Costs associated with research and development
activities attributable to these agreements are expected to approximate
the revenues recognized. The agreement also provided for a non-
refundable license fee of $500,000 upon execution of the agreement, which
was recognized as revenue in 1996.
In January 1994, the Company entered into a collaborative development
agreement with a pharmaceutical company to develop a modified version of
the SmartMist system and to conduct certain performance studies. The
agreement provided for a $125,000 research and development payment and a
payment of $125,000 upon acceptance by the pharmaceutical company of
certain specified deliverables. Costs associated with research and
development activities attributable to this agreement approximated the
revenues recognized. Under this agreement, revenues of $125,000 were
recognized in both 1994 and 1995.
7. Related Party Transactions
At DecemberE31, 1996, the Company holds notes receivable totaling
$219,739 from officers of the Company. Included therein is a $53,254
promissory note bearing interest at 6% per annum, due and payable on
FebruaryE7, 2001, and collateralized by certain personal assets of the
officer and a $90,000 full recourse promissory note bearing no interest
and due and payable on SeptemberE18, 1998.
At DecemberE31, 1996, the fair value of these notes is not materially
different from their carrying values. The fair values were estimated
using discounted cash flow analyses, using interest rates currently
offered for loans with similar terms and to borrowers of similar credit
quality.
8. Income Taxes
The Company uses the liability method to account for income taxes as
required by Statement of Financial Accounting Standards No.E109,
OAccounting for Income Taxes.O Under this method, deferred tax assets and
liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using
enacted tax rules and laws that are expected to be in effect when the
differences are expected to reverse.
Significant components of the CompanyOs deferred tax assets (in
thousands) are as follows:
December 31,
1996 1995
Net operating loss carry $7,336 $4,520
forward
Research and development
credit carryforward 851 476
Other 611 51
Gross deferred tax 8,798 5,047
assets
Valuation allowance (8,798) (5,047)
Net deferred tax assets $ - $ -
The valuation allowance increased by $3,751,000 and $2,203,000 in 1996
and 1995, respectively.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $18,000,000 for federal income tax purposes expiring in the
years 2006 through 2011 and net operating losses for state income tax
purposes of $17,000,000 expiring in the years 1997 through 2001. At
December 31, 1996, the Company had research and development credit
carryforwards for federal income tax purposes of approximately $600,000,
which expire in the years 2006 through 2011.
Because of the change in ownership provisions of the Tax Reform Act of
1986, utilization of the Company's tax net operating loss carryforwards
and tax credit carryforwards may be subject to an annual limitation in
future periods. As a result of the annual limitation, a portion of these
carryforwards may expire before ultimately becoming available to reduce
future income tax liabilities.
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
At a meeting held on March 14, 1995, the Board of Directors of the
Company approved the engagement of Ernst & Young LLP as its independent
auditors for the fiscal year ending December 31, 1994. Prior to the
engagement of Ernst & Young LLP, Bregante + Company LLP served as
independent auditors of the Company. The Audit Committee of the Board of
Directors approved the change in auditors on that date.
The report of Bregante + Company LLP on the company's financial
statements for the year ended December 31, 1993 did not contain an
adverse opinion or a disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope, or accounting principles.
In connection with the audit of the Company's financial statements
for the fiscal year ended December 31, 1993, there were no disagreements
with Bregante + Company LLP on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope and
procedures which, if not resolved to the satisfaction of Bregante +
Company LLP, would have caused Bregante + Company LLP to make reference
to the matter in their report.
PART III.
Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors
The information required by this Item concerning the Company's
directors is incorporated by reference from the sections captioned
"Proposal 1: Election of Directors" contained in the Company's
Definitive Proxy Statement related to the Annual Meeting of Shareholders
to be held May 20, 1997, to be filed by the Company with the Securities
and Exchange Commission (the "Proxy Statement").
Identification of Executive Officers
The information required by this Item concerning the Company's
executive offices is set forth in Part I of this Report.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
from the section captioned "Executive Compensation" contained in the
Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference
from the section captioned "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference
from the section captioned "Certain Transactions" and "Executive
Compensation" contained in the Proxy Statement.
PART IV
Item 14.EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1)Financial Statements.
Included in Part II of this Report: Page in Form 10-K
Report of Ernst & Young LLP, Independent Auditors 35
Report of Bregante + Company LLP, Independent Auditors 36
Balance Sheets December 31, 1996 and 1995 37
Statements of Operations Years ended December 31, 1996,
1995, and 1994 38
Statements of Shareholders' Equity Years ended
December 31, 1996, 1995 and 1994 39
Statements of Cash Flows Years ended December 31, 1996,
1995 and 1994 41
Notes to Financial Statements 42
(2) Financial Statement Schedules.
None.
(3) Exhibits.
3.1 (1) Amended and Restated Articles of Incorporation of the
Company.
3.2 (1) Bylaws of the Company
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 (1) Specimen stock certificate
4.3 (1) Amended and Restated Investor Rights Agreement, dated
December 22, 1995, among the Company and certain of its
shareholders
10.1 (1) (2) Form of Indemnity Agreement between the Registrant
and each of its directors and officers
10.2 (1) (2) The Company's Equity Incentive Plan, as amended (the
"Equity Incentive Plan")
10.3 (1) (2) Form of the Company's Incentive Stock Option
Agreement under the Equity Incentive Plan
10.4 (1) (2) Form of the Company's Nonstatutory Stock Option
Agreement under the Equity Incentive Plan
10.5 (1) (2) Form of the Company's Non-Employee Directors' Stock
Option Plan
10.6 (1) (2) Form of the Company's Nonstatutory Stock Option
Agreement under the Non-Employee Directors' Stock Option
Plan
10.7 (1) (2) Form of the Company's Employee Stock Purchase Plan
10.8 (1) (2) Form of the Company's Employee Stock Purchase Plan
Offering Document
10.9 (1)Lease Agreement for the property located at 26219 Eden
Landing Road, Hayward, California, dated November 1992 and
amended November 29, 1994, between the Company and Hayward
Point Eden I Limited Partnership
10.10 (1) Lease Agreement for the property located at 26224
Executive Place, Hayward, California, dated November 29,
1994 and amended January 30, 1995, between the Company and
Hayward Point Eden I Limited Partnership
10.11 (1) Lease Agreement for the property located at 3930
Point Eden Way, Hayward, California, dated February 21,
1996, between the Company and Hayward Point Eden I Limited
Partnership
10.12 (1) (2)Stock Purchase Agreement and related agreements,
including Promissory Note, dated May 19, 1994, between the
Company and Richard P. Thompson
10.13 (1) (2)Stock Purchase Agreement and related agreements,
including Promissory Note, dated May 23, 1995, between the
Company and R. Ray Cummings
10.14 (1) (2)Note Agreement and Promissory Note Secured by Deed of
Trust, dated May 1, 1995, between the Company and R. Ray
Cummings
10.15 (1) (2)Promissory Note, dated October 26, 1995, between the
Company and Igor Gonda
10.16 (1) (2)Promissory Note, dated December 27, 1995, between the
Company and Igor Gonda
10.17 (1) Master Lease Agreement and Warrant, between the
Company and Comdisco, Inc., dated June 9, 1995
11.1 Statement regarding computation of pro forma per share
loss. Reference is made to page 56.
23.1 Consent of Ernst & Young L.L.P., Independent Auditors.
Reference is made to page 57.
23.2 Consent of Bregante + Company L.L.P., Independent
Auditors. Reference is made to page 58.
24.1 Power of Attorney. Reference is made to page 54.
(b) Reports on Form 8-K.
None filed.
(c) Index to Exhibits.
See Exhibits listed under Item 14 (a) (3)
(d) Financial Statement Schedules.
None.
(1) Incorporated by reference to the indicated exhibit in the Company's
Registration Statement (No. 333-4236), as amended.
(2) Represents a management contract or compensatory plan or
arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Hayward, State of California, on the 27th day
of March, 1997.
ARADIGM CORPORATION
By /s/
Richard P. Thompson
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Richard P.
Thompson and Reid M. Rubsamen, M.D., and each one of them, attorneys-in-
fact for the undersigned, each with the power of substitution, for the
undersigned in any and all capacities, to sign any and all amendments to
this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities an Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitutes, may do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his/her name.
Pursuant to the requirements of the Securities and Exchange Act of
1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
/s/ President, Chief Executive Officer March 27,1997
Richard P. Thompson and Director (Principal Executive
Officer)
/s/ Vice President, Finance and March 27,1997
Mark A. Olbert Administration and Chief
Financial Officer (Principal
Financial and Accounting Officer)
/s/ Vice President, Medical March 27,1997
Reid M. Rubsamen, M.D Affairs, Secretary and
Director
/s/ Chairman of the Board of March 27,1997
Lester John Lloyd Directors
/s/ Director March 27,1997
Jared A. Anderson, Ph.D.
/s/ Director March 27,1997
Ross A. Jaffe, M.D.
/s/ Director March 27,1997
Burton J. McMurtry, Ph.D.
/s/ Director March 27,1997
Gordon W. Russell
/s/ Director March 27,1997
Fred E. Silverstein, M.D.
/s/ Director March 27,1997
Virgil D. Thompson
EXHIBIT 11.1
ARADIGM CORPORATION
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
Twelve Months Ended December 31,
1996 1995 1994
Net loss $(9,082,161) $(5,432,768) $(3,732,677)
Shares used in calculation of
net loss per share:
Weighted average Common 6,098,038 1,004,133 848,555
shares outstanding
Shares related to SAB 1,343,978 2,687,955 2,687,955
Nos. 55, 64, and 83
Shares used in computing 7,442,016 3,692,088 3,536,510
net loss per share
Net loss per share $ (1.22) $ (1.47) $ (1.06)
Shares used in calculation of
supplemental net loss per share:
Shares used in computing 7,442,016 3,692,088
net loss per share
Adjusted to reflect effect
of assumed conversion
of preferred stock from 1,475,230 3,503,468
date of issuance
Shares used in computing
supplemental net
loss per share 8,917,246 7,195,556
Supplemental net loss per $ (1.02) $ (.76)
share
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 No. 333-15947 pertaining to the 1996 Equity
Incentive Plan of Aradigm Corporation, the Employee Stock Purchase Plan
of Aradigm Corporation, and the Non-Employee Directors' Stock Option Plan
of Aradigm Corporation of our report dated February 7, 1997, with respect
to the financial statements of Aradigm Corporation included in the Annual
Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG
Palo Alto, California
March 27, 1997
EXHIBIT 23.2
CONSENT OF BREGANTE + COMPANY, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 No. 333-15947 pertaining to the 1996 Equity
Incentive Plan of Aradigm Corporation, the Employee Stock Purchase Plan
of Aradigm Corporation, and the Non-Employee Directors' Stock Option Plan
of Aradigm Corporation of our report dated February 22, 1994, with
respect to the financial statements of Aradigm Corporation included in
the Annual Report (Form 10-K) for the year ended December 31, 1996.
BREGANTE + COMPANY LLP
San Francisco, California
March 27, 1997