Attached files
file | filename |
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EX-31.1 - EX-31.1 - Alexza Pharmaceuticals Inc. | f59066exv31w1.htm |
EX-32.1 - EX-32.1 - Alexza Pharmaceuticals Inc. | f59066exv32w1.htm |
EX-31.2 - EX-31.2 - Alexza Pharmaceuticals Inc. | f59066exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-51820
ALEXZA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 77-0567768 | |
(State or other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) |
|
2091 Stierlin Court | ||
Mountain View, California |
94043 | |
(Address of principal executive offices) | (Zip Code) |
(Registrants telephone number, including area code): (650) 944-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Total number of shares of common stock outstanding as of May 6, 2011: 72,111,808.
ALEXZA PHARMACEUTICALS, INC.
TABLE OF CONTENTS
TABLE OF CONTENTS
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
ALEXZA PHARMACEUTICALS, INC.
(a development stage company)
(a development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
(in thousands)
(unaudited)
March 31, | December 31, | |||||||
2011 | 2010(1) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 22,037 | $ | 13,671 | ||||
Marketable securities |
9,803 | 27,778 | ||||||
Prepaid expenses and other current assets |
670 | 965 | ||||||
Total current assets |
32,510 | 42,414 | ||||||
Property and equipment, net |
23,248 | 24,361 | ||||||
Restricted cash |
400 | 400 | ||||||
Other assets |
65 | 1,307 | ||||||
Total assets |
$ | 56,223 | $ | 68,482 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 1,620 | $ | 2,781 | ||||
Accrued clinical trial expenses |
176 | 216 | ||||||
Other accrued expenses |
3,131 | 3,158 | ||||||
Deferred revenue |
4,053 | 4,331 | ||||||
Current portion of contingent consideration liability |
5,300 | 5,300 | ||||||
Financing obligations |
16,364 | 18,597 | ||||||
Total current liabilities |
30,644 | 34,383 | ||||||
Deferred rent |
14,039 | 14,609 | ||||||
Noncurrent portion of contingent consideration liability |
7,200 | 7,200 | ||||||
Stockholders equity: |
||||||||
Preferred stock |
| | ||||||
Common stock |
6 | 6 | ||||||
Additional paid-in-capital |
278,851 | 278,386 | ||||||
Other comprehensive income |
2 | 2 | ||||||
Deficit accumulated during development stage |
(274,519 | ) | (266,104 | ) | ||||
Total stockholders equity |
4,340 | 12,290 | ||||||
Total liabilities and stockholders equity |
$ | 56,223 | $ | 68,482 | ||||
(1) | The condensed consolidated balance sheet at December 31, 2010 has been derived from audited consolidated financial statements at that date. |
See accompanying notes to the financial statements.
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Table of Contents
ALEXZA PHARMACEUTICALS, INC.
(a development stage company)
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
(in thousands, except per share amounts)
(unaudited)
Period from | ||||||||||||
December 19, | ||||||||||||
2000 | ||||||||||||
Three Months Ended | (inception) to | |||||||||||
March 31, | March 31, | |||||||||||
2011 | 2010 | 2011 | ||||||||||
Revenue |
$ | 1,259 | $ | | $ | 61,080 | ||||||
Operating expenses: |
||||||||||||
Research and development |
6,262 | 7,564 | 284,251 | |||||||||
General and administrative |
2,820 | 5,052 | 94,930 | |||||||||
Restructuring charges |
| | 2,037 | |||||||||
Acquired in-process research and
development |
| | 3,916 | |||||||||
Total operating expenses |
9,082 | 12,616 | 385,134 | |||||||||
Loss from operations |
(7,823 | ) | (12,616 | ) | (324,054 | ) | ||||||
Loss/ (gain) on change in fair value of
contingent consideration liability |
| (722 | ) | (3,145 | ) | |||||||
Interest and other income/ (expense), net |
10 | (19 | ) | 13,873 | ||||||||
Interest expense |
(602 | ) | (55 | ) | (6,282 | ) | ||||||
Net loss |
(8,415 | ) | (13,412 | ) | (319,608 | ) | ||||||
Consideration paid in excess of
noncontrolling interest |
| | (61,566 | ) | ||||||||
Net loss attributed to noncontrolling interest
in Symphony Allegro, Inc. |
| | 45,089 | |||||||||
Net loss attributable to Alexza common
stockholders |
$ | (8,415 | ) | $ | (13,412 | ) | $ | (336,085 | ) | |||
Basic and Diluted net loss per share
attributable to Alexza common stockholders |
$ | (0.14 | ) | $ | (0.26 | ) | ||||||
Shares used to compute basic and diluted net
loss per share attributable to Alexza common
stockholders |
59,886 | 52,524 | ||||||||||
See accompanying notes to the financial statements.
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Table of Contents
ALEXZA PHARMACEUTICALS, INC.
(a development stage company)
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(in thousands)
(unaudited)
Period from | ||||||||||||
December 19, | ||||||||||||
2000 | ||||||||||||
Three Months Ended | (inception) to | |||||||||||
March 31, | March 31, | |||||||||||
2011 | 2010 | 2011 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (8,415 | ) | $ | (13,412 | ) | $ | (319,608 | ) | |||
Adjustments to reconcile net loss attributable to Alexza
common stockholders to net cash provided by (used in)
operating activities: |
||||||||||||
Share-based compensation |
465 | 1,650 | 22,324 | |||||||||
Change in fair value of contingent liability |
| 722 | 3,145 | |||||||||
Extinguishment of officer note receivable |
| | 2,300 | |||||||||
Issuance of common stock for intellectual property |
| | 92 | |||||||||
Charge for acquired in-process research and development |
| | 3,916 | |||||||||
Amortization of assembled workforce |
| | 222 | |||||||||
Amortization of debt discount and deferred interest |
134 | 4 | 824 | |||||||||
Amortization of premium (discount) on available-for-sale
securities |
75 | 7 | (346 | ) | ||||||||
Write off of other asset |
| | 2,800 | |||||||||
Depreciation and amortization |
1,137 | 1,167 | 27,303 | |||||||||
(Gain) loss on disposal of property and equipment |
| 19 | 205 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Other receivables |
| 1,406 | | |||||||||
Prepaid expenses and other current assets |
295 | 132 | (664 | ) | ||||||||
Other assets |
36 | | (2,660 | ) | ||||||||
Accounts payable |
(1,161 | ) | (617 | ) | 1,491 | |||||||
Accrued clinical and other accrued liabilities |
(67 | ) | (248 | ) | (393 | ) | ||||||
Deferred revenues |
(278 | ) | 40,000 | 4,053 | ||||||||
Other liabilities |
(570 | ) | 617 | 17,429 | ||||||||
Net cash provided by (used in) operating activities |
(8,349 | ) | 31,447 | (237,567 | ) | |||||||
Cash flows from investing activities: |
||||||||||||
Purchases of available-for-sale securities |
| (17,746 | ) | (401,606 | ) | |||||||
Maturities of available-for-sale securities |
17,900 | 6,460 | 392,152 | |||||||||
Purchases of available-for-sale securities held by Symphony
Allegro, Inc. |
| | (49,975 | ) | ||||||||
Maturities of available-for-sale securities held by Symphony
Allegro. Inc. |
| | 45,093 | |||||||||
(Increase) decrease in restricted cash |
| | (400 | ) | ||||||||
Purchases of property and equipment |
(24 | ) | (2,196 | ) | (50,548 | ) | ||||||
Proceeds from disposal of property and equipment |
| | 57 | |||||||||
Cash paid for merger |
| | (250 | ) | ||||||||
Net cash provided by (used in) investing activities |
17,876 | (13,482 | ) | (65,477 | ) | |||||||
See accompanying notes to the financial statements.
5
Table of Contents
ALEXZA PHARMACEUTICALS, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Period from | ||||||||||||
December 19, | ||||||||||||
2000 | ||||||||||||
Three Months Ended | (inception) to | |||||||||||
March 31, | March 31, | |||||||||||
2011 | 2010 | 2011 | ||||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of common stock and warrants and
exercise of stock options and stock purchase rights |
| 44 | 162,207 | |||||||||
Repurchase of common stock |
| | (8 | ) | ||||||||
Proceeds from issuance of convertible preferred stock |
| | 104,681 | |||||||||
Proceeds from repayment of stockholder note receivable |
| | 29 | |||||||||
Proceeds from purchase of noncontrolling interest in
Symphony Allegro, Inc |
| | 4,882 | |||||||||
Proceeds from purchase of noncontrolling interest by
preferred shareholders in Symphony Allegro, Inc, net of
fees |
| | 47,171 | |||||||||
Payments of contingent payments to Symphony Allegro
Holdings, LLC. |
| (7,500 | ) | (7,500 | ) | |||||||
Proceeds from financing obligations, net of issuance costs |
| | 33,738 | |||||||||
Payments of financing obligations |
(1,161 | ) | (728 | ) | (20,119 | ) | ||||||
Net cash provided by (used in) financing activities |
(1,161 | ) | (8,184 | ) | 325,031 | |||||||
Net increase (decrease) in cash and cash equivalents |
8,366 | 9,781 | 22,037 | |||||||||
Cash and cash equivalents at beginning of period |
13,671 | 13,450 | | |||||||||
Cash and cash equivalents at end of period |
$ | 22,037 | $ | 23,231 | $ | 22,037 | ||||||
See accompanying notes to the financial statements.
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Table of Contents
ALEXZA PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Basis of Presentation
Business
Alexza Pharmaceuticals, Inc. (Alexza or the Company) was incorporated in the state of Delaware
on December 19, 2000 as FaxMed, Inc. In June 2001, the Company changed its name to Alexza
Corporation and in December 2001 became Alexza Molecular Delivery Corporation. In July 2005, the
Company changed its name to Alexza Pharmaceuticals, Inc.
The Company is a pharmaceutical development company focused on the research, development, and
commercialization of novel proprietary products for the acute treatment of central nervous system
conditions. The Companys primary activities since incorporation have been establishing its
offices, recruiting personnel, conducting research and development, conducting preclinical studies
and clinical trials, performing business and financial planning, and raising capital. Accordingly,
the Company is considered to be in the development stage and operates in one business segment. The
Companys facilities and employees are currently located in the United States.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not contain all of the information and footnotes required for complete
financial statements. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Companys interim consolidated financial information.
The results for the three months ended March 31, 2011 are not necessarily indicative of the results
to be expected for the year ending December 31, 2011 or for any other interim period or any other
future year.
The accompanying unaudited condensed consolidated financial statements and notes to condensed
consolidated financial statements should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 2010 included in the Companys Annual Report
on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 15, 2011.
Basis of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Alexza and its
wholly-owned subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Significant Risks and Uncertainties
The Company has incurred significant losses from operations since its inception and expects losses
to continue for the foreseeable future. As of March 31, 2011, the Company had cash, cash
equivalents and marketable securities of $31.8 million and working capital of $1.9 million. The
Companys operating and capital plans call for cash expenditure to exceed that amount for 2011. The
Company plans to raise additional capital to fund its operations, to develop its product candidates
and to develop its manufacturing capabilities. Management plans to finance the Companys operations
through the sale of equity securities, debt arrangements or partnership or licensing
collaborations. Such funding may not be available or may be on terms that are not favorable to the
Company. The Companys inability to raise capital as and when needed could have a negative impact
on its financial condition and its ability to continue as a going concern. Based on the Companys
cash, cash equivalents and marketable securities balance at March 31, 2011, the net proceeds from
its May 2011 stock and warrant issuance (see Note 13), interest earned thereon, the proceeds from
option exercises and purchases of common stock pursuant to our 2005 Employee Stock Purchase Plan
and its expected cash usage, management estimates that it has sufficient capital resources to meet
its anticipated cash needs into the first quarter of 2012.
The accompanying financial statements have been prepared assuming the Company will continue to
operate as a going concern, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. The consolidated financial statements do not include
any adjustments to
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reflect the possible future effects on the recoverability and classification of assets or the
amounts of liabilities that may result from uncertainty related to the Companys ability to
continue as a going concern. As of December 31, 2010 and March 31, 2011, the Company classified all
of its outstanding financing obligations as a current liability due to this uncertainty.
Recently Adopted Accounting Standards
In October 2009, the Financial Accounting Standards Board (FASB) published Accounting Standards
Update (ASU) 2009-13 (ASU 2009-13), which amends the criteria to identify separate units of
accounting within Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements. The revised
guidance eliminates the residual method of allocation, and instead requires companies to use the
relative selling price method when allocating revenue in a multiple deliverable arrangement. When
applying the relative selling price method, the selling price for each deliverable shall be
determined using vendor specific objective evidence of selling price, if it exists, otherwise using
third-party evidence of selling price. If neither vendor specific objective evidence nor
third-party evidence of selling price exists for a deliverable, companies shall use their best
estimate of the selling price for that deliverable when applying the relative selling price method.
The adoption of ASU 2009-13 only affects multiple deliverable arrangements entered into, or
materially modified, after January 1, 2011. The prospective adoption of ASU 2009-13 did not have an
impact on the Companys financial position, results of operations or cash flows.
In April 2010, the FASB issued ASU 2010-17, Milestone Method of Revenue Recognition a consensus of
the FASB Emerging Issues Task Force. ASU 2010-17 provides guidance on defining a milestone and
determining when it may be appropriate to apply the milestone method of revenue recognition for
research and development transactions. A vendor can recognize consideration in its entirety as
revenue in the period in which the milestone is achieved only if the milestone meets all criteria
to be considered substantive. Additional disclosures describing the consideration arrangement and
the entitys accounting policy for recognition of such milestone payments are also required. The
Company elected to adopt the milestone method of revenue recognition on a prospective basis
effective January 1, 2011. The Companys adoption of ASU 2010-17 did not have an impact on its
financial position, results of operations or cash flows.
2. Equity Financing Facility
On May 26, 2010, the Company obtained a committed equity financing facility under which the Company
may sell up to $25 million of its common stock to Azimuth Opportunity, Ltd. (Azimuth) over a
24-month period pursuant to the terms of a Common Stock Purchase Agreement (the Purchase
Agreement). The Company is not obligated to utilize any of the facility.
The Company will determine, at its sole discretion, the timing, the dollar amount and the price per
share of each draw under this facility, subject to certain conditions. When and if the Company
elects to use the facility by delivery of a draw down notice to Azimuth, the Company will issue
shares to Azimuth at a discount of between 5.00% and 6.75% to the volume weighted average price of
the Companys common stock over a preceding period of trading days (a Draw Down Period). The
Purchase Agreement also provides that from time to time, at the Companys sole discretion, it may
grant Azimuth the right to purchase additional shares of the Companys common stock during each
Draw Down Period for an amount of shares specified by the Company based on the trading price of its
common stock. Upon Azimuths exercise of an option, the Company will sell to Azimuth the shares
subject to the option at a price equal to the greater of the daily volume weighted average price of
the Companys common stock on the day Azimuth notifies the Company of its election to exercise its
option or the threshold price for the option determined by the Company, less a discount calculated
in the same manner as it is calculated in the draw down notices.
Azimuth is not required to purchase any shares at a pre-discounted purchase price below $3.00 per
share, and any shares sold under this facility will be sold pursuant to a shelf registration
statement declared effective by the SEC on May 20, 2010. As part of the May 2011 registered direct
offering (Note 13), the Company agreed to refrain from utilizing this equity financing facility or
any similar facilities, or entering into variable rate transactions, until the earlier of (1) 30
days after the approval of the New Drug Application (NDA) for the Companys AZ-004 product
candidate or (2) June 30, 2012. The Purchase Agreement will terminate on May 26, 2012. As of March
31, 2011, there have been no sales of common stock under the Purchase Agreement.
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Table of Contents
3. Fair Value Accounting
Fair value is defined as the exchange price that would be received for an asset or paid to transfer
a liability in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Valuation techniques used to
measure fair value must maximize the use of observable inputs and minimize the use of unobservable
inputs. Three levels of inputs, of which the first two are considered observable and the last
unobservable, may be used to measure fair value. The three levels are:
| Level 1 Quoted prices in active markets for identical assets or liabilities. | ||
| Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | ||
| Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table represents the Companys fair value hierarchy for its financial assets (cash
equivalents, and marketable securities) by major security type and liability measured at fair value
on a recurring basis as of March 31, 2011 and December 31, 2010 (in thousands):
March 31,2011 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 20,784 | $ | | $ | | $ | 20,784 | ||||||||
Available for sale debt securities |
||||||||||||||||
Government-sponsored enterprises |
| 9,803 | $ | | 9,803 | |||||||||||
Total available for sale debt securities |
$ | | $ | 9,803 | $ | | $ | 9,803 | ||||||||
Total assets |
$ | 20,784 | $ | 9,803 | $ | | $ | 30,587 | ||||||||
Liabilities |
||||||||||||||||
Contingent consideration liability |
$ | | $ | | $ | 12,500 | $ | 12,500 | ||||||||
Total liabilities |
$ | | $ | | $ | 12,500 | $ | 12,500 | ||||||||
December 31, 2010 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 12,750 | $ | | $ | | $ | 12,750 | ||||||||
Available for sale debt securities |
||||||||||||||||
Government-sponsored enterprises |
$ | | $ | 12,997 | $ | | $ | 12,997 | ||||||||
Corporate debt securities |
$ | | 14,781 | | 14,781 | |||||||||||
Total available for sale debt securities |
$ | | $ | 27,778 | $ | | $ | 27,778 | ||||||||
Total assets |
$ | 12,750 | $ | 27,778 | $ | | $ | 40,528 | ||||||||
Liabilities |
||||||||||||||||
Contingent consideration liability |
$ | | $ | | $ | 12,500 | $ | 12,500 | ||||||||
Total liabilities |
$ | | $ | | $ | 12,500 | $ | 12,500 | ||||||||
Cash equivalents and marketable securities
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The following table outlines the amortized cost, fair value and unrealized gain/(loss) for the
Companys financial assets by major security type as of March 31, 2011 and December 31, 2010 (in
thousands):
Amortized | Unrealized | |||||||||||
March 31, 2011 | Cost | Fair Value | Gain/(Loss) | |||||||||
Money market funds |
$ | 20,784 | $ | 20,784 | $ | | ||||||
Government-sponsored enterprises |
9,801 | 9,803 | 2 | |||||||||
Total |
$ | 30,585 | $ | 30,587 | $ | 2 | ||||||
Amortized | Unrealized | |||||||||||
December 31, 2010 | Cost | Fair Value | Gain/(Loss) | |||||||||
Money market funds |
$ | 12,750 | $ | 12,750 | $ | | ||||||
Government-sponsored enterprises |
12,994 | 12,997 | 3 | |||||||||
Corporate debt securities |
14,782 | 14,781 | (1 | ) | ||||||||
Total |
$ | 40,526 | $ | 40,528 | $ | 2 | ||||||
The Company had no sales of marketable securities during the three months ended March 31, 2011
or 2010. As of March 31, 2011, all of the Companys marketable securities have a maturity of less
than one year.
The Companys available-for-sale debt securities are valued utilizing a multi-dimensional
relational model. Inputs, listed in approximate order of priority for use when available, include
benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets,
benchmark securities, bids, offers and reference data.
Contingent Consideration Liability
In connection with the exercise of the Companys option to purchase all of the outstanding equity
of Symphony Allegro, Inc. (Allegro), the Company is obligated to make contingent cash payments to
the former Allegro stockholders related to certain payments received by the Company from future
partnering agreements pertaining to AZ-004/104 (Staccato loxapine) or AZ-002 (Staccato alprazolam).
In order to estimate the fair value of the liability associated with the contingent cash payments,
the Company prepared several cash flow scenarios for the three product candidates, AZ-004, AZ-002
and AZ-104, which are subject to the contingent payment obligation. Each potential cash flow
scenario consisted of assumptions of the range of estimated milestone and license payments
potentially receivable from such partnerships and assumed royalties received from future product
sales. Based on these estimates, the Company computed the estimated payments to be made to the
former Allegro stockholders. Payments were assumed to terminate upon the expiration of the related
patents.
The projected cash flows for AZ-004 in the U.S. and Canada continue to be based on terms similar to
those noted in the agreements with Biovail Laboratories International SRL (Biovail) signed in
February 2010 and multiple internal product sales forecasts, as the Company has assumed for
purposes of estimating the contingent consideration liability that any potential partnership
agreement for AZ-004 in the U.S. and Canada will have similar terms and structures to that of the
Biovail agreements, despite these agreements being terminated in October 2010. The timing and
extent of the projected cash flows for AZ-004 outside of the U.S. and Canada, AZ-002 and AZ-104
were based on internal estimates for potential milestones and multiple product royalty scenarios
and are also consistent in structure to the Biovail agreements as the Company expects future
partnerships for these product candidates to have similar structures.
The Company then assigned a probability to each of the cash flow scenarios based on several
factors, including: the product candidates stage of development, preclinical and clinical results,
technological risk related to the successful development of the different drug candidates,
estimated market size, market risk and potential partnership interest to determine a risk adjusted
weighted average cash flow based on all of these scenarios. These probability and risk adjusted
weighted average cash flows were then discounted
utilizing the Companys estimated weighted average cost of capital (WACC). The Companys WACC
considered the Companys cash position, competition, risk of substitute products, and risk
associated with
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the financing of the development projects. The Company determined the discount rate
to be 18% and applied this rate to the probability adjusted cash flow scenarios.
This fair value measurement is based on significant inputs not observed in the market and thus
represents a Level 3 measurement. Level 3 instruments are valued based on unobservable inputs that
are supported by little or no market activity and reflect the Companys assumptions in measuring
fair value.
The Company records any changes in the fair value of the contingent consideration liability in
earnings in the period of the change. Certain events including, but not limited to, clinical trial
results, U.S. Food and Drug Administration (FDA) approval or non-approval of the Companys
submissions, the timing and terms of any strategic partnership agreement, and the commercial
success of AZ-004, AZ-104 or AZ-002 could have a material impact on the fair value of the
contingent consideration liability, and as a result, the Companys results of operations and
financial position.
During the three months ended March 31, 2011, the Company modified the assumptions regarding the
timing of certain cash flows. The changes in these assumptions along with the effect of the passage
of three months on the present value computation resulted in no net change to the contingent
consideration liability at March 31, 2011 compared to December 31, 2010.
The following table represents a reconciliation of the change in the fair value measurement of the
contingent consideration liability for the three months ended March 31, 2011 and 2010 (in
thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Beginning balance |
$ | 12,500 | $ | 24,838 | ||||
Payments made |
| (7,500 | ) | |||||
Adjustments to fair value measurement |
| 722 | ||||||
Ending balance |
$ | 12,500 | $ | 18,060 | ||||
4. Share-Based Compensation Plans
2005 Equity Incentive Plan
In December 2005, the Companys Board of Directors adopted the 2005 Equity Incentive Plan (the
2005 Plan). The 2005 Plan is an amendment and restatement of the Companys previous equity
incentive plans. New grants of stock options and restricted stock units issued under the 2005 Plan
that are not subject to performance-based vesting conditions generally vest over four years, based
on service time, or upon the accomplishment of certain milestones and have a maximum contractual
term of 10 years. Restricted stock units granted to non-employee directors generally vest one year
after the date of grant. Prior to vesting, restricted stock units do not have dividend equivalent
rights, do not have voting rights and the shares underlying the restricted units are not considered
issued and outstanding. Shares are issued upon vesting of the restricted stock units.
The 2005 Plan provides for annual reserve increases on the first day of each year commencing on
January 1, 2007 and ending on January 1, 2015. The annual reserve increases will be equal to the
lesser of (i) 2% of the total number of shares of the Companys common stock outstanding on
December 31 of the preceding calendar year, or (ii) 1,000,000 shares of common stock. The Companys
Board of Directors has the authority to designate a smaller number of shares by which the
authorized number of shares of common stock will be increased prior to the last day of any calendar
year. On each of January 1, 2011 and 2010 an additional 1,000,000 shares of the Companys common
stock were reserved for issuance under this provision.
2005 Non-Employee Directors Stock Option Plan
In December 2005, the Companys Board of Directors adopted the 2005 Non-Employee Directors Stock
Option Plan (the Directors Plan). The Directors Plan provides for the automatic grant of
nonstatutory stock options to purchase shares of common stock to the Companys non-employee
directors, which vest
over four years and have a term of 10 years. The Directors Plan provides for an annual reserve
increase to be added on the first day of each fiscal year, commencing on January 1, 2007 and ending
on January 1, 2015. The annual reserve increases will be equal to the number of shares subject to
options granted during
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the preceding fiscal year less the number of shares that revert back to the
share reserve during the preceding fiscal year. The Companys Board of Directors has the authority
to designate a smaller number of shares by which the authorized number of shares of common stock
will be increased prior to the last day of any calendar year. On January 1, 2011 and 2010 an
additional 75,000 and 37,500 shares, respectively, of the Companys common stock were reserved for
issuance under this provision.
On January 21, 2011, the Company commenced a voluntary employee stock option exchange program (the
Exchange Program) to permit the Companys eligible employees to exchange some or all of their
eligible outstanding options (Original Options) to purchase the Companys common stock with an
exercise price greater than or equal to $2.37 per share, whether vested or unvested, for a lesser
number of new stock options (New Options). In accordance with the terms and conditions of the
Exchange Program, on February 22, 2011 (the Grant Date), the Company accepted outstanding options
to purchase an aggregate of 2,128,430 shares of the Companys common stock, with exercise prices
ranging from $2.38 to $11.70, and issued, in exchange, an aggregate of 808,896 New Options with an
exercise price of $1.23. The New Options will vest 33% on February 22, 2012 with the balance of the
shares vesting in a series of twenty-four successive equal monthly installments thereafter, and
have a term of five years. The exchange resulted in a decrease in the Companys common stock
subject to outstanding stock options by 1,319,534 shares, which increased the number of shares
available to be issued under the 2005 Plan.
The following table sets forth the summary of option activity under the Companys share-based
compensation plans for the three months ended March 31, 2011:
Outstanding Options | ||||||||
Weighted | ||||||||
Number of | Average | |||||||
Shares | Exercise Price | |||||||
Outstanding at January 1, 2011 |
4,518,656 | $ | 4.72 | |||||
Options granted |
842,196 | 123 | ||||||
Options exercised |
(400 | ) | 110 | |||||
Options canceled |
(2,225,004 | ) | 6.18 | |||||
Outstanding at March 31, 2011 |
3,135,448 | 2.75 | ||||||
The total intrinsic value of options exercised during the three months ended March 31, 2011
and 2010 was $0 and $61,000, respectively.
The following table sets forth the summary of restricted stock unit activity under the Companys
equity incentive plans for the three months ended March 31, 2011:
Weighted | ||||||||
Number | Average | |||||||
Of | Grant-Date | |||||||
Shares | Fair Value | |||||||
Outstanding at January 1, 2011 |
1,401,937 | $ | 2.60 | |||||
Granted |
227,881 | 1.33 | ||||||
Released |
(168,069 | ) | 2.38 | |||||
Forfeited |
| | ||||||
Outstanding at March 31, 2011 |
1,461,749 | 2.43 | ||||||
As of March 31, 2011, 2,304,200 and 250,000 shares remained available for issuance under the
2005 Plan and the Directors Plan, respectively.
2005 Employee Stock Purchase Plan
In December 2005, the Companys Board of Directors adopted the 2005 Employee Stock Purchase Plan
(ESPP). The ESPP allows eligible employee participants to purchase shares of the Companys common
stock at a discount through payroll deductions. The ESPP consists of a fixed offering period,
generally 24
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months with four purchase periods within each offering period. Purchases are generally
made on the last trading day of each October and April. Employees purchase shares at each purchase
date at 85% of the market value of the Companys common stock on their enrollment date or the end
of the purchase period, whichever price is lower.
The ESPP provides for annual reserve increases on the first day of each fiscal year commencing on
January 1, 2007 and ending on January 1, 2015. The annual reserve increases will be equal to the
lesser of (i) 1% of the total number of shares of the Companys common stock outstanding on
December 31 of the preceding calendar year, or (ii) 250,000 shares of common stock. The Companys
Board of Directors has the authority to designate a smaller number of shares by which the
authorized number of shares of common stock will be increased prior to the last day of any calendar
year. An additional 250,000 shares were reserved for issuance on each of January 1, 2011 and 2010
under this provision. The Company did not issue any shares under the ESPP during the three months
ended March 31, 2011 or 2010. At March 31, 2011, 250,036 shares were available for issuance under
the ESPP.
5. Share-Based Compensation
Employee Share-Based Awards
Compensation cost for employee share-based awards is based on the grant-date fair value and is
recognized over the vesting period of the applicable award on a straight-line basis. The Company
issues employee share-based awards in the form of stock options and restricted stock units under
the Companys equity incentive plans, and stock purchase rights under the ESPP.
Valuation of Stock Options, Stock Purchase Rights and Restricted Stock Units
During the three months ended March 31, 2011 and 2010, the weighted average fair value of the
employee stock options granted, excluding the options issued in the Exchange Program, was $0.88 and
$1.75, respectively. The weighted average fair value of restricted stock units issued was $1.33 and
$2.40 in the three months ended March 31, 2011 and 2010, respectively. The weighted average fair
value of stock purchase rights granted under the ESPP was $0.88 and $1.54 during the three months
ended March 31, 2011 and 2010, respectively.
The estimated grant date fair values of the stock options, excluding the options issued in the
Exchange Program, and stock purchase rights were calculated using the Black-Scholes valuation
model, and the following weighted average assumptions:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Stock Option Plans |
||||||||
Expected term |
5.0 years | 5.0 years | ||||||
Expected volatility |
89 | % | 86 | % | ||||
Risk-free interest rate |
1.99 | % | 2.49 | % | ||||
Dividend yield |
0 | % | 0 | % | ||||
Employee Stock Purchase Plan |
||||||||
Expected term |
1.8 years | 2.0 years | ||||||
Expected volatility |
95 | % | 83 | % | ||||
Risk-free interest rate |
0.68 | % | 1.41 | % | ||||
Dividend yield |
0 | % | 0 | % |
The Exchange Program described in Note 4 did not result in incremental expense, as the fair
value of the New Options granted was less than the fair values of the Original Options measured
immediately prior to being replaced on the date the New Options were granted and the Original
Options were cancelled. The estimated grant date fair value of the New Options was calculated using
the Black-Sholes valuation model and the following weighted average assumptions. At the time of
exchange, the exercise price of the Original Options was in excess of the market price, therefore
the expected term of the Original Options granted was determined using the Monte Carlo Simulation method. The expected term of New Options
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granted was determined using the shortcut method, as illustrated in the Securities and Exchange
Commissions Staff Accounting Bulletin No. 107 (SAB 107), because the terms of the New Options
are unique as compared to the existing awards and the Company does not have historical experience
under the New Options terms. Under this approach, the expected term is estimated to be the average
of the vesting term and the contractual term of the option. All other assumptions have been
calculated using the historical methodologies applied by the Company to all other stock option
awards.
Original | New | |||||||
Options | Options | |||||||
Number of shares |
2,128,430 | 808,896 | ||||||
Expected term |
4.7 years | 3.4 years | ||||||
Expected volatility |
94 | % | 98 | % | ||||
Risk-free interest rate |
1.96 | % | 1.38 | % | ||||
Dividend yield |
0 | % | 0 | % |
The estimated fair value of restricted stock units awards is calculated based on the market
price of Alexzas common stock on the date of grant, reduced by the present value of dividends
expected to be paid on Alexza common stock prior to vesting of the restricted stock unit. The
Companys estimate assumes no dividends will be paid prior to the vesting of the restricted stock
unit.
As of March 31, 2011, there were $1,858,000, $158,000 and $111,000 of total unrecognized
compensation costs related to unvested stock option awards, unvested restricted stock units and
stock purchase rights, respectively, which are expected to be recognized over a weighted average
period of 2.1 years, 1.0 years and 1.0 years, respectively.
There was no share-based compensation capitalized at March 31, 2011.
6. Net Loss per Share Attributable to Alexza Common Stockholders
Historical basic and diluted net loss per share attributable to Alexza common stockholders is
calculated by dividing the net loss attributable to Alexza common stockholders by the
weighted-average number of common shares outstanding for the period. The following items were
excluded in the net loss per share attributable to Alexza common stockholders calculation for the
three months ended March 31, 2011 and 2010 because the inclusion of such items would have had an
anti-dilutive effect:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Stock options |
3,827,052 | 4,645,815 | ||||||
Restricted stock units |
1,431,843 | 755,183 | ||||||
Warrants to purchase common stock |
16,446,527 | 12,727,554 |
7. Comprehensive Loss Attributed to Alexza Common Stockholders
Comprehensive loss attributed to Alexza common stockholders is comprised of net loss and unrealized
gains (losses) on marketable securities. Total comprehensive loss attributed to Alexza common
stockholders for the three months ended March 31, 2011 and 2010 is as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net loss |
$ | (8,415 | ) | $ | (13,412 | ) | ||
Change in unrealized gain (loss) on marketable securities |
| 8 | ||||||
Comprehensive loss attributable to Alexza common stockholders |
$ | (8,415 | ) | $ | (13,404 | ) | ||
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8. Other Accrued Expenses
Other accrued expenses consisted of the following (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Accrued compensation |
$ | 1,322 | $ | 1,557 | ||||
Accrued professional fees |
703 | 798 | ||||||
Other |
1,106 | 803 | ||||||
Total |
$ | 3,131 | $ | 3,158 | ||||
9. Debt Obligations
Equipment Financing Agreements
The Company has outstanding borrowings under financing agreements to finance equipment purchases.
Borrowings under the agreements are to be repaid in 36 to 48 monthly installments of principal and
interest. The interest rate, which is fixed for each draw, is based on the U.S. Treasury securities
of comparable maturities and ranges from 9.2% to 10.6%. The equipment purchased under each of the
equipment financing agreements is pledged as security. The Company believes the amortized book
value represents the approximate fair value of the outstanding debt.
Term Loan Agreements
Hercules Technology Growth Capital
In May 2010, the Company entered into a Loan and Security Agreement (Loan Agreement) with
Hercules Technology Growth Capital, Inc. (Hercules). Under the terms of the Loan Agreement, the
Company borrowed $15,000,000 at an interest rate of the higher of (i) 10.75% or (ii) 6.5% plus the
prime rate as reported in the Wall Street Journal, with a maximum interest rate of 14% and issued
to Hercules a secured term promissory note evidencing the loan. The Company made interest only
payments through January 2011 and beginning in February 2011 the loan is being repaid in 33 equal
monthly installments. The Company believes the amortized book value represents the approximate fair
value of the outstanding debt.
The Loan Agreement limits both the seniority and amount of future debt the Company may incur. The
Company may be required to prepay the loan in the event of a change in control. In conjunction with
the loan, the Company issued to Hercules a five-year warrant to purchase 376,394 shares of the
Companys common stock at a price of $2.69 per share. The warrant is immediately exercisable and
expires in May 2015. The Company estimated the fair value of this warrant as of the issuance date
to be $921,000 which was recorded as a debt discount to the loan and consequently a reduction to
the carrying value of the loan. The fair value of the warrant was calculated using the
Black-Scholes option valuation model, and was based on the contractual term of the warrant of five
years, a risk-free interest rate of 2.31%, expected volatility of 84% and a 0% expected dividend
yield. The Company also recorded fees paid to Hercules as a debt discount, which further reduced
the carrying value of the loan. The debt discount is being amortized to interest expense.
Autoliv ASP, Inc.
In June 2010, in return for transfer to the Company of all right, title and interest in a
production line for the commercial manufacture of chemical heat packages completed or to be
completed by Autoliv ASP, Inc (Autoliv) on behalf of the Company, the Company paid Autoliv $4
million in cash and issued Autoliv a $4 million unsecured promissory note. In February 2011, the
Company entered into an agreement to amend the terms of the unsecured promissory note. Under the
terms of that amendment, the original $4 million note was cancelled and a new unsecured promissory
note was issued with a reduced principal amount of $2.8 million (the New Note).
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The New Note bears interest beginning on January 1, 2011 at 8% per annum and is being paid in 48
consecutive and equal installments of approximately $67,900. The Company believes the amortized
book value represents the approximate fair value of the outstanding debt.
Future scheduled principal payments under the equipment financing agreements and the term loans as
of March 31, 2011 are as follows (in thousands):
Equipment | ||||||||||||
Financing | Loan | |||||||||||
Obligations | Agreements | Total | ||||||||||
2011 remaining 9 months |
227 | 4,175 | 4,402 | |||||||||
2012 |
| 6,111 | 6,111 | |||||||||
2013 |
| 5,773 | 5,773 | |||||||||
2014 |
| 781 | 781 | |||||||||
Total |
$ | 227 | $ | 16,840 | $ | 17,067 | ||||||
10. Facility Leases
The Company leases two buildings in Mountain View, California, which the Company began to occupy in
the fourth quarter of 2007. The Company recognizes rental expense on the facility on a straight
line basis over the initial term of the lease. Differences between the straight line rent expense
and rent payments are classified as deferred rent liability on the balance sheet. The lease for
both facilities expires on March 31, 2018, and the Company has two options to extend the lease for
five years each.
The Mountain View lease, as amended, included $15,964,000 of tenant improvement reimbursements from
the landlord. The Company has recorded all tenant improvements as additions to property and
equipment and is amortizing the improvements over the shorter of the estimated useful life of the
improvement or the remaining life of the lease. The reimbursements received from the landlord are
included in deferred rent liability and amortized over the life of the lease as a contra-expense.
In May 2008, the Company entered into an agreement to sublease a portion of its Mountain View
facility. The sublease agreement, as recently amended on April 4, 2011, has been terminated by the
Company effective July 4, 2011. On April 21, 2011, the Company entered into a new sublease for 21
months with a separate party for this space, commencing on July 15, 2011.
In January 2010, the Company entered into an agreement to sublease an additional portion of its
Mountain View facility from March 1, 2010 through February 28, 2014. The sublessee has an option to
extend the sublease agreement for 12 months and a second option to extend the sublease agreement an
additional 37 months. If the sublessee exercises these options, the rent will be at fair market
rates at the time the option is exercised. In January 2010, the Company recorded a charge of
$1,144,000 to record the difference between the lease payments made by the Company and the cash
receipts to be generated from the sublease over the life of the sublease and is amortizing this
amount to rent expense over the term of the lease as a contra-expense.
In August 2010, the Company entered into an agreement to sublease approximately 2,500 square feet
of the Companys premises to Cypress Bioscience, Inc. (Cypress) and to provide certain
administrative, facility and information technology support for a period of 12 months. After 12
months, the space will be leased on a month-to-month basis.
11. License Agreement
Cypress Bioscience, Inc.
On August 26, 2010, the Company entered in to a license and development agreement (Cypress
Agreement) with Cypress for Staccato nicotine. According to the terms of the Cypress Agreement,
Cypress paid the Company a non-refundable upfront payment of $5 million to acquire the worldwide
license for the Staccato nicotine technology.
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Following the completion of certain preclinical and clinical milestones relating to the Staccato
nicotine technology, if Cypress elects to continue the development of Staccato nicotine, Cypress
will be obligated to pay the Company an additional technology transfer payment of $1 million. The
Company retains a carried interest of 10%, subject to adjustment in certain circumstances, in the
net proceeds of any sale or license by Cypress of the Staccato nicotine assets, and the carried
interest will be subject to put and call rights in certain circumstances.
Cypress has the responsibility for preclinical, clinical and regulatory aspects of the development
of Staccato nicotine, along with the commercialization of the product. Cypress paid the Company a
total of $3.9 million in research and development funding for the Companys efforts to execute a
development plan culminating with the delivery of clinical trial materials for a Phase 1 study with
Staccato nicotine.
For revenue recognition purposes, the Company viewed the Cypress Agreement as a multiple element
arrangement. Multiple element arrangements are analyzed to determine whether the various
performance obligations, or elements, can be separated or whether they must be accounted for as a
single unit of accounting. The Company evaluates whether the delivered elements under the
arrangement have value on a stand-alone basis and whether objective and reliable evidence of fair
value of the undelivered items exist. Deliverables that do not meet these criteria are not
evaluated separately for the purpose of revenue recognition. For a single unit of accounting,
payments received are recognized in a manner consistent with the final deliverable. The Company has
concluded that there is not objective and reliable evidence of fair value of all of the undelivered
elements, and thus the Company is accounting for such elements as a single unit of accounting. The
Company is recognizing revenue ratably over the estimated performance period of the agreement. The
Cypress Agreement was entered into prior to the Companys adoption of ASU 2009-13 on January 1,
2011. If this agreement is modified, the Company will be required to apply the provisions of ASU
2009-13.
12. Autoliv Manufacturing and Supply Agreement
On November 2, 2007, the Company entered into a Manufacturing and Supply Agreement (the
Manufacture Agreement) with Autoliv relating to the commercial supply of chemical heat packages
that can be incorporated into the Companys Staccato device (the Chemical Heat Packages). Autoliv
had developed these Chemical Heat Packages for the Company pursuant to a development agreement
between Autoliv and the Company. Under the terms of the Manufacture Agreement, Autoliv agreed to
develop a manufacturing line capable of producing 10 million Chemical Heat Packages a year.
In June 2010 and February 2011, the Company entered into agreements to amend the terms of the
Manufacture Agreement (together the Amendments). Under the terms of the first of the Amendments,
the Company paid Autoliv $4 million and issued Autoliv a $4 million unsecured promissory note in
return for a production line for the commercial manufacture of Chemical Heat Packages. Each
production line is comprised of two identical and self sustaining cells, and the first such cell
was completed, installed and qualified in connection with such Amendment. Under the terms of the
Second Amendment, the original $4 million note was cancelled and the New Note was issued with a
reduced principal amount of $2.8 million, and production on the second cell ceased. The New Note is
payable in 48 equal monthly installments of approximately $67,900. In the event that the Company
requests completion of the second cell of the first production line for the commercial manufacture
of Chemical Heat Packages, Autoliv will complete, install and fully qualify such second cell for a
cost to the Company of $1.2 million and Autoliv will transfer ownership of such cell to the Company
upon the payment in full of such $1.2 million and the New Note.
The provisions of the Amendments supersede (a) the Companys obligation set forth in the
Manufacture Agreement to reimburse Autoliv for certain expenses related to the equipment and
tooling used in production and testing of the Chemical Heat Packages in an amount of up to $12
million upon the earliest of December 31, 2011, 60 days after the termination of the Manufacture
Agreement or 60 days after approval by the FDA of an NDA filed by the Company, and (b) the
obligation of Autoliv to transfer possession of such equipment and tooling.
Subject to certain exceptions, Autoliv has agreed to manufacture, assemble and test the Chemical
Heat Packages solely for the Company in conformance with the Companys specifications. The Company
will pay Autoliv a specified purchase price, which varies based on annual quantities ordered by the
Company,
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per Chemical Heat Package delivered. The initial term of the Manufacture Agreement expires
on December
31, 2012, at which time the Manufacture Agreement will automatically renew for successive five-year
renewal terms unless the Company or Autoliv notifies the other party no less than 36 months prior
to the end of the initial term or the then-current renewal term that such party wishes to terminate
the Manufacture Agreement. The Manufacture Agreement provides that during the term of the
Manufacture Agreement, Autoliv will be the Companys exclusive supplier of the Chemical Heat
Packages. In addition, the Manufacture Agreement grants Autoliv the right to negotiate for the
right to supply commercially any second generation Chemical Heat Package (a Second Generation
Product) and provides that the Company will pay Autoliv certain royalty payments if the Company
manufactures Second Generation Products itself or if the Company obtains Second Generation Products
from a third party manufacturer. Upon the termination of the Manufacture Agreement, the Company
will be required, on an ongoing basis, to pay Autoliv certain royalty payments related to the
manufacture of the Chemical Heat Packages by the Company or third party manufacturers.
13. Subsequent Events
On May 6, 2011, the Company issued an aggregate of 11,927,034 shares of its common stock and
warrants to purchase up to an additional 4,174,457 shares of its common stock in a registered
direct offering. Net proceeds from the offering were approximately $15.8 million, after deducting
estimated offering expenses. The warrants will be exercisable six months after issuance at $1.755
per share and will expire five years from the date of issuance. The shares of common stock and
warrants are immediately separable and will be issued separately. The securities were sold pursuant
to a shelf registration statement declared effective by the SEC on May 20, 2010. The Company agreed
to customary obligations regarding registration, including indemnification and maintenance of the
registration statement and the Company also agreed that, subject to certain exceptions, it will
not, within the 90 days following the closing of the offering, enter into any agreement to issue or
announce the issuance or proposed issuance of any shares of its common stock or securities
convertible into, exercisable for or exchangeable for shares of its common stock. Further, if the
Company proposes to issue securities prior to the earlier of (a) the date on which it receives
written approval from the FDA for its NDA for AZ-004 or (b) June 30, 2012, the investors in the
offering, subject to certain exceptions, have the right to purchase their pro rata share, based on
their participation in the offering, of such securities. In addition, the Company agreed to not
issue shares pursuant to its equity financing facility with Azimuth or any similar facilities, or
enter into variable rate transactions, until the earlier of (1) 30 days after the approval of the
NDA for AZ-004 or (2) June 30, 2012.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This
Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which are subject to the safe harbor created by those sections.
Forward-looking statements are based on our managements beliefs and assumptions and on information
currently available to our management. In some cases, you can identify forward-looking statements
by terms such as may, will, should, could, would, expect, plans, anticipates,
believes, estimates, projects, predicts, potential and similar expressions intended to
identify forward-looking statements. Examples of these statements include, but are not limited to,
statements regarding: the prospects of us receiving approval to market AZ-004, our anticipated
timing and prospects for the resubmission of our New Drug Application for AZ-004, managements
plans for the use of the net proceeds from the offering, the implications of interim or final
results of our clinical trials, the progress and timing of our research programs, including
clinical testing, the extent to which our issued and pending patents may protect our products and
technology, the potential of our product candidates to lead to the development of safe or effective
therapies, our ability to enter into collaborations, our future operating expenses, our future
losses, our future expenditures and the sufficiency of our cash resources. Our actual results could
differ materially from those discussed in our forward-looking statements for many reasons,
including the risks faced by us and described in Part II, Item 1A of this Quarterly Report on Form
10-Q and our other filings with the Securities and Exchange Commission, or SEC. You should not
place undue reliance on these forward-looking statements, which apply only as of the date of this
Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and
with the understanding that our actual future results may be materially different from what we
expect. Except as required by law, we assume no obligation to update these forward-looking
statements publicly, or to update the reasons actual results could differ materially from those
anticipated in these forward-looking statements, even if new information becomes available in the
future.
The following discussion and analysis should be read in conjunction with the unaudited financial
statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
The names Alexza Pharmaceuticals, Alexza, and Staccato are registered trademarks of Alexza
Pharmaceuticals, Inc. All other trademarks, trade names and service marks appearing in this
Quarterly Report on Form 10-Q are the property of their respective owners.
We are a pharmaceutical company focused on the research, development, and commercialization of
novel proprietary products for the acute treatment of central nervous system conditions. All of our
product candidates are based on our proprietary technology, the Staccato system. The Staccato
system vaporizes an excipient-free drug to form a condensation aerosol that, when inhaled, allows
for rapid systemic drug delivery. Because of the particle size of the aerosol, the drug is quickly
absorbed through the deep lung into the bloodstream, providing speed of therapeutic onset that is
comparable to intravenous, or IV, administration but with greater ease, patient comfort and
convenience.
In early 2010, we conducted a thorough review of our product pipeline, evaluating current and
potential new Staccato-based product candidates. This review yielded three categories of
Staccato-based product candidates: (1) product candidates where we believe we can add value through
internal development, (2) product candidates where we have developed the product idea, but where a
development partner is required, and (3) product candidates based on new ideas, primarily focused
on new chemical entities, where the Staccato technology can facilitate better or more effective
delivery. In July 2010, we announced that, in addition to AZ-004, AZ-007 (Staccato zaleplon) and
Staccato nicotine would remain in active development. Active development on the remainder of our
development pipeline is suspended. We are continuing to seek partners to support development and
commercialization of our product candidates. We believe that, based on our cash, cash equivalents
and marketable securities balance at March 31, 2011, the net proceeds from our May 2011 stock and
warrant issuance, interest earned thereon, the proceeds from option exercises and purchases of
common stock pursuant to our 2005 Employee Stock Purchase Plan and our expected cash usage, we have
sufficient capital resources to meet our anticipated cash needs into the first quarter of 2012. We
are unable to assert that our financial position is sufficient to fund operations beyond that date,
and as a result, there is substantial doubt about our ability to continue as a going concern. We
may not be able to raise sufficient capital on acceptable terms, or at all, to continue development
of AZ-004 or our other programs or to continue operations and we may not be able to execute any
strategic transaction.
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Our product candidates in active development are:
| AZ-004 (Staccato loxapine). We are developing AZ-004 for the rapid treatment of agitation in patients with schizophrenia or bipolar disorder. In December 2009, we submitted a New Drug Application, or NDA, for AZ-004, submitted as Adasuvetm Staccato® (loxapine) inhalation aerosol, 5 mg and 10 mg. In October 2010, we received a Complete Response Letter, or CRL, from the U.S. Food and Drug Administration, or the FDA, regarding our NDA for AZ-004. A CRL is issued by the FDA indicating that the NDA review cycle is complete and the application is not ready for approval in its present form. In December 2010, we completed an End-of-Review meeting with the FDA to discuss the issues outlined in the AZ-004 CRL. In January 2011, we received the official FDA minutes of the meeting, and we anticipate resubmitting the AZ-004 NDA in July 2011. In April 2011 we completed a meeting with the FDA to discuss preliminary draft labeling and initial Risk Evaluation and Mitigation Strategy, or REMS, program proposals. We are seeking commercial partners for the worldwide development and commercialization of AZ-004. | |
In the CRL, the FDA stated that its primary clinical safety concern was related to data from the three Phase 1 pulmonary safety studies with AZ-004. This concern was primarily based on observed, dose-related post-dose decreases in forced expiratory volume in one second, or FEV1, a standard measure of lung function, in healthy subjects and in subjects with asthma or chronic obstructive pulmonary disease, or COPD. The FDA also noted that decreases in FEV1 were recorded in subjects who were administered device-only, placebo versions of AZ-004. In the information package submitted to the FDA in response to the CRL and in preparation for the End-of-Review meeting, we presented evidence that we believe demonstrates the placebo device is safe, including a blinded expert review of the flow-volume loops data from the healthy subject study as further evidence that there appears to be no consistent pattern suggestive of airway obstruction in these subjects. We also provided an analysis that we believe shows that there is no meaningful temporal relationship between placebo administration and decreases in FEV1. We believe this evidence and analysis confirm that the changes seen were likely background events in the population studied, where the repeated and extensive pulmonary function testing may have contributed to some of the observations. Additionally, we believe we showed that the aerosol characterization does not indicate a basis for concern. We agreed to reiterate these arguments in our NDA resubmission. | ||
In the information package, we also believe we showed that the pulmonary safety program in subjects with asthma or COPD had identified patients who may be susceptible to bronchospasm, the nature of this adverse event, and how it can be managed. We stated we believe the risk in these patients could be mitigated through labeling and a REMS program. At the End-of-Review meeting, the FDA stated that it would be reasonable to propose a REMS program for the use of Staccato loxapine, and requested that as part of our resubmission, we provide a detailed REMS proposal including labeling, a medication guide, a communication plan and post-approval studies to manage the potential risks. In the resubmission, we must also show how to identify patients at risk of developing pulmonary side effects, as well as a way to decide who should and should not be treated with Staccato loxapine when they present for treatment. The FDA also informed us that it would likely present the NDA to an advisory committee. | ||
The CRL also raised issues relating to the suitability of our stability studies and certain other Chemistry, Manufacturing, and Controls, or CMC, concerns, including items relating to the FDAs pre-approval manufacturing inspection. Because AZ-004 incorporates a novel delivery system, the CRL included input from the FDAs Center for Devices and Radiological Health, or the CDRH. In the CRL, the CDRH requested a human factors study and related analysis to validate that the product can be used effectively in the proposed clinical setting. We have finalized the protocol with input from the FDA and expect to complete this study in the coming months. We are not currently required to conduct any additional efficacy or safety clinical trials for AZ-004. The CDRH also requested further bench testing of the product under an additional worst-case manufacturing scenario. We have completed this additional worst-case bench testing of the product, submitted the data to the FDA and believe that this issue has been adequately addressed. |
In April 2011 we completed a Type C meeting with the FDA. The primary purpose of this meeting was to discuss preliminary draft labeling and initial REMS program proposals. The FDA granted |
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this meeting at our request, as a follow-on activity to discussions during our End-of-Review meeting held in December 2010. | ||
In the information package submitted to the FDA in preparation for this guidance meeting, we included updated draft labeling and a medication guide, and initial proposals for an AZ-004 REMS program, including a draft communication plan and draft post-approval study outline. | ||
Following the guidance meeting, we believe there is agreement with the FDA on the definition of patients at risk. We believe that our clinical program has identified the patients who are at risk for respiratory adverse reactions, or bronchospasm, associated with the administration of Staccato loxapine, notably patients who have obvious respiratory signs and/or who are taking medications to treat asthma or COPD. | ||
We proposed to the FDA that standard medical clearance procedures, including a medical and medication history, and a physical examination, would provide the appropriate information to determine eligibility of patients for treatment. The FDA indicated that while screening and examining patients is useful, this cannot identify all patients who should not receive Staccato loxapine. Therefore the FDA indicated that close observation of the patient post-dosing would be important. | ||
The FDA emphasized that there are two key components for a risk mitigation proposal: (i) adequacy of monitoring via patient observation for a period of time relative to the likely occurrence of a respiratory adverse reaction, and (ii) availability of rescue medication (e.g., inhaled albuterol) should an adverse reaction occur. The FDA suggested that it is also possible that a REMS for AZ-004 could include elements to assure safe use as one manner in which to address the need for post-dose observation and training for possible treatment of a respiratory adverse reaction, if it were to occur. We will address this updated guidance from the FDA in our draft REMS proposal contained within the AZ-004 NDA resubmission. | ||
In the information package submitted to the FDA, we also proposed, as a study outline, to conduct a post-approval observational study of the real-world use of Staccato loxapine. The AZ-004 study objectives would include an assessment of patient selection, the usability of AZ-004 in a range of agitated patients, safety and adverse event observations during dosing and in post-dose time periods,and the adequacy of post-dose monitoring. The FDA indicated that the size of the study needs to be sufficient to characterize the usage and safety profile of AZ-004 in a real-world setting. | ||
In summary, the FDA indicated that a complete review of the proposed REMS in conjunction with the full clinical review of the resubmitted NDA will be necessary to determine whether the REMS would be acceptable. The FDA stated it would present the AZ-004 application to an advisory committee. | ||
We note that we have not received the official FDA meeting minutes from the guidance meeting. The summaries of that meeting in this Report and our other filings may be altered or supplemented by the information contained in the official meeting minutes. | ||
| AZ-007 (Staccato zaleplon). We have completed Phase 1 testing for AZ-007. This product candidate is being developed for the treatment of insomnia in patients who have difficulty falling asleep, including patients who awake in the middle of the night and have difficulty falling back asleep. In the Phase 1 study, AZ-007 delivered an IV-like pharmacokinetic profile with a median time to peak drug concentration of 1.6 minutes. Pharmacodynamics, measured as sedation assessed on a 100 mm visual-analog scale, showed onset of effect as early as 2 minutes after dosing. We do not intend to spend any external development resources on AZ-007 in the first half of 2011, but are continuing internal work on the technical product development of AZ-007. | |
| Staccato nicotine is designed to help smokers quit by addressing both the chemical and behavioral components of nicotine addiction by delivering nicotine replacement via inhalation. On August 25, 2010, we entered into a license and development agreement, or the Cypress Agreement, with Cypress Bioscience, Inc., or Cypress, for Staccato nicotine. According to the terms of the Cypress Agreement, Cypress paid us a non-refundable upfront payment of $5 million to acquire the worldwide license for the Staccato nicotine technology. In addition, following the completion of certain preclinical and clinical milestones relating to the Staccato nicotine technology, if Cypress |
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elects to continue the development of Staccato nicotine, Cypress is obligated to pay to us an additional technology transfer payment of $1 million. We have a carried interest of 10%, subject to adjustment in certain circumstances, in the net proceeds of any sale or license by Cypress of the Staccato nicotine assets and the carried interest will be subject to put and call rights in certain circumstances. Under the Cypress Agreement, Cypress has responsibility for preclinical, clinical and regulatory aspects of the development of Staccato nicotine, along with the commercialization of the product. Through April 1, 2011, Cypress has paid us a total of $3.9 million for our efforts to execute a defined development plan for Cypress culminating with the delivery of clinical trial materials for a Phase 1 study with Staccato nicotine. |
Our product candidates not in active development are:
| AZ-104 (Staccato loxapine, low-dose). AZ-104, a lower-dose version of AZ-004, is being studied for the treatment of patients suffering from acute migraine headaches. AZ-104 has completed a Phase 1 clinical trial in healthy subjects and two Phase 2 clinical trials in patients with migraine headache. | ||
| AZ-002 (Staccato alprazolam). AZ-002 has completed a Phase 1 clinical trial in healthy subjects and a Phase 2a proof-of-concept clinical trial in panic disorder patients for the treatment of panic attacks, an indication we are not planning to pursue. However, given the safety profile, the successful and reproducible delivery of alprazolam, and the IV-like pharmacological effect demonstrated to date, we are assessing AZ-002 for other possible indications and renewed clinical development. | ||
| AZ-003 (Staccato fentanyl). We have completed and announced positive results from a Phase 1 clinical trial of AZ-003 in opioid-naïve healthy subjects. This product candidate is being developed for the treatment of patients with acute pain, including patients with breakthrough cancer pain and postoperative patients with acute pain episodes. |
On May 6, 2011, we issued an aggregate of 11,927,034 shares of our common stock and warrants to
purchase up to an additional 4,174,457 shares of our common stock in a registered direct offering.
Net proceeds from the offering were approximately $15.8 million, after deducting estimated offering
expenses. The warrants are exercisable six months after issuance at $1.755 per share, and will
expire five years from the date of issuance. The shares of common stock and warrants are
immediately separable and will be issued separately. The securities were sold pursuant to a shelf
registration statement declared effective by the SEC on May 20, 2010. We agreed to customary
obligations regarding registration, including indemnification and maintenance of the registration
statement, and we also agreed that, subject to certain exceptions, we will not, within the 90 days
following the closing of the offering, enter into any agreement to issue or announce the issuance
or proposed issuance of any shares of our common stock or securities convertible into, exercisable
for or exchangeable for shares of our common stock. Further, if we propose to issue securities
prior to the earlier of (a) the date on which we receive written approval from the FDA for our NDA
for AZ-004 or (b) June 30, 2012, the investors in the offering, subject to certain exceptions, have
the right to purchase their pro rata share, based on their participation in the offering, of such
securities. The foregoing rights and restrictions and applicable listing standards may affect our
ability to consummate certain types of offerings of our securities in the future.
In May 2010, we obtained a committed equity financing facility under which we may sell up to
8,936,550 shares of our common stock to Azimuth Opportunity, Ltd., or Azimuth, over a 24-month
period. We are not obligated to utilize any of the facility and we remain free to enter into and
consummate other equity and debt financing transactions. We will determine, at our sole discretion,
the timing, the dollar amount and the price per share of each draw under this facility, subject to
certain conditions. When and if we elect to use the facility, we will issue shares to Azimuth at a
discount between 5.00% and 6.75% to the volume weighted average price of our common stock over a
preceding period of trading days. Azimuth is not required to purchase any shares at a
pre-discounted purchase price below $3.00 per share. Any shares sold under this facility will be
sold pursuant to a shelf registration statement declared effective by the Securities and Exchange
Commission on May 20, 2010. This facility replaces a similar facility that was established in March
2008 and expired after its 24-month term. As part of our May 2011 registered direct offering, we
agreed to refrain from utilizing this equity financing facility or any similar facilities, or
entering into variable rate transactions, until the earlier of: (i) 30 days after the approval of
our AZ-004 NDA or (ii) June 30, 2012. As of March 31, 2011, there have been no sales of common
stock under these facilities.
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Other than those licensed to Cypress, we currently retain all rights to our product candidates and
the Staccato system. We intend to capitalize on our internal resources to develop certain of our
product candidates and identify routes to utilize external resources to develop and commercialize
other product candidates.
We were incorporated December 19, 2000. We have funded our operations primarily through the sale of
equity securities, payments received pursuant to collaborations, capital lease and equipment
financings, debt financings and government grants. We have generated $61.1 million in revenues from
inception through March 31, 2011, primarily through license and development agreements and United
States Small Business Innovation Research grants and drug compound feasibility studies. Prior to
2007, we recognized governmental grant revenue and drug compound feasibility revenues, however, we
expect no grant revenue or drug compound feasibility screening revenue in 2011. We do not expect
any material product revenue until at least 2012, if at all.
We have incurred significant losses since our inception. As of March 31, 2011, our deficit
accumulated during development stage was $274.5 million and total stockholders equity was $4.3
million. We recognized net losses of $8.4 million, $1.5 million, $56.1 million, $77.0 million and
$319.6 million during the three months ended March 31, 2011, the years ended December 31, 2010,
2009 and 2008, and the period from December 19, 2000 (Inception) to March 31, 2011, respectively.
We expect our net losses to increase in 2011 compared to 2010, as the 2010 results were impacted by
the $40 million of revenue recognized from the termination of our license agreement with Biovail
Laboratories International, SRL, or Biovail, for AZ-004.
The process of conducting preclinical studies and clinical trials necessary to obtain FDA approval
is costly and time consuming. We consider the development of our product candidates to be crucial
to our long term success. If we do not complete development of our product candidates and obtain
regulatory approval to market one or more of these product candidates, we may be forced to cease
operations. The probability of success for each product candidate may be impacted by numerous
factors, including preclinical data, clinical data, competition, device development, manufacturing
capability, regulatory approval and commercial viability. Our current strategy is to focus our
resources on AZ-004. In addition, we plan to seek commercial partners for the worldwide development
and commercialization for all of our product candidates. If in the future we enter into additional
partnerships, third parties could have control over preclinical development or clinical trials for
some of our product candidates. Accordingly, the progress of such product candidates would not be
under our control. We cannot forecast with any degree of certainty which of our product candidates,
if any, will be subject to any future partnerships or how such arrangements would affect our
development plans or capital requirements.
As a result of the uncertainties discussed above, the uncertainty associated with clinical trial
enrollments, and the risks inherent in the development process, we are unable to determine the
duration and completion costs of the current or future clinical stages of our product candidates or
when, or to what extent, we will generate revenues from the commercialization and sale of any of
our product candidates. Development timelines, probability of success and development costs vary
widely. While we are currently focused on developing our product candidates, we anticipate that we
and our partners, will make determinations as to which programs to pursue and how much funding to
direct to each program on an ongoing basis in response to the scientific and clinical success of
each product candidate, as well as an ongoing assessment as to the product candidates commercial
potential. We do not expect any of our current product candidates to be commercially available
before 2012, if at all.
We believe that with current cash, cash equivalents and marketable securities along with the
proceeds from our May 2011 stock and warrant issuance, interest earned thereon, the proceeds from
option exercises and purchases of common stock pursuant to our 2005 Employee Stock Purchase Plan,
or ESPP, we will be able to maintain our currently planned operations into the first quarter of
2012. Changing circumstances may cause us to consume capital significantly faster or slower than we
currently anticipate or to alter our operations. We have based these estimates on assumptions that
may prove to be wrong, and we could utilize our available financial resources sooner than we
currently expect.
Results of Operations
Comparison of Three months Ended March 31, 2011 and 2010
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Revenue
The following table summarizes the revenues recognized to date (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenue |
$ | 1,259 | $ | | ||||
Revenues for the three months ended March 31, 2011 of $1,259,000 were related to our license
and development agreement with Cypress signed in August 2010. There were no revenues for the three
months ended March 31, 2010.
Research and Development Expenses
Research and development costs are identified as either directly attributable to one of our product
candidates or as general research. Direct costs consist of personnel costs directly associated with
a candidate, preclinical study costs, clinical trial costs, related clinical drug and device
development and manufacturing costs, contract services and other research expenditures. Overhead,
facility costs and other support service expenses are allocated to each candidate or to general
research, and the allocation is based on employee time spent on each program.
The following table allocates our expenditures between product candidate costs or general research,
based on our internal records and estimated allocations of employee time and related expenses (in
thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Product candidate expenses |
$ | 5,714 | $ | 6,180 | ||||
General research |
548 | 1,384 | ||||||
Total research and development expenses |
$ | 6,262 | $ | 7,564 | ||||
Research and development expenses were $6.3 million and $7.6 million during the three months
ended March 31, 2011 and 2010, respectively. The decrease in 2011 was primarily due to our
deferral of certain AZ-004 commercialization and manufacturing efforts as a result of the CRL
received for the AZ-004 NDA. In addition, we reduced our general research efforts to preserve our
cash balances.
In July 2010, we announced that we moved AZ-007 into active development. However, due to the FDA
not approving AZ-004 for commercial marketing in October 2010, we have slowed the clinical
development of AZ-007 from second half of 2010 levels and eliminated all external development
costs. We are continuing our development obligations under the Cypress agreement for Staccato
nicotine. We expect that 2011 research and development expenses will remain relatively consistent
with 2010 levels.
General and Administrative Expenses
General and administrative expenses were $2.8 million and $5.1 million during the three months
ended March 31, 2011 and 2010, respectively. The decrease was a result of the Company reducing
discretionary spending to preserve cash balances and the result of a charge of $1.1 million
included in our 2010 expenses related to our entering into a sublease agreement for a portion of
one of our Mountain View facilities equal to the difference between the lease payments made by us
and the cash receipts generated from the sublease over the life of the sublease and a $0.3 million
non-cash share-based compensation charge for the surrender of certain stock options during the
three months ended March 31, 2010.
We expect our general and administrative expenses to remain consistent, excluding the above
outlined charge related to our subleasing of a portion of our facilities, with 2010 levels.
Change in the Fair Value of Contingent Consideration Liability
In connection with our acquisition of all of the outstanding equity of Symphony Allegro, Inc., or
Allegro, in the third quarter of 2009, we are obligated to pay Symphony Allegro Holdings LLC, or
Holdings, certain
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percentages of cash receipts that may be generated from future collaboration
transactions for AZ-002, AZ-004 and/or AZ-104. We measure the fair value of this contingent
consideration liability on a recurring basis. Any changes in the fair value of this contingent
consideration liability are recognized in earnings in the period of the change. Certain events,
including, but not limited to, clinical trial results, FDA approval or nonapproval of our
submissions, such as our NDA filed in December 2009, the timing and terms of a strategic
partnership, and the commercial success of AZ-002, AZ-004 and/or AZ-104, could have a material
impact on the fair value of the contingent consideration liability, and as a result, our results of
operations. During the three months ended March 31, 2011, we modified the assumptions regarding the
timing of certain cash flows. The changes in these assumptions along with the effect of the passage
of three months on the present value computation resulted in no net change to the contingent cash
liability as of March 31, 2011 compared to December 31, 2010.
Interest and Other Income/(Expense), Net
Interest and other income/(expense) was $10,000 and $(19,000) for the three months ended March 31,
2011 and 2010, respectively. The amounts primarily represent income earned on our cash, cash
equivalents and marketable securities as well as losses on the retirement of fixed assets. We
expect interest income to continue to remain nominal through 2011 as we expect the low interest
rate environment to continue.
Interest Expense
Interest expense was $602,000 and $55,000 for the three months ended March 31, 2011 and 2010,
respectively. The amounts represent interest on our equipment financing obligations and term loan
agreement. Interest expense increased due to the addition of the $15 million term loan agreement in
May 2010 and the additional expense related to the Autoliv $2.8 million unsecured promissory note
beginning in January 2011. We expect interest expense to decrease slightly from first quarter
levels due to decreasing outstanding debt balances as we make our monthly payments.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private placements and public
offerings of equity securities, receiving aggregate net proceeds from such sales totaling $266.9
million, revenues primarily from licensing and development agreements and government grants
totaling $61.1 million. We have received equipment financing obligations and term loans, interest
earned on investments, as described below, and funds received upon exercises of stock options and
exercises of purchase rights under our ESPP. As of March 31, 2011, we had $31.8 million in cash,
cash equivalents and marketable securities. Our cash and marketable securities balances are held in
a variety of interest bearing instruments, including obligations of U.S. government agencies and
money market accounts. Cash in excess of immediate requirements is invested with regard to
liquidity and capital preservation.
Cash Flows from Operating Activities. Net cash (used in) provided by operating activities was
$(8.3) million and $31.4 million during the three months ended March 31, 2011 and 2010,
respectively. The net cash used in the three months ended March 31, 2011 primarily reflects the
net loss of $8.4 million offset by share-based compensation expense of $0.5 million and
depreciation and amortization of $1.1 million, and the decrease in accounts payable of $1.2 million
and deferred rent of $0.6 million.
The net cash provided in the three months ended March 31, 2010 primarily reflects the receipt of
the $40 million up-front payment from Biovail as part of our collaboration and the receipt of the
$1.4 million other receivable. Cash flows from operations in the three months ended March 31, 2010
also reflects the net loss of $13.4 million, net of share-based compensation expense of $1.7
million and depreciation and amortization of $1.2 million.
Cash Flows from Investing Activities. Net cash provided by (used in) investing activities was $17.9
million and $(13.5) million during the three months ended March 31, 2011 and 2010, respectively.
Investing activities consist primarily of purchases and maturities of marketable securities and
property and equipment
purchases. During the three months ended March 31, 2011, we had maturities of marketable securities
of $17.9 million.
During the three months ended March 31, 2010, we had purchases of marketable securities, net of
maturities, of $11.3 million, and purchases of property and equipment of $2.2 million, primarily
consisting of equipment purchases.
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Cash Flows from Financing Activities. Net cash used in financing activities was $1.2 million and
$8.2 million during the three months ended March 31, 2011 and 2010, respectively. Cash flows from
financing activities have generally consisted of proceeds from the issuance of our common stock and
net cash flows from our financing agreements. In the three months ended March 31, 2011 and 2010,
principal payments on our financing obligations were $1.2 million and $0.7 million, respectively.
In the three months ended March 31, 2010, we made a payment of $7.5 million to Holdings as a result
of our receipt of the $40 million Biovail payment.
We believe that with current cash, cash equivalents and marketable securities along with the
proceeds from our May 2011 stock and warrant issuance, interest earned thereon, the proceeds from
option exercises and purchases of common stock pursuant to our ESPP, we will be able to maintain
our current operations, at our current cost levels, into the first quarter of 2012. Changing
circumstances may cause us to consume capital significantly faster or slower than we currently
anticipate or to alter our operations. We have based these estimates on assumptions that may prove
to be wrong, and we could utilize our available financial resources sooner than we currently
expect. The key assumptions underlying these estimates include:
| expenditures related to continued preclinical and clinical development of our lead product candidates during this period within budgeted levels; | ||
| no unexpected costs related to the development of our manufacturing capability; and | ||
| no growth in the number of our employees during this period. |
Our forecast of the period of time that our financial resources will be adequate to support
operations is a forward-looking statement and involves risks and uncertainties, and actual results
could vary as a result of a number of factors, including the factors discussed in Risk Factors.
In light of the numerous risks and uncertainties associated with the development and
commercialization of our product candidates and the extent to which we enter into strategic
partnerships with third parties to participate in development and commercialization of our product
candidates, we are unable to estimate the amounts of increased capital outlays and operating
expenditures associated with our current and anticipated clinical trials. Our future funding
requirements will depend on many factors, including:
| the cost, timing and outcomes of regulatory approvals or non-approvals; | ||
| the scope, rate of progress, results and costs of our preclinical studies, clinical trials and other research and development activities; | ||
| the terms and timing of any distribution, strategic partnership or licensing agreements that we may establish; | ||
| the number and characteristics of product candidates that we pursue; | ||
| the cost and timing of establishing manufacturing, marketing and sales capabilities; | ||
| the cost of establishing clinical and commercial supplies of our product candidates; | ||
| the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and | ||
| the extent to which we acquire or invest in businesses, products or technologies, although we currently have no commitments or agreements relating to any of these types of transactions. |
We will need to raise additional funds to support our operations, and such funding may not be
available to us on acceptable terms, or at all. In this regard, for the year ended December 31,
2010, we received an explanatory paragraph from our independent registered public accounting firm
in their audit opinion raising substantial doubt about our ability to continue as a going
concern.If we are unable to raise additional funds when needed, we may not be able to
continue development of our product candidates or we could be required to delay, scale back or
eliminate some or all of our development programs, or reduce our efforts to build our commercial
manufacturing capacity, and other operations. We may seek to raise additional funds through public
or private financing, strategic partnerships or other arrangements. Any additional equity
financing may be dilutive to stockholders and debt financing, if available, may involve restrictive
covenants. Certain restrictions imposed on us in connection with our May 2011 stock and warrant
issuance, as well as applicable listing standards, may affect our ability to consummate certain
types of offerings of our securities in the future. If we raise funds through collaborative or
licensing arrangements, we may be required to relinquish, on terms that are not favorable to us,
rights to some of our technologies or product candidates that we would otherwise seek to develop or
commercialize ourselves. Our failure to raise capital when needed may harm our business, financial
condition, results of operations, and prospects.
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Contractual Obligations
We lease two buildings with an aggregate of 106,894 square feet of manufacturing, office and
laboratory facilities in Mountain View, California, which we began to occupy in the fourth quarter
of 2007. We currently have subleases covering 19,334 square feet, 20,956 square feet and 2,500
square feet of these facilities, reducing the space we occupy to 64,104 square feet. The lease for
both facilities expires on March 31, 2018, and we have two options to extend the lease for five
years each. On April 4, 2011, we terminated the sublease agreement pertaining to 19,334, square feet
which will be effective July 4, 2011, and subsequently leased this space to another party for a
period of 21 months commencing on July 15, 2011. Our other sublease agreements will expire on
February 28, 2014 with regards to 20,956 square feet and on August 31, 2011 with regards to 2,500
square feet. We believe that the Mountain View facilities are sufficient for our office,
manufacturing and laboratory needs for at least the next three years.
We have financed a portion of our equipment purchases through various equipment financing
agreements. Under the agreements, equipment advances are to be repaid in 36 to 48 monthly
installments of principal and interest. The interest rate, which is fixed for each draw, is based
on the U.S. Treasuries of comparable maturities and ranges from 9.2% to 10.5%. The equipment
purchased under the equipment financing agreement is pledged as security.
On May 4, 2010, we entered into a Loan and Security Agreement, or loan agreement, with Hercules
Technology Growth Capital, Inc., or Hercules. Under the terms of the loan agreement, we have
borrowed $15,000,000 at an interest rate equal to the higher of (i) 10.75% or (ii) 6.5% plus the
prime rate as reported in the Wall Street Journal, with a maximum interest rate of 14%, and issued
to Hercules a secured term promissory note evidencing the loan. We made interest only payments
through January 2011 and beginning in February 2011 the loan began to be repaid in 33 equal monthly
installments.
On November 2, 2007, we entered into a manufacturing and supply agreement, or the manufacture
agreement, with Autoliv ASP, Inc, or Autoliv, relating to the commercial supply of chemical heat
packages that can be incorporated into our Staccato device. Autoliv had developed these chemical
heat packages for us pursuant to a development agreement between Autoliv and us executed in October
2005.
In June 2010 and February 2011, we entered into agreements to amend the terms of the manufacture
agreement, or the amendments. Under the terms of the first of the amendments, we paid Autoliv $4
million and issued Autoliv a $4 million unsecured promissory note in return for a production line
for the commercial manufacture of chemical heat packages. Each production line is comprised of two
identical and self sustaining cells, and the first such cell was completed, installed and
qualified in connection with such amendment. Under the terms of the second of the amendments, the
original $4 million note was cancelled and a new unsecured promissory note was issued with a
reduced principal amount of $2.8 million, or the second note, and production on the second cell
ceased. The second note is payable in 48 equal monthly installments of approximately $67,900. In
the event that we request completion of the second cell of the first production line for the
commercial manufacture of chemical heat packages, Autoliv will complete, install and fully qualify
such second cell for a cost to us of $1.2 million and Autoliv will transfer ownership of such cell
to us upon the payment in full of such $1.2 million and the second note. At our request, Autoliv
will manufacture up to two additional production lines for the commercial manufacture of chemical
heat packages at a cost not to exceed $2,400,000 for each additional line.
We will pay Autoliv a specified purchase price, which varies based on annual quantities ordered by
us, per chemical heat package delivered. The initial term of the manufacture agreement expires on
December 31, 2012, at which time the manufacture agreement will automatically renew for successive
five-year renewal terms unless we or Autoliv notify the other party no less than 36 months prior to
the end of the initial term or the then-current renewal term that such party wishes to terminate
the manufacture agreement.
Our recurring losses from operations and our need for additional capital raise substantial doubt
about our ability to continue as a going concern, and as a result, we have classified all of our
financing obligations as current. If this substantial doubt is removed in future periods, we will
reclassify these financing obligations
between current and non-current. Our scheduled future minimum contractual payments, net of sublease
income, including interest at March 31, 2011, are as follows (in thousands):
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Operating | Equipment | |||||||||||||||
Lease | Financing | Loan | ||||||||||||||
Agreements | Obligations | Agreements | Total | |||||||||||||
2011 remaining 9 months |
3,495 | 235 | 5,355 | 9,085 | ||||||||||||
2012 |
4,825 | | 7,140 | 11,965 | ||||||||||||
2013 |
4,469 | | 6,124 | 10,593 | ||||||||||||
2014 |
4,859 | | 815 | 5,674 | ||||||||||||
Thereafter |
15,858 | | | 15,858 | ||||||||||||
Total |
$ | 33,506 | $ | 235 | $ | 19,434 | $ | 53,175 | ||||||||
Critical Accounting Policies, Estimates and Judgments
Our managements discussion and analysis of our financial condition and results of operations is
based on our financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements, as well as
reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our
estimates and judgments related to development costs. We base our estimates on historical
experience and on various other factors that we believe are reasonable under the circumstances, the
results of which form the basis for making assumptions about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 3 of the notes to the
consolidated financial statements in our Annual Report on Form 10-K as filed with the SEC on March
15, 2011, we believe the following accounting policies are critical to the process of making
significant estimates and judgments in preparation of our financial statements.
Share-Based Compensation
We use the Black-Scholes option pricing model to determine the fair value of stock options and
purchase rights issued under our ESPP. The determination of the fair value of share-based payment
awards on the date of grant using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of complex and subjective variables. These variables include our
expected stock price volatility over the term of the awards, actual and projected employee stock
option exercise behaviors, risk-free interest rates and expected dividends.
We estimated the expected term of options based on the historical term periods of options that have
been granted but are no longer outstanding and the estimated terms of outstanding options. We
estimated the volatility of our stock based on our actual historical volatility since our initial
public offering. We base the risk-free interest rate that we use in the option pricing model on
U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
We do not anticipate paying any cash dividends in the foreseeable future and therefore use an
expected dividend yield of zero in the option pricing model.
We are required to estimate forfeitures at the time of grant and revise those estimates in
subsequent periods if actual forfeitures differ from those estimates. We use historical data to
estimate pre-vesting option forfeitures and record share-based compensation expense only for those
awards that are expected to vest. All share-based payment awards are amortized on a straight-line
basis over the requisite service periods of the awards, which are generally the vesting periods.
The estimated fair value of restricted stock unit awards is calculated based on the market price of
our common stock on the date of grant, reduced by the present value of dividends expected to be
paid on our common stock prior to vesting of the restricted stock unit. Our current estimate
assumes no dividends will be paid prior to the vesting of the restricted stock unit.
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If factors change and we employ different assumptions for estimating share-based compensation
expense in future periods or if we decide to use a different valuation model, the expenses in
future periods may differ significantly from what we have recorded in the current period and could
materially affect our operating loss, net loss and net loss per share.
See Note 5 to the condensed consolidated financial statements in this Quarterly Report on this Form
10-Q for further information regarding ASC 718 option valuation disclosures.
Contingent Consideration Liability
In August 2009, we completed our purchase of all of the outstanding equity of Allegro and in
exchange we: (i) issued to Symphony Capital LLC and other investors, or the Allegro Investors, 10
million shares of our common stock; (ii) issued to the Allegro Investors five year warrants to
purchase five million shares of our common stock with an exercise price of $2.26 per share; and
(iii) will pay certain percentages of cash payments that may be generated from future partnering
transactions for the programs.
We estimate the fair value of the liability associated with the contingent cash payments to the
Allegro Investors, or contingent consideration liability, on a quarterly basis using a
probability-weighted discounted cash flow model. We derive multiple cash flow scenarios for each of
the product candidates subject to the cash payments and apply a probability to each of the
scenarios. These probability and risk adjusted weighted average cash flows are then discounted
utilizing our estimated weighted average cost of capital (WACC). Our WACC considers the Companys
cash position, competition, risk of substitute products, and risk associated with the financing of
the development projects. We determined the discount rate to be 18% and applied this rate to the
probability adjusted cash flow scenarios.
Changes in the fair value of the contingent consideration liability are recognized in earnings in
the period of the change. Certain events including, but not limited to, clinical trial results, FDA
approval or non-approval of our submissions, the timing and terms of a strategic partnership, the
commercial success of the programs, and the discount rate used could have a material impact on the
fair value of the contingent consideration liability, and as a result, our results of operations.
Revenue Recognition
We recognize revenue in accordance with the SEC Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements, as amended by Staff Accounting Bulletin No. 104, Revision of
Topic 13.
In determining the accounting for collaboration agreements, we determine whether an arrangement
involves multiple revenue-generating deliverables that should be accounted for as a single unit of
accounting or divided into separate units of accounting for revenue recognition purposes and, if
this division is required, how the arrangement consideration should be allocated among the separate
units of accounting. If the arrangement represents a single unit of accounting, the revenue
recognition policy and the performance obligation period must be determined, if not already
contractually defined, for the entire arrangement. If the arrangement represents separate units of
accounting, a revenue recognition policy must be determined for each unit.
Revenues for non-refundable upfront license fee payments, where we continue to have obligations,
will be recognized as performance occurs and obligations are completed.
Recently Adopted Accounting Standards
In October 2009, the Financial Accounting Standards Board, or FASB, published Accounting Standards
Update, or ASU, 2009-13, or ASU 2009-13, which amends the criteria to identify separate units of
accounting within Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements. The revised
guidance eliminates the residual method of allocation, and instead requires companies to use the
relative selling price method when allocating revenue in a multiple deliverable arrangement. When
applying the relative selling price method, the selling price for each deliverable shall be determined using
vendor specific objective evidence of selling price, if it exists, otherwise using third-party
evidence of selling price. If neither vendor specific objective evidence nor third-party evidence
of selling price exists for a deliverable, companies shall use their best estimate of the selling
price for that deliverable when applying the relative selling price method. The adoption of ASU
2009-13 only affects multiple deliverable
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arrangements entered into, or materially modified, after
January 1, 2011. The prospective adoption of ASU 2009-13 did not have an impact on our financial
position, results of operations or cash flows.
In April 2010, the FASB issued ASU 2010-17, Milestone Method of Revenue Recognition a consensus of
the FASB Emerging Issues Task Force. ASU 2010-17 provides guidance on defining a milestone and
determining when it may be appropriate to apply the milestone method of revenue recognition for
research and development transactions. A vendor can recognize consideration in its entirety as
revenue in the period in which the milestone is achieved only if the milestone meets all criteria
to be considered substantive. Additional disclosures describing the consideration arrangement and
the entitys accounting policy for recognition of such milestone payments are also required. The
Company elected to adopt the milestone method of revenue recognition on a prospective basis
effective January 1, 2011. The adoption of ASU 2010-17 on January 1, 2011 did not have an impact on
our financial position, results of operations or cash flows.
Off Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is confined to our cash, cash equivalents, and marketable securities.
The primary objective of our investment activities is to preserve our capital to fund operations.
We also seek to maximize income from our investments without assuming significant risk. To achieve
our objectives, we maintain a portfolio of cash equivalents and marketable securities in a variety
of securities of high credit quality. As of March 31, 2011, we had cash, cash equivalents and
marketable securities of $31.8 million. The securities in our investment portfolio are not
leveraged, are classified as available-for-sale and are, due to their very short-term nature,
subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of
the short-term maturities of our investments, we do not believe that an increase in market rates
would have a material negative impact on the realized value of our investment portfolio. We
actively monitor changes in interest rates. We perform quarterly reviews of our investment
portfolio and believe we have minimal exposure related to mortgage and other asset-backed
securities. We have no exposure to auction rate securities.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Our management (with the participation of our chief executive officer, chief financial officer and
outside counsel) has reviewed our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our
chief executive officer and chief financial officer have concluded that, as of March 31, 2011, our
internal disclosure controls and procedures were effective.
Changes in Internal Controls over Financial Reporting
There has been no change in our internal control over financial reporting during our most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Limitations on the Effectiveness of Controls.
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Because of inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues, if any, within a company have been detected. Accordingly, our disclosure
controls and procedures are designed to provide reasonable, not absolute, assurance that the
objectives of our disclosure control system are met and, as set forth above, our chief executive
officer and chief financial officer have concluded, based on their
evaluation as of the end of the period covered by this report, that our disclosure controls and
procedures were sufficiently effective to provide reasonable assurance that the objectives of our
disclosure control system were met.
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PART II. OTHER INFORMATION
Item 1A. Risk Factors
Investing
in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Quarterly
Report, before deciding whether to invest in shares of our common stock. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial also may impair our
business operations. The occurrence of any of the following risks could harm our business,
financial condition or results of operations. In such case, the trading price of our common stock
could decline, and you may lose all or part of your investment.
Risks Relating to Our Business
Our management concluded that due to our need for additional capital, and the uncertainties
surrounding our ability to raise such funding, substantial doubt exists as to our ability to
continue as a going concern.
Our audited financial statements for the fiscal year ended December 31, 2010, were prepared on
a going concern basis in accordance with United States generally accepted accounting principles.
The going concern basis of presentation assumes that we will continue in operation for the next
twelve months and will be able to realize our assets and discharge our liabilities and commitments
in the normal course of business and do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and classification of
liabilities that may result from our inability to continue as a going concern. Our management
concluded that due to our need for additional capital, and the uncertainties surrounding our
ability to raise such funding, substantial doubt exists as to our ability to continue as a going
concern. We may be forced to reduce our operating expenses, raise additional funds, principally
through the additional sales of our securities or debt financings, or enter into a corporate
partnership to meet our working capital needs. However, we cannot guarantee that we will be able to
obtain sufficient additional funds when needed or that such funds, if available, will be obtainable
on terms satisfactory to us. If we are unable to raise sufficient additional capital or complete a
strategic transaction, we may be unable to continue to fund our operations, develop our product
candidates or realize value from our assets and discharge our liabilities in the normal course of
business. These uncertainties raise substantial doubt about our ability to continue as a going
concern. If we become unable to continue as a going concern, we may have to liquidate our assets,
and might realize significantly less than the values at which they are carried on our financial
statements, and stockholders may lose all or part of their investment in our common stock.
We have a history of net losses. We expect to continue to incur substantial and increasing net
losses for the foreseeable future, and we may never achieve or maintain profitability.
We are not profitable and have incurred significant net losses in each year since our
inception, including net losses of $8.4 million, $1.5 million, $56.1 million and $77.0 million for
the three months ended March 31, 2011, and the years ended December 31, 2010, 2009 and 2008,
respectively, and $319.6 million for the period from December 19, 2000 (inception) to March 31,
2011. As of March 31, 2011, we had a deficit accumulated during development stage of $274.5 million
and stockholders equity of $4.3 million. We expect to continue to incur substantial net losses and
negative cash flow for the foreseeable future. These losses and negative cash flows have had, and
will continue to have, an adverse effect on our stockholders equity and working capital.
Because of the numerous risks and uncertainties associated with pharmaceutical product
development and commercialization, we are unable to accurately predict the timing or amount of
future expenses or when, or if, we will be able to achieve or maintain profitability. Currently, we
have no products approved for commercial sale, and to date we have not generated any product
revenue. We have financed our operations primarily through the sale of equity securities, capital
lease and equipment financing, debt financing, collaboration and licensing agreements, and
government grants. The size of our future net losses will depend, in part, on the rate of growth or
contraction of our expenses and the level and rate of growth, if any, of our revenues. Revenues
from strategic partnerships are uncertain because we may not enter into any additional strategic
partnerships. If we are unable to develop and commercialize one or more of our product candidates
or if sales revenue from any product candidate that receives marketing approval is insufficient,
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we will not achieve profitability. Even if we do achieve profitability, we may not be able to
sustain or increase profitability.
We are a development stage company. Our success depends substantially on our lead product
candidates. If we do not develop commercially successful products, we may be forced to cease
operations.
You must evaluate us in light of the uncertainties and complexities affecting a development
stage pharmaceutical company. We have not completed clinical development for any of our product
candidates. In October 2010, we received a CRL from the FDA regarding our NDA for our AZ-004
product candidate. A CRL is issued by the FDA indicating that the NDA review cycle is complete and
the application is not ready for approval in its present form. In December 2010, we completed an
End-of-Review meeting with the FDA to discuss the issues outlined in the AZ-004 CRL. In January
2011, we received the official FDA minutes of the meeting, and we anticipate resubmitting the
AZ-004 NDA in July 2011. In April 2011, we completed a meeting with the FDA to discuss preliminary
draft labeling and initial Risk Evaluation and Mitigation Strategy (REMS) program proposals. The
FDA indicated that a complete review of the proposed REMS in conjunction with the full clinical
review of the resubmitted NDA will be necessary to determine whether the REMS will be acceptable.
We may be unsuccessful in resolving the concerns raised in the CRL, our proposed REMS may not be
acceptable to the FDA and we may never receive marketing approval for AZ-004 or any of our product
candidates as a result of the issues raised in the CRL. Each of our other product candidates is at
an earlier stage of development and may be affected by concerns expressed in the CRL. Each of our
product candidates will be unsuccessful if it:
| does not demonstrate acceptable safety and efficacy in preclinical studies and clinical trials or otherwise does not meet applicable regulatory standards for approval; | ||
| does not offer therapeutic or other improvements over existing or future drugs used to treat the same or similar conditions; | ||
| is not capable of being produced in commercial quantities at an acceptable cost, or at all; or | ||
| is not accepted by patients, the medical community or third party payors. |
Our ability to generate product revenue in the future is dependent on the successful development
and commercialization of our product candidates. We have not proven our ability to develop and
commercialize products. Problems frequently encountered in connection with the development and
utilization of new and unproven technologies and the competitive environment in which we operate
might limit our ability to develop commercially successful products. We do not expect any of our
current product candidates to be commercially available before 2012, if at all. If we are unable to
make our product candidates commercially available, we will not generate product revenues, and we
will not be successful.
We will need substantial additional capital in the future. If additional capital is not available,
we will have to delay, reduce or cease operations.
We will need to raise additional capital to fund our operations, to develop our product
candidates and to develop our manufacturing capabilities. Our future capital requirements will be
substantial and will depend on many factors including:
| our response to the CRL, including the NDA we expect to resubmit in July 2011, and interactions with the FDA regarding the issues raised in the CRL; | ||
| the scope, rate of progress, results and costs of our preclinical studies, clinical trials and other research and development activities, and our manufacturing development and commercial manufacturing activities; | ||
| the cost, timing and outcomes of regulatory proceedings; | ||
| the cost and timing of developing manufacturing capacity; |
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| the cost and timing of developing sales and marketing capabilities prior to receipt of any regulatory approval of our product candidates; | ||
| revenues received from any existing or future products; | ||
| payments received under our collaboration with Cypress and any future strategic partnerships; | ||
| the filing, prosecution and enforcement of patent claims; and | ||
| the costs associated with commercializing our product candidates, if they receive regulatory approval. |
We believe that with current cash, cash equivalents and marketable securities along with the
proceeds from our May 2011 stock and warrant issuance, interest earned thereon, the proceeds from
option exercises and purchases of common stock pursuant to our 2005 Employee Stock Purchase Plan,
or ESPP, we will be able to maintain our current operations, at our current cost levels, into the
first quarter of 2012. Further, due to the FDA not approving AZ-004 for commercial marketing in
October 2010, we are slowing the clinical development of AZ-007. Changing circumstances may cause
us to consume capital significantly faster or slower than we currently anticipate, or to alter our
operations. We have based these estimates on assumptions that may prove to be wrong, and we could
exhaust our available financial resources sooner than we currently expect. The key assumptions
underlying these estimates include:
| expenditures related to continued preclinical and clinical development of our product candidates during this period within budgeted levels; | ||
| no unexpected costs related to the development of our manufacturing capability; | ||
| no unexpected costs related to the resubmission of our AZ-004 NDA: and | ||
| no growth in the number of our employees during this period. |
We may never be able to generate a sufficient amount of product revenue to cover our expenses.
Until we do, we expect to finance our future cash needs through public or private equity offerings,
debt financings, strategic partnerships or licensing arrangements, as well as interest income
earned on cash and marketable securities balances and proceeds from stock option exercises and
purchases under our ESPP. Any financing transaction may contain unfavorable terms. If we raise
additional funds by issuing equity securities, our stockholders equity will be diluted and debt
financing, if available, may involve restrictive covenants. If we raise additional funds through
strategic partnerships, we may be required to relinquish rights to our product candidates or
technologies, or to grant licenses on terms that are not favorable to us.
The process for obtaining approval of an NDA is time consuming, subject to unanticipated delays
and costs, and requires the commitment of substantial resources. We received a CRL for our NDA in
October 2010.
In October 2010, we received a complete response letter, or CRL, from the FDA regarding our
NDA. A CRL is issued by the FDA indicating that the NDA review cycle is complete and the
application is not ready for approval in its present form. The CRL conveyed the FDAs comments
regarding certain issues with our NDA, including data from the three Phase 1 pulmonary safety
studies with AZ-004, suitability of stability studies and certain other CMC concerns, including
matters related to the FDAs inspection of our manufacturing facilities. In December 2010, we met
with the FDA to address the concerns raised in the CRL and have received official FDA minutes from
the meeting. We expect to resubmit our NDA in July 2011 to address the FDAs concerns outlined in
the CRL. In April 2011, we completed a meeting with the FDA to discuss preliminary draft labeling
and initial REMS program proposals. The FDA indicated that a complete review of the proposed REMS
in conjunction with the full clinical review of the resubmitted NDA will be necessary to determine
whether the REMS will be acceptable. We may be unsuccessful in resolving these issues, our proposed
REMS may not be acceptable to the FDA and we may never receive marketing approval for AZ-004 or any
of our product candidates as a result of the issues raised in the CRL.
The FDA will conduct an in-depth review of our resubmission to determine whether to approve
AZ-004 for commercial marketing for the indications we have proposed. If the FDA is not satisfied
with the
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information we provide, the FDA may refuse to approve our NDA or may require us to perform
additional studies or provide other information in order to secure approval. The FDA may delay,
limit or refuse to approve our resubmitted NDA if we do not sufficiently address the issues raised
in the CRL.
If the FDA determines that the clinical trials of AZ-004 that were submitted in support of our
NDA were not conducted in full compliance with the applicable protocols for these studies, as well
as with applicable regulations and standards, or if the FDA does not agree with our interpretation
of the results of such studies, the FDA may reject the data that resulted from such studies. The
rejection of data from clinical trials required to support our NDA for AZ-004 could negatively
impact our ability to obtain marketing authorization for this product candidate and would have a
material adverse effect on our business and financial condition.
In addition, our resubmitted NDA may not be approved, or approval may be delayed, as a result
of changes in FDA policies for drug approval during the review period. For example, although many
products have been approved by the FDA in recent years under Section 505(b)(2) under the Federal
Food, Drug and Cosmetic Act, objections have been raised to the FDAs interpretation of Section
505(b)(2). If challenges to the FDAs interpretation of Section 505(b)(2) are successful, the FDA
may be required to change its interpretation, which could delay or prevent the approval of an NDA.
Any significant delay in the review or approval of our resubmitted NDA would have a material
adverse effect on our business and financial condition.
Unstable market conditions may have serious adverse consequences on our business.
The recent economic downturn and market instability has made the business climate more
volatile and more costly. Our general business strategy may be adversely affected by unpredictable
and unstable market conditions. If the current equity and credit markets deteriorate further, or do
not improve, it may make any necessary debt or equity financing more difficult, more costly, and
more dilutive. While we believe that with current cash, cash equivalents and marketable securities
along with the proceeds from our May 2011 stock and warrant issuance, interest earned thereon, the
proceeds from option exercises and purchases of common stock pursuant to our ESPP, we will be able
to maintain our current operations, at our current cost levels, into the first quarter of 2012, we
may obtain additional financing on less than attractive rates or on terms that are excessively
dilutive to existing stockholders. Failure to secure any necessary financing in a timely manner and
on favorable terms could have a material adverse effect on our business, financial condition and
stock price and could require us to delay or abandon clinical development plans or alter our
operations. There is a risk that one or more of our current component manufacturers and partners
may encounter difficulties during challenging economic times, which would directly affect our
ability to attain our operating goals on schedule and on budget.
Unless our preclinical studies demonstrate the safety of our product candidates, we will not be
able to commercialize our product candidates.
To obtain regulatory approval to market and sell any of our product candidates, we must
satisfy the FDA and other regulatory authorities abroad, through extensive preclinical studies,
that our product candidates are safe. Our Staccato system creates condensation aerosol from drug
compounds, and there currently are no approved products that use a similar method of drug delivery.
Companies developing other inhalation products have not defined or successfully completed the types
of preclinical studies we believe will be required for submission to regulatory authorities as we
seek approval to conduct our clinical trials. We may not have conducted or may not conduct in the
future the types of preclinical testing ultimately required by regulatory authorities, or future
preclinical tests may indicate that our product candidates are not safe for use in humans.
Preclinical testing is expensive, can take many years and have an uncertain outcome. In addition,
success in initial preclinical testing does not ensure that later preclinical testing will be
successful.
We may experience numerous unforeseen events during, or as a result of, the preclinical
testing process, which could delay or prevent our ability to develop or commercialize our product
candidates, including:
| our preclinical testing may produce inconclusive or negative safety results, which may require us to conduct additional preclinical testing or to abandon product candidates that we believed to be promising; | ||
| our product candidates may have unfavorable pharmacology, toxicology or carcinogenicity; and |
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| our product candidates may cause undesirable side effects. |
Any such events would increase our costs and could delay or prevent our ability to
commercialize our product candidates, which could adversely impact our business, financial
condition and results of operations.
Failure or delay in commencing or completing clinical trials for our product candidates could harm
our business.
We have not completed all the clinical trials necessary to support an application with the FDA
for approval to market any of our product candidates other than what we believe to be adequate
clinical trials to support the marketing approval for AZ-004 in the United States. Future clinical
trials may be delayed or terminated as a result of many factors, including:
| insufficient financial resources to fund such trials; | ||
| delays or failure in reaching agreement on acceptable clinical trial contracts or clinical trial protocols with prospective sites; | ||
| regulators or institutional review boards may not authorize us to commence a clinical trial; | ||
| regulators or institutional review boards may suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or concerns about patient safety; | ||
| we may suspend or terminate our clinical trials if we believe that they expose the participating patients to unacceptable health risks; | ||
| we may experience slower than expected patient enrollment or lack of a sufficient number of patients that meet the enrollment criteria for our clinical trials; | ||
| patients may not complete clinical trials due to safety issues, side effects, dissatisfaction with the product candidate, or other reasons; | ||
| we may have difficulty in maintaining contact with patients after treatment, preventing us from collecting the data required by our study protocol; | ||
| product candidates may demonstrate a lack of efficacy during clinical trials; | ||
| we may experience governmental or regulatory delays, failure to obtain regulatory approval or changes in regulatory requirements, policy and guidelines; and | ||
| we may experience delays in our ability to manufacture clinical trial materials in a timely manner as a result of ongoing process and design enhancements to our Staccato system. |
Any delay in commencing or completing clinical trials for our product candidates would delay
commercialization of our product candidates and harm our business, financial condition and results
of operations. It is possible that none of our product candidates will successfully complete
clinical trials or receive regulatory approval, which would severely harm our business, financial
condition and results of operations.
If our product candidates do not meet safety and efficacy endpoints in clinical trials, they will
not receive regulatory approval, and we will be unable to market them.
We have not yet received regulatory approval from the FDA or any foreign regulatory authority
to market any of our product candidates. The clinical development and regulatory approval process
is extremely expensive and takes many years. The timing of any approval cannot be accurately
predicted. If we fail to obtain regulatory approval for our product candidates, we will be unable
to market and sell them and therefore we may never be profitable. In October 2010 the FDA issued a
CRL regarding our NDA for AZ-004. In December 2010, we met with the FDA to address the concerns
raised in the CRL and have
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received official FDA minutes from the meeting. We expect to resubmit our NDA in July 2011 to
address the FDAs concerns outlined in the CRL. In April 2011, we completed a meeting with the FDA
to discuss preliminary draft labeling and initial REMS program proposals. The FDA indicated that a
complete review of the proposed REMS in conjunction with the full clinical review of the
resubmitted NDA will be necessary to determine whether the REMS will be acceptable. We may be
unsuccessful in resolving these issues, our proposed REMS may not be acceptable to the FDA and we
may never receive marketing approval for AZ-004 or any of our product candidates as a result of the
issues raised in the CRL.
As part of the regulatory process, we must conduct clinical trials for each product candidate
to demonstrate safety and efficacy to the satisfaction of the FDA and other regulatory authorities
abroad. The number and design of clinical trials that will be required varies depending on the
product candidate, the condition being evaluated, the trial results and regulations applicable to
any particular product candidate. In June 2008, we announced that our Phase 2a proof-of-concept
clinical trial of AZ-002 (Staccato alprazolam) did not meet either of its two primary endpoints. In
September 2009, we announced that our Phase 2b clinical trial of AZ-104 (Staccato loxapine,
low-dose) for the treatment of migraine did not meet its primary endpoint.
Prior clinical trial program designs and results are not necessarily predictive of future
clinical trial designs or results. Initial results may not be confirmed upon full analysis of the
detailed results of a trial. Product candidates in later stage clinical trials may fail to show the
desired safety and efficacy despite having progressed through initial clinical trials with
acceptable endpoints. In the CRL, the FDA raised concerns regarding the safety of AZ-004 based on
data from three Phase 1 pulmonary safety studies. If we do not resolve these concerns to the
satisfaction of the FDA, AZ-004 will not be approved for marketing.
If our product candidates fail to show a clinically significant benefit compared to placebo, they
will not be approved for marketing.
The design of our clinical trials is based on many assumptions about the expected effect of
our product candidates, and if those assumptions prove incorrect, the clinical trials may not
produce statistically significant results. Our Staccato system is not similar to other approved
drug delivery methods, and there is no precedent for the application of detailed regulatory
requirements to our product candidates. We cannot assure you that the design of, or data collected
from, the clinical trials of our product candidates will be sufficient to support the FDA and
foreign regulatory approvals.
Regulatory authorities may not approve our product candidates even if they meet safety and
efficacy endpoints in clinical trials.
The FDA and other foreign regulatory agencies can delay, limit or deny marketing approval for
many reasons, including:
| a product candidate may not be considered safe or effective; | ||
| the manufacturing processes or facilities we have selected may not meet the applicable requirements; and | ||
| changes in their approval policies or adoption of new regulations may require additional work on our part. |
Part of the FDA approval process includes FDA inspections on manufacturing facilities to
ensure adherence to applicable regulations. The FDA may delay, limit or deny marketing approval of
our other product candidates as a result of such inspections. In August 2010 the FDA inspected our
manufacturing facilities at our Mountain View headquarters. The CRL we received in October 2010
regarding our NDA for AZ-004 raised issues regarding our manufacturing processes that must be
resolved before we will be allowed to market AZ-004.
Any delay in, or failure to receive or maintain, approval for any of our product candidates
could prevent us from ever generating meaningful revenues or achieving profitability. The CRL we
received in October 2010 conveyed the FDAs comments regarding certain issues with our NDA,
including Phase 1 pulmonary safety studies with AZ-004, stability studies and matters related to
the inspection of our manufacturing
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faculties. We may never receive marketing approval for AZ-004 or any of our product candidates
as a result of the issues raised in the CRL.
Our product candidates may not be approved even if they achieve their endpoints in clinical
trials. Regulatory agencies, including the FDA, or their advisors may disagree with our trial
design and our interpretations of data from preclinical studies and clinical trials. Regulatory
agencies may change requirements for approval even after a clinical trial design has been approved.
For example, AZ-004 and Alexzas other product candidates combine drug and device components in a
manner that the FDA considers to render them combination products under FDA regulations. The FDA
exercises significant discretion over the regulation of combination products, including the
discretion to require separate marketing applications for the drug and device components in a
combination product. To date, Alexzas products are being regulated as drug products under the new
drug application process administered by the FDA. The FDA could in the future require additional
regulation of Alexzas products under the medical device provisions of the Federal Food, Drug, and
Cosmetic Act.
Regulatory agencies also may approve a product candidate for fewer or more limited indications
than requested or may grant approval subject to the performance of post-marketing studies. In
addition, regulatory agencies may not approve the labeling claims that are necessary or desirable
for the successful commercialization of our product candidates.
Our product candidates will remain subject to ongoing regulatory review even if they receive
marketing approval. If we fail to comply with continuing regulations, we could lose these
approvals, and the sale of any future products could be suspended.
Even if we receive regulatory approval to market a particular product candidate, the FDA or a
foreign regulatory authority could condition approval on conducting additional costly post-approval
studies or trials or could limit the scope of our approved labeling or could impose burdensome
post-approval obligations, such as those required under a REMS. If required, a REMS may include
various elements, such as distribution of a medication guide or a patient package insert,
implementation of a communication plan to educate healthcare providers of the drugs risks, and
imposition of limitations on who may prescribe or dispense the drug or other measures that the FDA
deems necessary to assure the safe use of the drug. Moreover, the product may later cause adverse
effects that limit or prevent its widespread use, force us to withdraw it from the market, cause
the FDA to impose additional REMS obligations or impede or delay our ability to obtain regulatory
approvals in additional countries. In addition, we will continue to be subject to FDA review and
periodic inspections to ensure adherence to applicable regulations. After receiving marketing
approval, the FDA imposes extensive regulatory requirements on the manufacturing, labeling,
packaging, adverse event reporting, storage, advertising, promotion and record keeping related to
the product.
If we fail to comply with the regulatory requirements of the FDA and other applicable U.S. and
foreign regulatory authorities or previously unknown problems with any future products, suppliers
or manufacturing processes are discovered, we could be subject to administrative or judicially
imposed sanctions, including:
| restrictions on the products, suppliers or manufacturing processes; | ||
| warning letters or untitled letters; | ||
| civil or criminal penalties or fines; | ||
| injunctions; | ||
| product seizures, detentions or import bans; | ||
| voluntary or mandatory product recalls and publicity requirements; | ||
| suspension or withdrawal of regulatory approvals; | ||
| total or partial suspension of production; and |
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| refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications. |
If we do not produce our devices cost effectively, we will never be profitable.
Our Staccato system based product candidates contain electronic and other components in
addition to the active pharmaceutical ingredients. As a result of the cost of developing and
producing these components, the cost to produce our product candidates, and any approved products,
will likely be higher per dose than the cost to produce intravenous or oral tablet products. This
increased cost of goods may prevent us from ever selling any products at a profit. In addition, we
are developing single dose and multiple dose versions of our Staccato system. Developing multiple
versions of our Staccato system may reduce or eliminate our ability to achieve manufacturing
economies of scale. Developing multiple versions of our Staccato system reduces our ability to
focus development resources on each version, potentially reducing our ability to effectively
develop any particular version. We expect to continue to modify each of our product candidates
throughout their clinical development to improve their performance, dependability,
manufacturability and quality. Some of these modifications may require additional regulatory review
and approval, which may delay or prevent us from conducting clinical trials. The development and
production of our technology entail a number of technical challenges, including achieving adequate
dependability, that may be expensive or time consuming to solve. Any delay in or failure to develop
and manufacture any future products in a cost effective way could prevent us from generating any
meaningful revenues and prevent us from becoming profitable.
We rely on third parties to conduct our preclinical studies and our clinical trials. If these
third parties do not perform as contractually required or expected, we may not be able to obtain
regulatory approval for our product candidates, or we may be delayed in doing so.
We do not have the ability to conduct preclinical studies or clinical trials independently for
our product candidates. We must rely on third parties, such as contract research organizations,
medical institutions, academic institutions, clinical investigators and contract laboratories, to
conduct our preclinical studies and clinical trials. We are responsible for confirming that our
preclinical studies are conducted in accordance with applicable regulations and that each of our
clinical trials is conducted in accordance with its general investigational plan and protocol. The
FDA requires us to comply with regulations and standards, commonly referred to as good laboratory
practices for conducting and recording the results of our preclinical studies and good clinical
practices for conducting, monitoring, recording and reporting the results of clinical trials, to
assure that data and reported results are accurate and that the clinical trial participants are
adequately protected. Our reliance on third parties does not relieve us of these responsibilities.
If the third parties conducting our clinical trials do not perform their contractual duties or
obligations, do not meet expected deadlines, fail to comply with the FDAs good clinical practice
regulations, do not adhere to our clinical trial protocols or otherwise fail to generate reliable
clinical data, we may need to enter into new arrangements with alternative third parties and our
clinical trials may be extended, delayed or terminated or may need to be repeated, and we may not
be able to obtain regulatory approval for or commercialize the product candidate being tested in
such trials.
Problems with the third parties that manufacture the active pharmaceutical ingredients in our
product candidates may delay our clinical trials or subject us to liability.
We do not currently own or operate manufacturing facilities for clinical or commercial
production of the active pharmaceutical ingredient, or API, used in any of our product candidates.
We have no experience in drug manufacturing, and we lack the resources and the capability to
manufacture any of the APIs used in our product candidates, on either a clinical or commercial
scale. As a result, we rely on third parties to supply the API used in each of our product
candidates. We expect to continue to depend on third parties to supply the API for our product
candidates and any additional product candidates we develop in the foreseeable future.
An API manufacturer must meet high precision and quality standards for that API to meet
regulatory specifications and comply with regulatory requirements. A contract manufacturer is
subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign
authorities to ensure strict compliance with current good manufacturing practice, or cGMP, and
other applicable government regulations and corresponding foreign standards. Additionally, a
contract manufacturer must pass a pre-approval inspection by the FDA to ensure strict compliance
with cGMP prior to the FDAs approval of any
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product candidate for marketing. A contract manufacturers failure to conform with cGMP could
result in the FDAs refusal to approve or a delay in the FDAs approval of a product candidate for
marketing. We are ultimately responsible for confirming that the APIs used in our product
candidates are manufactured in accordance with applicable regulations.
Our third party suppliers may not carry out their contractual obligations or meet our
deadlines. In addition, the API they supply to us may not meet our specifications and quality
policies and procedures. If we need to find alternative suppliers of the API used in any of our
product candidates, we may not be able to contract for such supplies on acceptable terms, if at
all. Any such failure to supply or delay caused by such contract manufacturers would have an
adverse effect on our ability to continue clinical development of our product candidates or
commercialize any future products.
If our third party drug suppliers fail to achieve and maintain high manufacturing standards in
compliance with cGMP regulations, we could be subject to certain product liability claims in the
event such failure to comply resulted in defective products that caused injury or harm.
If we experience problems with the manufacturers of components of our product candidates, our
development programs may be delayed or we may be subject to liability.
We outsource the manufacturing of the components of our Staccato system, including the printed
circuit boards, the plastic airways, and the chemical heat packages to be used in our commercial
single dose device. We have no experience in the manufacturing of components, other than our
chemical heat packages, and we currently lack the resources and the capability to manufacture them,
on either a clinical or commercial scale. As a result, we rely on third parties to supply these
components. We expect to continue to depend on third parties to supply these components for our
current product candidates and any devices based on the Staccato system we develop in the
foreseeable future.
The third-party suppliers of the components of our Staccato system must meet high precision
and quality standards for our finished devices to comply with regulatory requirements. A contract
manufacturer is subject to ongoing periodic unannounced inspection by the FDA and corresponding
state and foreign authorities to ensure that our finished devices remain in strict compliance with
the QSR, which sets forth the FDAs current good manufacturing practice requirements for medical
devices, and other applicable government regulations and corresponding foreign standards. We are
ultimately responsible for confirming that the components used in the Staccato system are
manufactured in accordance with specifications, standards and procedures necessary to ensure that
our finished devices comply with the QSR or other applicable regulations.
Our third party suppliers may not comply with their contractual obligations or meet our
deadlines, or the components they supply to us may not meet our specifications and quality policies
and procedures. If we need to find alternative suppliers of the components used in the Staccato
system, we may not be able to contract for such components on acceptable terms, if at all. Any such
failure to supply or delay caused by such contract manufacturers would have an adverse affect on
our ability to continue clinical development of our product candidates or commercialize any future
products.
In addition, the heat packages used in the single dose version of our Staccato system are
manufactured using certain energetic, or highly combustible, materials that are used to generate
the rapid heating necessary for vaporizing the drug compound while avoiding degradation.
Manufacture of products containing energetic materials is regulated by the U.S. government. We have
entered into a manufacture agreement with Autoliv for the manufacture of the heat packages in the
commercial design of our single dose version of our Staccato system. If Autoliv fails to
manufacture the heat packages to the necessary specifications, or does not carry out its
contractual obligations to supply our heat packages to us, or if the FDA requires different
manufacturing or quality standards than those set forth in our manufacture agreement, our clinical
trials or commercialization efforts may be delayed, suspended or terminated while we seek
additional suitable manufacturers of our heat packages, which may prevent us from commercializing
our product candidates that utilize the single dose version of the Staccato system.
If we do not establish additional strategic partnerships, we will have to undertake development
and commercialization efforts on our own, which would be costly and delay our ability to
commercialize any future products.
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A key element of our business strategy is our intent to selectively partner with
pharmaceutical, biotechnology and other companies to obtain assistance for the development and
potential commercialization of our product candidates. In December 2006, we entered into such a
development relationship with Symphony Allegro, Inc., or Allegro, and in December 2007 we entered
into a strategic relationship with Endo Pharmaceuticals, Inc., or Endo, for the development of
AZ-003, or the Endo license agreement. In January 2009, we mutually agreed with Endo to terminate
the Endo license agreement. In June 2009, we amended the terms of our option agreement with
Allegro, resulting in our acquisition of Allegro and the termination of the agreement in August
2009. In February 2010, we entered into a collaboration with Biovail for the commercialization of
AZ-004 in the United States and Canada. In October 2010, Biovail gave us notice that it was
terminating the collaboration and the collaboration terminated in January 2011. In August 2010, we
entered into a license and development agreement with Cypress for Staccato nicotine. We intend to
enter into additional strategic partnerships with third parties to develop and commercialize our
product candidates. Other than Cypress, we do not currently have any strategic partnerships for any
of our product candidates. We face significant competition in seeking appropriate strategic
partners, and these strategic partnerships can be intricate and time consuming to negotiate and
document. We may not be able to negotiate additional strategic partnerships on acceptable terms, or
at all. We are unable to predict when, if ever, we will enter into any additional strategic
partnerships because of the numerous risks and uncertainties associated with establishing strategic
partnerships. If we are unable to negotiate additional strategic partnerships for our product
candidates we may be forced to curtail the development of a particular candidate, reduce or delay
its development program or one or more of our other development programs, delay its potential
commercialization, reduce the scope of our sales or marketing activities or undertake development
or commercialization activities at our own expense. In addition, we will bear all the risk related
to the development of that product candidate. If we elect to increase our expenditures to fund
development or commercialization activities on our own, we may need to obtain additional capital,
which may not be available to us on acceptable terms, or at all. If we do not have sufficient
funds, we will not be able to bring our product candidates to market and generate product revenue.
If we enter into additional strategic partnerships, we may be required to relinquish important
rights to and control over the development of our product candidates or otherwise be subject to
terms unfavorable to us.
Our relationship with Cypress is, and any other strategic partnerships or collaborations with
pharmaceutical or biotechnology companies we may establish will be, subject to a number of risks
including:
| business combinations or significant changes in a strategic partners business strategy may adversely affect a strategic partners willingness or ability to complete its obligations under any arrangement; |
| we may not be able to control the amount and timing of resources that our strategic partners devote to the development or commercialization of product candidates; | ||
| strategic partners may delay clinical trials, provide insufficient funding, terminate a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new version of a product candidate for clinical testing; | ||
| strategic partners may not pursue further development and commercialization of products resulting from the strategic partnering arrangement or may elect to discontinue research and development programs; | ||
| strategic partners may not commit adequate resources to the marketing and distribution of any future products, limiting our potential revenues from these products; | ||
| disputes may arise between us and our strategic partners that result in the delay or termination of the research, development or commercialization of our product candidates or that result in costly litigation or arbitration that diverts managements attention and consumes resources; | ||
| strategic partners may experience financial difficulties; |
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| strategic partners may not properly maintain or defend our intellectual property rights or may use our proprietary information in a manner that could jeopardize or invalidate our proprietary information or expose us to potential litigation; | ||
| strategic partners could independently move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors; and | ||
| strategic partners could terminate the arrangement or allow it to expire, which would delay the development and may increase the cost of developing our product candidates. |
If we fail to gain market acceptance among physicians, patients, third-party payors and the
medical community, we will not become profitable.
The Staccato system is a fundamentally new method of drug delivery. Any future product based
on our Staccato system may not gain market acceptance among physicians, patients, third-party
payors and the medical community. If these products do not achieve an adequate level of acceptance,
we will not generate sufficient product revenues to become profitable. The degree of market
acceptance of any of our product candidates, if approved for commercial sale, will depend on a
number of factors, including:
| demonstration of efficacy and safety in clinical trials; | ||
| the existence, prevalence and severity of any side effects; | ||
| potential or perceived advantages or disadvantages compared to alternative treatments; | ||
| perceptions about the relationship or similarity between our product candidates and the parent drug compound upon which each product candidate is based; | ||
| the timing of market entry relative to competitive treatments; | ||
| the ability to offer any future products for sale at competitive prices; | ||
| relative convenience, product dependability and ease of administration; | ||
| the strength of marketing and distribution support; | ||
| the sufficiency of coverage and reimbursement of our product candidates by governmental and other third-party payors; and | ||
| the product labeling, including the package insert, and the marketing restrictions required by the FDA or regulatory authorities in other countries. |
Our product candidates that we may develop may require expensive carcinogenicity tests.
We combine small molecule drugs with our Staccato system to create proprietary product
candidates. Some of these drugs may not have previously undergone carcinogenicity testing that is
now generally required for marketing approval. We may be required to perform carcinogenicity
testing with product candidates incorporating drugs that have not undergone carcinogenicity testing
or may be required to do additional carcinogenicity testing for drugs that have undergone such
testing. Any carcinogenicity testing we are required to complete will increase the costs to develop
a particular product candidate and may delay or halt the development of such product candidate.
If some or all of our patents expire, are invalidated or are unenforceable, or if some or all of
our patent applications do not yield issued patents or yield patents with narrow claims,
competitors may develop competing products using our or similar intellectual property and our
business will suffer.
Our success will depend in part on our ability to obtain and maintain patent and trade secret
protection for our technologies and product candidates both in the United States and other
countries. We do not know whether any patents will issue from any of our pending or future patent
applications. In addition, a third party may successfully circumvent our patents. Our rights under
any issued patents may not provide us with
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sufficient protection against competitive products or otherwise cover commercially valuable
products or processes.
The degree of protection for our proprietary technologies and product candidates is uncertain
because legal means afford only limited protection and may not adequately protect our rights or
permit us to gain or keep our competitive advantage. For example:
| we might not have been the first to make the inventions covered by each of our pending patent applications and issued patents; | ||
| we might not have been the first to file patent applications for these inventions; | ||
| others may independently develop similar or alternative technologies or duplicate any of our technologies; | ||
| the claims of our issued patents may be narrower than as filed and not sufficiently broad to prevent third parties from circumventing them; | ||
| it is possible that none of our pending patent applications will result in issued patents; | ||
| we may not develop additional proprietary technologies or drug candidates that are patentable; | ||
| our patent applications or patents may be subject to interference, opposition or similar administrative proceedings; | ||
| any patents issued to us or our potential strategic partners may not provide a basis for commercially viable products or may be challenged by third parties in the course of litigation or administrative proceedings such as reexaminations or interferences; and | ||
| the patents of others may have an adverse effect on our ability to do business. |
Even if valid and enforceable patents cover our product candidates and technologies, the patents
will provide protection only for a limited amount of time.
Our potential strategic partners ability to obtain patents is uncertain because, to date,
some legal principles remain unresolved, there has not been a consistent policy regarding the
breadth or interpretation of claims allowed in patents in the United States, and the specific
content of patents and patent applications that are necessary to support and interpret patent
claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual
issues. Furthermore, the policies governing pharmaceutical and medical device patents outside the
United States may be even more uncertain. Changes in either patent laws or interpretations of
patent laws in the United States and other countries may diminish the value of our intellectual
property or narrow the scope of our patent protection.
Our current patents or any future patents that may be issued regarding our product candidates
or methods of using them, can be challenged by our competitors who can argue that our patents are
invalid and/or unenforceable. Third parties may challenge our rights to, or the scope or validity
of, our patents. Patents also may not protect our product candidates if competitors devise ways of
making these or similar product candidates without legally infringing our patents. The Federal
Food, Drug and Cosmetic Act and the FDA regulations and policies provide incentives to
manufacturers to challenge patent validity or create modified, non-infringing versions of a drug or
device in order to facilitate the approval of generic substitutes. These same types of incentives
encourage manufacturers to submit new drug applications that rely on literature and clinical data
not prepared for or by the drug sponsor.
We also rely on trade secrets to protect our technology, especially where we do not
believe that patent protection is appropriate or obtainable. However, trade secrets are difficult
to protect. The employees, consultants, contractors, outside scientific collaborators and other
advisors of our company and our strategic partners may unintentionally or willfully disclose our
confidential information to competitors. Enforcing a claim that a third party illegally obtained
and is using our trade secrets is
expensive and time consuming and the outcome is unpredictable. Failure to protect or maintain
trade secret protection could adversely affect our competitive business position.
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Our research and development collaborators may have rights to publish data and other
information in which we have rights. In addition, we sometimes engage individuals or entities to
conduct research that may be relevant to our business. The ability of these individuals or entities
to publish or otherwise publicly disclose data and other information generated during the course of
their research is subject to certain contractual limitations. These contractual provisions may be
insufficient or inadequate to protect our trade secrets and may impair our patent rights. If we do
not apply for patent protection prior to such publication or if we cannot otherwise maintain the
confidentiality of our technology and other confidential information, then our ability to receive
patent protection or protect our proprietary information may be jeopardized.
Litigation or other proceedings or third party claims of intellectual property infringement could
require us to spend time and money and could shut down some of our operations.
Our commercial success depends in part on not infringing patents and proprietary rights of
third parties. Others have filed, and in the future are likely to file, patent applications
covering products that are similar to our product candidates, as well as methods of making or using
similar or identical products. If these patent applications result in issued patents and we wish to
use the claimed technology, we would need to obtain a license from the third party. We may not be
able to obtain these licenses at a reasonable cost, if at all.
In addition, administrative proceedings, such as interferences and reexaminations before the
U.S. Patent and Trademark Office, could limit the scope of our patent rights. We may incur
substantial costs and diversion of management and technical personnel as a result of our
involvement in such proceedings. In particular, our patents and patent applications may be subject
to interferences in which the priority of invention may be awarded to a third party. We do not know
whether our patents and patent applications would be entitled to priority over patents or patent
applications held by such a third party. Our issued patents may also be subject to reexamination
proceedings. We do not know whether our patents would survive reexamination in light of new
questions of patentability that may be raised following their issuance.
Third parties may assert that we are employing their proprietary technology or their
proprietary products without authorization. In addition, third parties may already have or may
obtain patents in the future and claim that use of our technologies or our products infringes these
patents. We could incur substantial costs and diversion of management and technical personnel in
defending our self against any of these claims. Furthermore, parties making claims against us may
be able to obtain injunctive or other equitable relief, which could effectively block our ability
to further develop, commercialize and sell any future products and could result in the award of
substantial damages against us. In the event of a successful claim of infringement against us, we
may be required to pay damages and obtain one or more licenses from third parties. We may not be
able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter
delays in product introductions while we attempt to develop alternative methods or products. In the
event we cannot develop alternative methods or products, we may be effectively blocked from
developing, commercializing or selling any future products. Defense of any lawsuit or failure to
obtain any of these licenses would be expensive and could prevent us from commercializing any
future products.
We review from time to time publicly available information concerning the technological
development efforts of other companies in our industry. If we determine that these efforts violate
our intellectual property or other rights, we intend to take appropriate action, which could
include litigation. Any action we take could result in substantial costs and diversion of
management and technical personnel in enforcing our patents or other intellectual property rights
against others. Furthermore, the outcome of any action we take to protect our rights may not be
resolved in our favor.
Competition in the pharmaceutical industry is intense. If our competitors are able to develop and
market products that are more effective, safer or less costly than any future products that we may
develop, our commercial opportunity will be reduced or eliminated.
We face competition from established as well as emerging pharmaceutical and biotechnology
companies, academic institutions, government agencies and private and public research institutions.
Our commercial opportunity will be reduced or eliminated if our competitors develop and
commercialize products that are safer, more effective, have fewer side effects or are less
expensive than any future products that we may develop and commercialize. In addition, significant
delays in the development of our
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product candidates could allow our competitors to bring products to market before us and
impair our ability to commercialize our product candidates.
We anticipate that, if approved, AZ-004 would compete with the available forms of loxapine and
other available antipsychotic drugs for the treatment of agitation, such as intramuscular
formulations, oral tablets and oral solutions.
We anticipate that, if approved, AZ-007 would compete with non-benzodiazepine GABA-A receptor
agonists. We are also aware of more than 10 approved generic versions of zolpidem oral tablets, as
well as at least one insomnia product that is under review by the FDA. Also, we are aware that a
company has received a complete response letter from the FDA with respect to a version of zolpidem
intended to treat middle of the night awakening. Additionally, we are aware of four products in
Phase 3 development for the treatment of insomnia.
We anticipate that, if approved, AZ-104 would compete with currently marketed triptan drugs
and with other migraine headache treatments. In addition, we are aware of at least 15 product
candidates in development for the treatment of migraines, one of which is an inhaled formulation.
We anticipate that, if approved, AZ-003 would compete with some of the available forms of
fentanyl, including injectable fentanyl, oral transmucosal fentanyl formulations and ionophoretic
transdermal delivery of fentanyl. We are also aware of three fentanyl products under review by
regulatory agencies either in the United States or abroad, and at least 14 products in Phase 3
clinical trial development for acute pain, four of which are fentanyl products. There are two
inhaled forms of fentanyl products that are in at least Phase 2 development. In addition, if
approved, AZ-003 would compete with various generic opioid drugs, such as oxycodone, hydrocodone
and morphine, or combination products including one or more of such drugs.
We anticipate that, if approved, AZ-002 would compete with the oral tablet form of alprazolam
and possibly IV and oral forms of other benzodiazepines.
Many of our competitors have significantly greater financial resources and expertise in
research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining
regulatory approvals and marketing approved products than we do. Established pharmaceutical
companies may invest heavily to discover quickly and develop novel compounds or drug delivery
technology that could make our product candidates obsolete. Smaller or early stage companies may
also prove to be significant competitors, particularly through strategic partnerships with large
and established companies. In addition, these third parties compete with us in recruiting and
retaining qualified scientific and management personnel, establishing clinical trial sites and
patient registration for clinical trials, as well as in acquiring technologies and technology
licenses complementary to our programs or advantageous to our business. Accordingly, our
competitors may succeed in obtaining patent protection, receiving FDA approval or discovering,
developing and commercializing products before we do. If we are not able to compete effectively
against our current and future competitors, our business will not grow and our financial condition
will suffer.
If we are unable to establish sales and marketing capabilities or enter into additional agreements
with third parties to market and sell our product candidates, we may be unable to generate
significant product revenue.
We do not have an internal sales organization and we have no experience in the sales and
distribution of pharmaceutical products. There are risks involved with establishing our own sales
capabilities and increasing our marketing capabilities, as well as entering into arrangements with
third parties to perform these services. Developing an internal sales force is expensive and time
consuming and could delay any product launch. On the other hand, if we enter into arrangements with
third parties to perform sales, marketing and distribution services, our product revenues or the
profitability of these product revenues are likely to be lower than if we market and sell any
products that we develop ourselves.
We may establish our own specialty sales force and/or engage additional pharmaceutical or
other healthcare companies with an existing sales and marketing organization and distribution
systems to sell, market and distribute any future products. We are currently seeking partners for
the worldwide development and commercialization of AZ-004. We also intend to seek international
distribution partners for our product candidates. We may not be able to establish a specialty sales
force or establish sales and
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distribution relationships on acceptable terms. Factors that may inhibit our efforts to
commercialize any future products without strategic partners or licensees include:
| our inability to recruit and retain adequate numbers of effective sales and marketing personnel; | ||
| the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products; | ||
| the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and | ||
| unforeseen costs and expenses associated with creating an independent sales and marketing organization. |
Because the establishment of sales and marketing capabilities depends on the progress towards
commercialization of our product candidates and because of the numerous risks and uncertainties
involved with establishing our own sales and marketing capabilities, we are unable to predict when,
if ever, we will establish our own sales and marketing capabilities. If we are not able to partner
with additional third parties and are unsuccessful in recruiting sales and marketing personnel or
in building a sales and marketing infrastructure, we will have difficulty commercializing our
product candidates, which would adversely affect our business and financial condition.
If we lose our key personnel or are unable to attract and retain additional personnel, we may be
unable to develop or commercialize our product candidates.
We are highly dependent on our President and Chief Executive Officer, Thomas B. King, the loss
of whose services might adversely impact the achievement of our objectives. In addition, recruiting
and retaining qualified clinical, scientific and engineering personnel to manage clinical trials of
our product candidates and to perform future research and development work will be critical to our
success. There is currently a shortage of skilled executives in our industry, which is likely to
continue. As a result, competition for skilled personnel is intense and the turnover rate can be
high. Although we believe we will be successful in attracting and retaining qualified personnel,
competition for experienced management and clinical, scientific and engineering personnel from
numerous companies and academic and other research institutions may limit our ability to do so on
acceptable terms. In addition, we do not have employment agreements with any of our employees, and
they could leave our employment at will. We have change of control agreements with our executive
officers and vice presidents that provide for certain benefits upon termination or a change in role
or responsibility in connection with a change of control of our company. We do not maintain life
insurance policies on any employees. Failure to attract and retain personnel would prevent us from
developing and commercializing our product candidates.
If plaintiffs bring product liability lawsuits against us, we may incur substantial liabilities
and may be required to limit commercialization of the product candidates that we may develop.
We face an inherent risk of product liability as a result of the clinical testing of our
product candidates in clinical trials and will face an even greater risk if we commercialize any
products. We may be held liable if any product we develop causes injury or is found otherwise
unsuitable during product testing, manufacturing, marketing or sale. Regardless of merit or
eventual outcome, liability claims may result in decreased demand for any product candidates or
products that we may develop, injury to our reputation, withdrawal of clinical trials, costs to
defend litigation, substantial monetary awards to clinical trial participants or patients, loss of
revenue and the inability to commercialize any products that we develop. We have product liability
insurance that covers our clinical trials up to a $10 million aggregate annual limit. We intend to
expand product liability insurance coverage to include the sale of commercial products if we obtain
marketing approval for AZ-004 or any other products that we may develop. However, this insurance
may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to
obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against
potential product liability claims could prevent or delay the commercialization of our product
candidates. If we are sued for any injury caused by any future products, our liability could exceed
our total assets.
Healthcare law and policy changes, based on recently enacted legislation, may have an adverse
effect on us.
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Healthcare costs have risen significantly over the past decade. In March 2010, President Obama
signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act, or, collectively, the Healthcare Reform Act. This law substantially changes the
way health care is financed by both governmental and private insurers, and significantly impacts
the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions that are
expected to impact our business and operations, including provisions governing enrollment in
federal healthcare programs, reimbursement and discount programs and fraud and abuse prevention and
control, which will impact existing government healthcare programs and will result in the
development of new programs, including Medicare payment for performance initiatives and
improvements to the physician quality reporting system and feedback program. We anticipate that if
we obtain approval for our product candidates, some of our revenue and the revenue from our
collaborators may be derived from U.S. government healthcare programs, including Medicare.
Additionally, in 2009, the Department of Defense implemented a program pursuant to the National
Defense Authorization Act for Fiscal Year 2008 that requires rebates, based on Federal statutory
pricing, from manufacturers of innovator drugs and biologics. Furthermore, beginning in 2011, the
Healthcare Reform Act imposes a non-deductible fee treated as an excise tax on pharmaceutical
manufacturers or importers who sell branded prescription drugs, which includes innovator drugs
and biologics (excluding certain orphan drugs, generics and over-the-counter drugs) to U.S.
government programs. We expect that the Healthcare Reform Act and other healthcare reform measures
that may be adopted in the future could have an adverse effect on our industry generally and our
ability to successfully commercialize our product candidates or could limit or eliminate our
spending on development projects.
In addition to this legislation, there will continue to be proposals by legislators at both
the federal and state levels, regulators and third-party payors to keep these costs down while
expanding individual healthcare benefits. Certain of these changes could impose limitations on the
prices we will be able to charge for any product candidates that are approved or the amounts of
reimbursement available for these products from governmental agencies or third-party payors, or may
increase the tax obligations on life sciences companies such as ours. While it is too early to
predict specifically what effect the Health Reform Act and its implementation or any future
legislation or policies will have on our business, we believe that healthcare reform may have an
adverse effect on our business and financial condition.
Our product candidates AZ-002, AZ-003 and AZ-007 contain drug substances that are regulated by the
U.S. Drug Enforcement Administration. Failure to comply with applicable regulations and
requirements could harm our business.
The Controlled Substances Act imposes various registration, recordkeeping and reporting
requirements, procurement and manufacturing quotas, labeling and packaging requirements, security
controls and a restriction on prescription refills on certain pharmaceutical products. A principal
factor in determining the particular requirements, if any, applicable to a product is its actual or
potential abuse profile. The U.S. Drug Enforcement Administration, or DEA, regulates chemical
compounds as Schedule I, II, III, IV or V substances, with Schedule I substances considered to
present the highest risk of substance abuse and Schedule V substances the lowest risk. Alprazolam,
the API in AZ-002, is regulated as a Schedule IV substance, fentanyl, the API in AZ-003, is
regulated as a Schedule II substance, and zaleplon, the API in AZ-007, is regulated as a Schedule
IV substance. Each of these product candidates is subject to DEA regulations relating to
manufacture, storage, distribution and physician prescription procedures, and the DEA may regulate
the amount of the scheduled substance that would be available for clinical trials and commercial
distribution. As a Schedule II substance, fentanyl is subject to more stringent controls, including
quotas on the amount of product that can be manufactured as well as a prohibition on the refilling
of prescriptions without a new prescription from the physician. The DEA periodically inspects
facilities for compliance with its rules and regulations. Failure to comply with current and future
regulations of the DEA could lead to a variety of sanctions, including revocation, or denial of
renewal, of DEA registrations, injunctions, or civil or criminal penalties and could harm our
business, financial condition and results of operations.
The single dose version of our Staccato system contains materials that are regulated by the U.S.
government, and failure to comply with applicable regulations could harm our business.
The single dose version of our Staccato system uses energetic materials to generate the rapid
heating necessary for vaporizing the drug, while avoiding degradation. Manufacture of products
containing energetic materials is controlled by the U.S. Bureau of Alcohol, Tobacco, Firearms and
Explosives, or ATF. Technically, the energetic materials used in our Staccato system are classified
as low explosives, and the ATF has granted us a license/permit for the manufacture of such low
explosives. Additionally, due to inclusion of the energetic materials in our Staccato system, the
U.S. Department of Transportation, or
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DOT, regulates shipments of the single dose version of our Staccato system. The DOT has
granted the single dose version of our Staccato system Not Regulated as an Explosive status.
Failure to comply with the current and future regulations of the ATF or DOT could subject us to
future liabilities and could harm our business, financial condition and results of operations.
Furthermore, these regulations could restrict our ability to expand our facilities or construct new
facilities or could require us to incur other significant expenses in order to maintain compliance.
We use hazardous chemicals and highly combustible materials in our business. Any claims relating
to improper handling, storage or disposal of these materials could be time consuming and costly.
Our research and development processes involve the controlled use of hazardous materials,
including chemicals. We also use energetic materials in the manufacture of the chemical heat
packages that are used in our single dose devices. Our operations produce hazardous waste products.
We cannot eliminate the risk of accidental contamination or discharge or injury from these
materials. Federal, state and local laws and regulations govern the use, manufacture, storage,
handling and disposal of these materials. We could be subject to civil damages in the event of an
improper or unauthorized release of, or exposure of individuals to, hazardous materials. In
addition, claimants may sue us for injury or contamination that results from our use or the use by
third parties of these materials and our liability may exceed our total assets. Compliance with
environmental and other laws and regulations may be expensive, and current or future regulations
may impair our research, development or production efforts.
Certain of our suppliers are working with these types of hazardous and energetic materials in
connection with our component manufacturing agreements. In the event of a lawsuit or investigation,
we could be held responsible for any injury caused to persons or property by exposure to, or
release of, these hazardous and energetic materials. Further, under certain circumstances, we have
agreed to indemnify our suppliers against damages and other liabilities arising out of development
activities or products produced in connection with these agreements.
We will need to implement additional finance and accounting systems, procedures and controls in
the future as we grow and to satisfy new reporting requirements.
The laws and regulations affecting public companies, including the current provisions of the
Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and rules enacted and proposed by the SEC and by The
NASDAQ Global Market, will result in increased costs to us as we continue to undertake efforts to
comply with rules and respond to the requirements applicable to public companies. The rules make it
more difficult and costly for us to obtain certain types of insurance, including director and
officer liability insurance, and we may be forced to accept reduced policy limits and coverage or
incur substantially higher costs to obtain the same or similar coverage as compared to the polices
previously available to public companies. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to serve on our board of directors or our
board committees or as executive officers.
As a public company, we need to comply with Sarbanes-Oxley and the related rules and
regulations of the SEC, including expanded disclosure, accelerated reporting requirements and more
complex accounting rules. Compliance with Section 404 of Sarbanes-Oxley and other requirements will
continue to increase our costs and require additional management resources. We have been upgrading
our finance and accounting systems, procedures and controls and will need to continue to implement
additional finance and accounting systems, procedures and controls as we grow to satisfy new
reporting requirements. We currently do not have an internal audit group. In addition, we may need
to hire additional legal and accounting staff with appropriate experience and technical knowledge,
and we cannot assure you that if additional staffing is necessary that we will be able to do so in
a timely fashion.
Our business is subject to increasingly complex corporate governance, public disclosure and
accounting requirements that could adversely affect our business and financial results.
We are subject to changing rules and regulations of federal and state government as well as
the stock exchange on which our common stock is listed. These entities, including the Public
Company Accounting Oversight Board, the SEC and The NASDAQ Global Market, have issued a significant
number of new and increasingly complex requirements and regulations over the course of the last
several years and continue to develop additional regulations and requirements in response to laws
enacted by Congress. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the
Dodd-Frank Act, was enacted. The
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Dodd-Frank Act contains significant corporate governance and executive compensation-related
provisions, some of which the Securities and Exchange Commission, or SEC, has recently implemented
by adopting additional rules and regulations in areas such as the compensation of executives
(say-on-pay). We cannot assure you that we are or will be in compliance with all potentially
applicable regulations. If we fail to comply with the Sarbanes Oxley Act of 2002, the Dodd-Frank
Act and associated SEC rules, or any other regulations, we could be subject to a range of
consequences, including restrictions on our ability to sell equity securities or otherwise raise
capital funds, the de-listing of our common stock from The NASDAQ Global Market, suspension or
termination of our clinical trials, failure to obtain approval to market AZ-004, restrictions on
future products or our manufacturing processes, significant fines, or other sanctions or
litigation. Our efforts to comply with these requirements have resulted in, and are likely to
continue to result in, an increase in expenses and a diversion of managements time from other
business activities.
Our facilities are located near known earthquake fault zones, and the occurrence of an earthquake
or other catastrophic disaster could damage our facilities and equipment, which could cause us to
curtail or cease operations.
Our facilities are located in the San Francisco Bay Area near known earthquake fault zones
and, therefore, are vulnerable to damage from earthquakes. We are also vulnerable to damage from
other types of disasters, such as power loss, fire, floods and similar events. If any disaster were
to occur, our ability to operate our business could be seriously impaired. We currently may not
have adequate insurance to cover our losses resulting from disasters or other similar significant
business interruptions, and we do not plan to purchase additional insurance to cover such losses
due to the cost of obtaining such coverage. Any significant losses that are not recoverable under
our insurance policies could seriously impair our business, financial condition and results of
operations.
Risks Relating to Owning Our Common Stock
Our stock price has been and may continue to be extremely volatile.
Our common stock price has experienced large fluctuations. In addition, the trading prices of
life science and biotechnology company stocks in general have experienced extreme price
fluctuations in recent years. The valuations of many life science companies without consistent
product revenues and earnings are extraordinarily high based on conventional valuation standards,
such as price to revenue ratios. These trading prices and valuations may not be sustained. Any
negative change in the publics perception of the prospects of life science or biotechnology
companies could depress our stock price regardless of our results of operations. Other broad market
and industry factors may decrease the trading price of our common stock, regardless of our
performance. Market fluctuations, as well as general political and economic conditions such as
terrorism, military conflict, recession or interest rate or currency rate fluctuations, also may
decrease the trading price of our common stock. In addition, our stock price could be subject to
wide fluctuations in response to various factors, including:
| actual or anticipated regulatory approvals or non-approvals of our product candidates or competing products; | ||
| actual or anticipated cash depletion of our financial resources | ||
| actual or anticipated results and timing of our clinical trials; | ||
| changes in laws or regulations applicable to our product candidates; | ||
| changes in the expected or actual timing of our development programs, including delays or cancellations of clinical trials for our product candidates; | ||
| period to period fluctuations in our operating results; | ||
| announcements of new technological innovations or new products by us or our competitors; | ||
| changes in financial estimates or recommendations by securities analysts; | ||
| sales results for AZ-004, if it is approved for marketing; | ||
| conditions or trends in the life science and biotechnology industries; | ||
| changes in the market valuations of other life science or biotechnology companies; |
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| developments in domestic and international governmental policy or regulations; | ||
| announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; | ||
| additions or departures of key personnel; | ||
| disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; | ||
| sales of our common stock (or other securities) by us; and | ||
| sales and distributions of our common stock by our stockholders. |
In the past, stockholders have often instituted securities class action litigation after
periods of volatility in the market price of a companys securities. If a stockholder files a
securities class action suit against us, we would incur substantial legal fees, and our
managements attention and resources would be diverted from operating our business in order to
respond to the litigation.
If we sell shares of our common stock in future financings, existing common stockholders will
experience immediate dilution and, as a result, our stock price may go down.
We will need to raise additional capital to fund our operations, to develop our product
candidates and to develop our manufacturing capabilities. We may obtain such financing through the
sale of our equity securities from time to time. As a result, our existing common stockholders will
experience immediate dilution upon any such issuance. For example, in August 2009 we issued
10,000,000 shares of our common stock and warrants to purchase an additional 5,000,000 shares of
our common stock in connection with the closing of our acquisition of all of the equity of Symphony
Allegro, Inc., in October 2009 we issued 8,107,012 shares of our common stock and warrants to
purchase an additional 7,296,312 shares of our common stock in a private placement, in May 2010 we
issued a warrant to purchase 376,394 shares of our common stock in connection with a secured term
debt financing, in August 2010 we issued 6,685,183 shares of our common stock and warrants to
purchase up to an additional 3,342,589 shares of our common stock in a registered direct offering
and in May 2011 we issued 11,927,034 shares of our common stock and warrants to purchase up to an
additional 4,174,457 shares of our common stock in a registered direct offering. Additionally, in
May 2010, we entered into a common stock purchase agreement with Azimuth that provides that, upon
the terms and subject to the conditions set forth therein, Azimuth is committed to purchase up to
8,936,550 shares of our common stock at times and in amounts determined by us. If we enter into
other financing transactions in which we issue equity securities in the future, our existing common
stockholders will experience immediate dilution upon any such issuance.
If we fail to continue to comply with the listing requirements of The NASDAQ Global Market, the
price of our common stock and our ability to access the capital markets could be negatively
impacted.
Our common stock is currently listed on The NASDAQ Global Market. To maintain the listing of
our common stock on The NASDAQ Global Market we are required to meet certain listing requirements,
including, among others, either: (i) a minimum closing bid price of $1.00 per share, a market value
of publicly held shares (excluding shares held by our executive officers, directors and 10% or more
stockholders) of at least $5 million and stockholders equity of at least $10 million; or (ii) a
minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding
shares held by our executive officers, directors and 10% or more stockholders) of at least $15
million and a total market value of listed securities of at least
$50 million. As of May 6, 2011,
the closing bid price of our common stock was $1.41 the total market value of our publicly held
shares of our common stock (excluding shares held by our executive officers, directors and 10% or
more stockholders) was $83.5 million and the total market value of
our listed securities was $101.7
million. As of March 31, 2011, we had stockholders equity of $4.4 million. In addition, as
recently as December 2010 the bid price of our common stock has been as low as $0.86 per share. If
the closing bid price of our common stock is below $1.00 per share for 30 consecutive business
days, we could be subject to delisting from The NASDAQ Global Market. Not maintaining our listing
on The NASDAQ Global Market may result in a decrease in the trading price of our common stock,
lessen interest by institutions and individuals in investing in our common stock, make it more
difficult to obtain analyst coverage and make it more difficult for us to raise capital in the
future.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Equity Securities
None.
Use of Proceeds from the Sale of Registered Securities
Not applicable.
Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
None.
Item 6. Exhibits
See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list
of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by
reference.
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SIGNATURES
Pursuant to the requirements 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.
Alexza Pharmaceuticals, Inc. | ||||
(Registrant) | ||||
May 9, 2011 | /s/ Thomas B. King | |||
Thomas B. King | ||||
President and Chief Executive Officer | ||||
May 9, 2011 | /s/ August J. Moretti | |||
August J. Moretti | ||||
Senior Vice President, Chief Financial Officer, General Counsel and Secretary (principal financial officer) | ||||
May 9, 2011 | /s/ Mark K. Oki | |||
Mark K. Oki | ||||
Vice President, Finance and Controller (principal accounting officer) |
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Exhibit Index
3.5
|
Amended and Restated Certificate of Incorporation. (1) | |
3.6
|
Amended and Restated Bylaws. (1) | |
3.7
|
Amendment to Amended and Restated Bylaws. (2) | |
4.1
|
Specimen Common Stock Certificate. (1) | |
4.2
|
Second Amended and Restated Investors Right Agreement dated November 5, 2004, by and between Alexza and certain holders of Preferred Stock. (1) | |
10.1
|
2011 Cash Bonus Plan. (3)* | |
10.2
|
Amendment No. 2 to Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc. dated February 15, 2011. (3) | |
10.3
|
Promissory Note issued by Registrant to Autoliv ASP, Inc. dated February 15, 2011. (3) | |
10.4
|
Form of Notice of Grant of Stock Options to 2005 Equity Incentive Plan. (4)* | |
10.5
|
Form of Option Agreement to 2005 Equity Incentive Plan. (4)* | |
10.6
|
Form of Option Agreement to 2005 Equity Incentive Plan. (4)* | |
31.1
|
Certification required by Rule 13a-14(a) or Rule 15d-14(a). | |
31.2
|
Certification required by Rule 13a-14(a) or Rule 15d-14(a). | |
32.1
|
Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). |
* | Management contract or compensation plan or arrangement. | |
| Confidential treatment has been granted with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. Omitted portions have been filed separately with the SEC. | |
(1) | Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on December 22, 2005, as amended (File No. 333-130644). | |
(2) | Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 17, 2008. | |
(3) | Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 15, 2011. | |
(4) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on February 22, 2011. |
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