e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 0-28402
Aradigm Corporation
(Exact name of registrant as specified in its charter)
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California
(State or other jurisdiction of
incorporation or organization)
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94-3133088
(I.R.S. Employer
Identification No.) |
3929 Point Eden Way
Hayward, CA 94545
(Address of principal executive offices including zip code)
(510) 265-9000
(Registrants telephone number, including area code)
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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
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
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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(Class)
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(Outstanding at April 30, 2008) |
Common
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54,923,839 |
ARADIGM CORPORATION
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ARADIGM CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share data)
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March 31, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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(Note 1) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
30,702 |
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$ |
29,964 |
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Short-term investments |
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3,591 |
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10,546 |
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Receivables |
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77 |
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500 |
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Restricted cash |
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155 |
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152 |
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Prepaid and other current assets |
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868 |
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971 |
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Total current assets |
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35,393 |
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42,133 |
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Property and equipment, net |
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4,007 |
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3,223 |
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Notes receivable from officers and employees |
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33 |
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33 |
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Restricted cash |
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153 |
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153 |
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Other assets |
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265 |
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271 |
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Total assets |
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$ |
39,851 |
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$ |
45,813 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,702 |
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$ |
1,658 |
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Accrued clinical and cost of other studies |
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411 |
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789 |
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Accrued compensation |
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1,085 |
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1,252 |
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Deferred revenue |
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930 |
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880 |
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Facility lease exit obligation |
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376 |
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376 |
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Other accrued liabilities |
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513 |
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584 |
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Total current liabilities |
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5,017 |
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5,539 |
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Deferred rent |
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264 |
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283 |
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Facility lease exit obligation |
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1,278 |
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1,373 |
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Other non-current liabilities |
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245 |
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248 |
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Note payable and accrued interest to related party |
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8,167 |
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8,071 |
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Total liabilities |
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14,971 |
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15,514 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock, 2,950,000 shares authorized, none outstanding
Common stock, no par value; authorized shares: 100,000,000 at
March 31, 2008 and December 31, 2007; issued and outstanding
shares: 54,776,455 at March 31, 2008; 54,772,705 at December
31, 2007 |
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342,568 |
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342,355 |
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Accumulated other comprehensive income |
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16 |
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10 |
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Accumulated deficit |
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(317,704 |
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(312,066 |
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Total shareholders equity |
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24,880 |
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30,299 |
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Total liabilities and shareholders equity |
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$ |
39,851 |
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$ |
45,813 |
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See accompanying Notes to Condensed Financial Statements
3
ARADIGM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three months ended |
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March 31, |
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2008 |
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2007 |
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Revenues (including amounts from related parties $0 - 2008; $15 - 2007) |
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$ |
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$ |
416 |
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Operating expenses: |
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Research and development |
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4,329 |
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3,407 |
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General and administrative |
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1,549 |
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1,987 |
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Restructuring and lease exit activities |
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22 |
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98 |
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Total operating expenses |
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5,900 |
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5,492 |
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Loss from operations |
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(5,900 |
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(5,076 |
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Interest income |
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361 |
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637 |
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Interest expense |
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(98 |
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(96 |
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Other expense |
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(1 |
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(31 |
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Net loss |
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$ |
(5,638 |
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$ |
(4,566 |
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Basic and diluted net loss per common share |
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$ |
(0.10 |
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$ |
(0.11 |
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Shares used in computing basic and diluted net loss per common share |
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54,007 |
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40,820 |
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See accompanying Notes to Condensed Financial Statements
4
ARADIGM CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three months ended |
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March 31, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(5,638 |
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$ |
(4,566 |
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Adjustments to reconcile net loss to cash used in operating activities: |
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Amortization and accretion of investments |
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(3 |
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(3 |
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Depreciation and amortization |
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190 |
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195 |
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Stock-based compensation |
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208 |
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310 |
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Loss on retirement and sale of property and equipment |
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11 |
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Changes in operating assets and liabilities: |
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Receivables |
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423 |
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515 |
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Prepaid and other current assets |
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103 |
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404 |
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Restricted cash |
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(3 |
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Other assets |
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6 |
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156 |
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Accounts payable |
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(79 |
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(576 |
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Accrued compensation |
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(167 |
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(164 |
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Other accrued liabilities |
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(400 |
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(330 |
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Deferred rent |
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(19 |
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(42 |
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Deferred revenue |
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50 |
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5 |
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Facility lease exit obligation |
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(95 |
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Net cash used in operating activities |
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(5,424 |
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(4,085 |
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Cash flows from investing activities: |
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Capital expenditures |
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(807 |
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(317 |
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Purchases of available-for-sale investments |
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(2,969 |
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Proceeds from sales and maturities of available-for-sale investments |
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6,964 |
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503 |
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Net cash provided (used) by investing activities |
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6,157 |
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(2,783 |
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Cash flows from financing activities: |
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Proceeds from public offering of common stock, net |
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33,178 |
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Proceeds from issuance of common stock, net |
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5 |
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55 |
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Net cash provided by financing activities |
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5 |
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33,233 |
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Net increase in cash and cash equivalents |
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738 |
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26,365 |
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Cash and cash equivalents at beginning of period |
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29,964 |
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27,013 |
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Cash and cash equivalents at end of period |
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$ |
30,702 |
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$ |
53,378 |
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Supplemental disclosure of non-cash financing activities: |
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Conversion of convertible preferred stock to common stock |
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$ |
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$ |
23,669 |
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Supplemental disclosure of non-cash investing activities: |
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Purchase of property and equipment in trade accounts payable |
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$ |
167 |
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$ |
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See accompanying Notes to Condensed Financial Statements
5
ARADIGM CORPORATION
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 2008
1. Organization and Basis of Presentation
Organization
Aradigm Corporation (the Company, we, and/or our) is a California corporation focused on
the development and commercialization of a portfolio of drugs delivered by inhalation for the
treatment of severe respiratory diseases by pulmunologists. The Companys principal activities to
date have included research and development, securing operating facilities, expanding commercial
production capabilities, recruiting management and technical personnel and obtaining financing. The
Company does not anticipate receiving any revenue from the sale of products in the upcoming year.
The Companys ability to continue its development and commercialization activities is dependent
upon the ability of management to obtain additional financing as required. Management believes that
cash, cash equivalents and short-term investments at March 31, 2008 are sufficient to enable the
Company to meet its obligations through at least the first quarter of 2009. Management plans to
continue to obtain funds through collaborative arrangements, equity issuances and/or debt
arrangements. The Company operates as a single operating segment.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to the Securities and
Exchange Commissions rules and regulations. In the opinion of management, the financial statements
reflect all adjustments, which are only of a normal recurring nature, necessary for a fair
presentation. The accompanying unaudited condensed financial statements should be read in
conjunction with the financial statements and notes thereto included with the Companys Annual
Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange
Commission. The results of the Companys operations for the interim periods presented are not
necessarily indicative of operating results for the full fiscal year or any future interim period.
The balance sheet at December 31, 2007 has been derived from the audited financial statements
at that date, but does not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements.
Reclassifications
The Company reclassified restructuring activity expenses incurred during the first quarter of
2007 from the general and administrative expense line item to the restructuring and lease exit
activities line item in the accompanying unaudited condensed statements of operations to conform to
the presentation for the current quarter.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements, in conformity with U.S. generally accepted accounting
principles, requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. These estimates include useful lives for
property and equipment and related depreciation calculations, estimated amortization period for
payments received from product development and license agreements as they relate to the revenue
recognition, assumptions for valuing options and warrants and income taxes. Actual results could
differ from these estimates.
Revenue Recognition
Contract revenues consist of revenues from grants, collaboration agreements and feasibility
studies. The Company recognizes revenue under the provisions of the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 104, Revenue
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Recognition (SAB 104) and Emerging
Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21). Revenue for arrangements not having multiple deliverables, as
outlined in EITF 00-21, is recognized once costs are incurred and collectability is reasonably
assured. Under some agreements the Companys collaborators have the right to withhold
reimbursement of costs incurred until the work performed under the agreement is mutually agreed
upon. For these agreements, revenue is recognized upon acceptance of the work and confirmation of
the amount to be paid by the collaborator. Deferred revenue represents the portion of all
refundable and nonrefundable research payments received that have not been earned. In accordance
with contract terms, milestone payments from collaborative research agreements are considered
reimbursements for costs incurred under the agreements and, accordingly, are recognized as revenue
either upon completion of the milestone effort, when payments are contingent upon completion of the
effort, or are based on actual efforts expended over the remaining term of the agreement when
payments precede the required efforts. Costs of contract revenues are approximate to or are
greater than such revenues, and are included in research and development expenses. Refundable
development and license fee payments are deferred until specific performance criteria are achieved.
Refundable development and license fee payments are generally not refundable once specific
performance criteria are achieved and accepted.
Collaborative license and development agreements that require the Company to provide multiple
deliverables, such as a license, research and product steering committee services and other
performance obligations, are accounted for in accordance with EITF 00-21. Under EITF 00-21,
delivered items are evaluated to determine whether such items have value to the Companys
collaborators on a stand-alone basis and whether objective reliable evidence of fair value of the
undelivered items exist. Deliverables that meet these criteria are considered a separate unit of
accounting. Deliverables that do not meet these criteria are combined and accounted for as a
single unit of accounting. The appropriate revenue recognition criteria are identified and applied
to each separate unit of accounting.
Accounting for Costs Associated with Exit or Disposal Activities
In accordance with Statement of SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (SFAS 146), the Company recognizes a liability for the cost associated with
an exit or disposal activity that is measured initially at its fair value in the period in which
the liability is incurred, except for a liability for one-time termination benefits that is
incurred over time. According to SFAS 146, costs to terminate an operating lease or other contracts
are (a) costs to terminate the contract before the end of its term or (b) costs that will continue
to be incurred under the contract for its remaining term without economic benefit to the entity.
In periods subsequent to initial measurement, changes to the liability are measured using the
credit-adjusted risk-free rate that was used to measure the liability initially.
Research and Development
Research and development expenses consist of costs incurred for company-sponsored,
collaborative and contracted research and development activities. These costs include direct and
research-related overhead expenses. Research and development expenses under collaborative and
government grants approximate the revenue recognized under such agreements. The Company expenses
research and development costs as such costs are incurred.
Income Taxes
The Company uses the asset and liability method to account for income taxes as required by
SFAS No. 109, Accounting for Income Taxes. Under this method, deferred income taxes reflect the
net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes as well as net operating
loss and tax credit carryforwards. Valuation allowances are established to reduce the deferred tax
assets to amounts more likely than not to be realized. The Company currently maintains a full
valuation allowance. The balance at December 31, 2007 was $127.5 million.
Stock-Based Compensation Expense
The Company measures stock-based compensation at the grant date based on the awards fair
value and recognizes the expense ratably over the requisite vesting period, net of estimated
forfeitures, for all stock-based awards granted after January 1, 2006 and all stock based awards
granted prior to, but not vested as of, January 1, 2006.
The Company has elected to calculate an awards fair value based on the Black-Scholes
option-pricing model. The Black-Scholes model requires various assumptions, including expected
option life and volatility. If any of the assumptions used in the Black-Scholes
7
model or the estimated forfeiture rate change significantly, stock-based compensation expense
may differ materially in the future from that recorded in the current period.
Recently Issued Accounting Pronouncements
In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
No. FAS 157-2 Effective Date of FASB Statement No. 157 (FSP FAS 157-2), which defers the
effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a recurring basis (at
least annually), for fiscal years beginning after November 15, 2008 and interim periods within
those fiscal years for items within the scope of FSP FAS 157-2. Management does not expect that
the adoption of FSP FAS 157-2 will have a material impact on the Companys financial position and
results of operations.
In November 2007, the EITF issued EITF Issue No. 07-1, Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property (EITF
07-1). Companies may enter into arrangements with other companies to jointly develop,
manufacture, distribute, and market a product. Often the activities associated with these
arrangements are conducted by the collaborators without the creation of a separate legal entity
(that is, the arrangement is operated as a virtual joint venture). The arrangements generally
provide that the collaborators will share, based on contractually defined calculations, the profits
or losses from the associated activities. Periodically, the collaborators share financial
information related to product revenues generated (if any) and costs incurred that may trigger a
sharing payment for the combined profits or losses. The consensus requires collaborators in such an
arrangement to present the result of activities for which they act as the principal on a gross
basis and report any payments received from (made to) other collaborators based on other applicable
GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting
literature or a reasonable, rational, and consistently applied accounting policy election. EITF
07-1 is effective for collaborative arrangements in place at the beginning of the annual period
beginning after December 15, 2008. Management does not expect that the adoption of EITF 07-1 will
have a material impact on the Companys financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)),
which replaces FAS No. 141. SFAS 141(R) establishes principles and requirements for how an acquirer
in a business combination recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase; and determines
what information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. FAS 141(R) is to be applied prospectively to
business combinations for which the acquisition date is on or after an entitys fiscal year that
begins after December 15, 2008. Management will assess the impact of SFAS 141(R) if and when a
future acquisition occurs.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes new
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated financial statements and
separate from the parents equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income statement. SFAS 160
clarifies that changes in a parents ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains a controlling financial interest. In
addition, this statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its noncontrolling interest.
SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on
or after December 15, 2008. Earlier adoption is prohibited. Management does not believe that the
adoption of SFAS 160 will have an effect on the Companys financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an Amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires
companies to provide qualitative disclosures about the objectives and strategies for using
derivatives, quantitative data about the fair value of and gains and losses on derivative
contracts, and details of credit-risk-related contingent features in their hedged positions. The
statement also requires companies to disclose more information about the location and amounts of
derivative instruments in financial statements; how derivatives and related hedges are accounted
for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities; and how the
hedges affect a companys financial position, financial performance and cash flows. SFAS 161 is
effective for years beginning after November 15,
2008. Management is currently evaluating the impact, if any, the adoption of SFAS 161 will have on
the Companys financial statements.
8
3. Stock-Based Compensation
The following table shows the stock-based employee compensation expense included in the
accompanying condensed statements of operations for the three month periods ended March 31, 2008
and 2007 (in thousands, except per share amounts):
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|
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|
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March 31, |
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March 31, |
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2008 |
|
|
2007 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
$ |
174 |
|
|
$ |
94 |
|
General and administrative |
|
|
(43 |
) |
|
|
160 |
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
131 |
|
|
$ |
254 |
|
|
|
|
|
|
|
|
Impact on basic and diluted net loss per common share |
|
$ |
(0.002 |
) |
|
$ |
(0.006 |
) |
|
|
|
|
|
|
|
There was no capitalized stock-based employee compensation cost for the quarters ended March
31, 2008 and 2007. Since the Company incurred net losses during the first quarter of 2008 and
2007, there was no recognized tax benefit associated with stock-based compensation expense.
Total compensation expense for stock options and stock purchases under the Companys employee
stock purchase plan recognized under SFAS No. 123R was $96,000 and $235,000 for the three months
ended March 31, 2008 and 2007, respectively. As of March 31, 2008, $1.4 million of total
unrecognized compensation costs, net of forfeitures, related to non-vested stock options and stock
purchases and is expected to be recognized over a weighted average period of 2.71 years.
Total compensation expense for restricted stock awards issued to employees recognized by the
Company under SFAS No. 123R was $35,000 and $19,000 for the three months ended March 31, 2008 and
2007, respectively, and at March 31, 2008, 765,750 shares subject to restricted share awards are
outstanding. As of March 31, 2008, $521,000 of total unrecognized compensation costs, net of
forfeitures, related to non-vested stock awards is expected to be recognized over a weighted
average period of 3.44 years.
Total compensation expense for stock options and restricted stock awards issued to consultants
recognized by the Company was $77,000 and $56,000 for the three months ended March 31, 2008 and
2007, respectively.
2005 Equity Incentive Plan
The 1996 Equity Incentive Plan (the 1996 Plan) and the 2005 Equity Incentive Plan (the 2005
Plan), which amended, restated and retitled the 1996 Plan, were adopted to provide a means by
which selected officers, directors, scientific advisory board members and employees of and
consultants to the Company and its affiliates could be given an opportunity to acquire an equity
interest in the Company. All employees, directors, officers, scientific advisory board members and
consultants of the Company are eligible to participate in the 2005 Plan. As of March 31, 2008, the
Company had 1,677,747 shares of common stock available for future issuance under the 2005 Plan.
Valuation Assumptions
The fair value of options was estimated at the date of grant using the Black-Scholes option
pricing model. The assumptions used for the three months ended March 31, 2008 and 2007 and the
resulting estimates of weighted-average fair value per share of options granted and shares
purchased during these periods are as follows:
9
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2008 |
|
2007 |
Employee Stock Options |
|
|
|
|
|
|
|
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility factor |
|
|
70.6 |
% |
|
|
85.2 |
% |
Risk-free interest rate |
|
|
2.9 |
% |
|
|
5.1 |
% |
Expected life (years) |
|
|
2.4 |
|
|
|
4.0 |
|
Weighted-average fair value of options granted during the periods |
|
$ |
0.6 |
8 |
|
$ |
0.7 |
9 |
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility factor |
|
|
68.9 |
% |
|
|
86.4 |
% |
Risk-free interest rate |
|
|
4.1 |
% |
|
|
4.9 |
% |
Expected life (years) |
|
|
1.0 |
|
|
|
0.5 |
|
Weighted-average fair value of employee stock purchases during
the periods |
|
$ |
0.5 |
7 |
|
$ |
0.5 |
9 |
Stock Option Activity
A summary of the status of the Companys stock option plans at March 31, 2008 and changes
during the three months then ended is presented in the table below (aggregate intrinsic value in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
average |
|
|
|
|
Number |
|
average |
|
remaining |
|
Aggregate |
|
|
of |
|
exercise |
|
contractual |
|
intrinsic |
|
|
shares |
|
price |
|
life in years |
|
value |
Options outstanding at December 31, 2007 |
|
|
3,493,154 |
|
|
$ |
5.37 |
|
|
|
8.34 |
|
|
$ |
167 |
|
Options granted |
|
|
180,500 |
|
|
|
1.57 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(3,750 |
) |
|
|
1.15 |
|
|
|
|
|
|
|
|
|
Options cancelled |
|
|
(21,086 |
) |
|
|
46.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2008 |
|
|
3,648,818 |
|
|
|
4.95 |
|
|
|
8.21 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2008 |
|
|
1,807,169 |
|
|
$ |
8.29 |
|
|
|
7.33 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2008 and 2007, the Company granted options to
employees and consultants to purchase approximately 180,500 and 261,950 shares of common stock,
respectively. There were 3,750 options exercised during the three months ended March 31, 2008.
4. Net Loss Per Share
The Company computes basic net loss using the weighted-average number of shares of common
stock outstanding less the weighted-average number of shares subject to repurchase. The effects of
including the incremental shares associated with options, warrants and unvested restricted stock
are antidilutive, and are not included in diluted weighted average common shares outstanding for
the three months ended March 31, 2008.
The Company excluded the following securities from the calculation of diluted loss per share
for the three months ended March 31, 2008 and 2007, as their effect would be anti-dilutive (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, |
|
|
2008 |
|
2007 |
Outstanding stock options |
|
|
3,649 |
|
|
|
3,288 |
|
Unvested restricted stock |
|
|
766 |
|
|
|
60 |
|
Warrants to purchase common stock |
|
|
421 |
|
|
|
836 |
|
Performance bonus stock award |
|
|
100 |
|
|
|
100 |
|
10
5. Comprehensive Loss
Comprehensive loss includes net loss and other comprehensive income, which for the Company is
primarily comprised of unrealized holding gains and losses on the Companys available-for-sale
securities that are excluded from the accompanying condensed statements of operations in computing
net loss and reported separately in shareholders equity. Comprehensive loss and its components
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net loss |
|
$ |
(5,638 |
) |
|
$ |
(4,566 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
Change in unrealized gain on available-for-sale securities |
|
|
6 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(5,632 |
) |
|
$ |
(4,563 |
) |
|
|
|
|
|
|
|
6. Cash, Cash Equivalents and Short-Term Investments
The following summarizes the fair value of the Companys cash, cash equivalents and short-term
investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
December31, 2007 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash and money market fund |
|
$ |
4,717 |
|
|
$ |
1,345 |
|
Commercial paper |
|
|
25,985 |
|
|
|
28,619 |
|
|
|
|
|
|
|
|
|
|
$ |
30,702 |
|
|
$ |
29,964 |
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
Corporate and government notes |
|
$ |
3,591 |
|
|
$ |
10,546 |
|
|
|
|
|
|
|
|
The Company considers all highly liquid investments purchased with a maturity of three months
or less to be cash equivalents. All short-term investments at March 31, 2008 mature in less than
one year. The Company places its cash, cash equivalents and short term investments in money market
funds, commercial paper and corporate and government notes.
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 applies to all fair value measurements not otherwise specified in an existing
standard, it clarifies how to measure fair value and it expands fair value disclosures. SFAS No.
157 does not significantly change the Companys previous practice with regard to asset valuation.
All of the Companys fair market value measurements utilize quoted prices in active markets for all
its short-term investments, and are as a result, valued at the Level 1 fair value hierarchy as
defined in SFAS 157.
7. Equity
On December 21, 2007, the Company filed a shelf registration statement on Form S-3 (No.
333-148263) covering the sale of $60 million of common stock. The registration statement became
effective on January 25, 2008.
On January 30, 2007, the Company received $33.9 million from the closing of its public
offering of 37,950,000 shares of common stock in an underwritten public offering with net proceeds,
after underwriting discount and expenses, of approximately $33.2 million. This public offering
triggered the automatic conversion of all outstanding shares of Series A convertible preferred
stock to common stock and eliminated the Series A liquidation preference of $41.9 million, equal to
the original issue price plus all accrued and unpaid dividends (as adjusted for any stock
dividends, combinations, splits, recapitalizations and other similar events). Following the
offering, the 1,544,626 shares of Series A convertible preferred stock were converted to 1,235,699
shares of common stock, and no liquidation preference or other preferential rights remained. As of
March 31, 2008, the Company had 54,766,455 common shares outstanding.
11
8. Related Parties
CyDex
On August 31, 2007, the Company and CyDex Pharmaceuticals, Inc. (CyDex) entered into a
Collaboration Agreement (the CyDex Agreement), which contemplates that the parties will
collaborate on the development and commercialization of products that utilize our AERx® pulmonary
delivery technology and CyDexs solubilization and stabilization technologies to deliver
combinations of inhaled corticosteroids, anticholinergics and beta-2 agonists for the treatment of
asthma and chronic obstructive pulmonary diseases (COPD). John Siebert, a member of our Board of
Directors, is the Chief Executive Officer of CyDex.
Under the terms of the CyDex Agreement, the parties will share in the revenue from sales and
licensing of such products to a third party for further development and commercialization. Details
of each collaboration project will be determined by a joint steering committee consisting of
members appointed by each of the parties. Costs of each collaboration project will be borne 60% by
the Company and 40% by CyDex. Revenues from each collaboration project will be shared in the same
ratio. The CyDex Agreement commenced on August 31, 2007, and unless terminated earlier, will extend
for a minimum period of two years. Either party may terminate the Agreement upon advance notice to
the other party, and the non-terminating party will retain an option to continue the development
and commercialization of any terminated product, subject to payment of a royalty to the terminating
party. The Company did not recognize any revenue since inception and incurred expenses of $44,000
during the first quarter of 2008 and $51,000 from the inception of the agreement through March 31,
2008.
Novo Nordisk
Prior to the Companys follow-on public offering completed on January 30, 2007, Novo Nordisk
and its affiliate, Novo Nordisk Pharmaceuticals, Inc. were considered related parties. At December
31, 2006, Novo Nordisk beneficially owned 1,573,674 shares of the Companys common stock,
representing 10.6% of the Companys total outstanding common stock (9.8% on an as-converted basis).
As a result of the Companys public offering on January 30, 2007, Novo Nordisks ownership was
reduced to approximately 3.0% of the Companys stock on an as-converted basis, and as of March 31,
2008 and December 31, 2007, Novo Nordisk owned less than 1% of the Companys common stock.
In June 1998, the Company executed a Development and Commercialization Agreement with Novo
Nordisk to jointly develop a pulmonary delivery system for administering insulin by inhalation AERx
insulin Diabetes Management System (iDMS). Under the terms of the agreement, Novo Nordisk was granted exclusive worldwide
sales and marketing rights to any products developed. On July 3, 2006, the Company and Novo
Nordisk entered into the Second Amended and Restated License Agreement (the July 3, 2006 License
Agreement). For the three month period ending March 31, 2008 and 2007, the Company recorded
revenue of zero and $15,000, respectively, related to product development and milestone payments.
Pursuant to the July 3, 2006 License Agreement , Novo Nordisk loaned the Company a principal
amount of $7.5 million under a Promissory Note and Security Agreement (Promissory Note). The
Promissory Note bears interest accruing at 5% per annum and the principal, along with the accrued
interest, is payable in three equal payments of $3.5 million at July 2, 2012, July 1, 2013 and June
30, 2014. The amount outstanding under the Promissory Note, including accrued interest, was $8.2
million and $8.1 million as of March 31, 2008 and December 31, 2007, respectively. The Promissory
Note does contain a number of covenants that include restrictions in the event of changes to
corporate structure, change in control and certain asset transactions. The Promissory Note was
also secured by a pledge of the net royalty stream payable to the Company by Novo Nordisk pursuant
to the July 3, 2006 License Agreement.
On January 14, 2008, Novo Nordisk issued a press release announcing the termination of its
phase 3 clinical trials for fast-acting inhaled insulin delivered via the AERx iDMS. Also on
January 14, 2008, the Company received a 120-day notice from Novo Nordisk terminating the July 3,
2006 License Agreement between the Company and Novo Nordisk. The termination of the July 3, 2006
License Agreement does not accelerate any of the payment provisions under the Promissory Note.
12
9. Revenue and Deferred Revenue:
Significant payments from and amounts billed to collaborators, contract and milestone revenues
and deferred revenue are as follows (thousands):
|
|
|
|
|
|
|
March 31, |
|
|
|
2008 |
|
Deferred revenue December 31, 2007 |
|
$ |
880 |
|
Payments/amounts billed for collaborator funded programs |
|
|
50 |
|
|
|
|
|
Subtotal |
|
|
930 |
|
|
|
|
|
Contract revenues recognized from collaborator-funded programs |
|
|
|
|
|
|
|
|
Deferred revenue March 31, 2008 |
|
|
930 |
|
Less: non-current portion of deferred revenue |
|
|
|
|
|
|
|
|
Current portion of deferred revenue |
|
$ |
930 |
|
|
|
|
|
The Company receives revenues from collaborator-funded programs that are generally early-stage
feasibility programs. These programs may not necessarily develop into long-term development
agreements with the collaborators.
10. Sublease Agreement and Lease Exit Liability:
On July 18, 2007, the Company entered into a sublease agreement with Mendel to lease
approximately 48,000 square feet of the 72,000 square foot facility located at 3929 Point Eden Way,
Hayward, CA During the year ended December 31, 2007, the Company recorded a $2.1 million lease
exit liability and related expense for the expected loss on the sublease, in accordance with SFAS
146, because the monthly payments the Company expects to receive under the sublease are less than
the amounts that the Company will owe the lessor for the sublease space. The fair value of the
lease exit liability was determined using a credit-adjusted risk-free rate to discount the
estimated future net cash flows, consisting of the minimum lease payments to the lessor for the
sublease space and payments the Company will receive under the sublease. The sublease loss and
ongoing accretion expense required to record the lease exit liability at its fair value using the
interest method have been recorded as part of restructuring and lease exit activities in the
accompanying condensed statements of operations. The lease exit liability activity from
inception in July 2007 through March 31, 2008 is as follows (in thousands):
|
|
|
|
|
Loss on sublease upon subleasing to Mendel in July 2007 |
|
$ |
2,063 |
|
Accretion of imputed interest expense |
|
|
39 |
|
Lease payments |
|
|
(353 |
) |
|
|
|
|
Balance at December 31, 2007 |
|
|
1,749 |
|
Accretion of imputed interest expense |
|
|
22 |
|
Lease payments |
|
|
(117 |
) |
|
|
|
|
Balance at March 31, 2008 |
|
$ |
1,654 |
|
|
|
|
|
The Company recorded $376,000 of the $1,654,000 lease exit liability in current liabilities
and the remaining $1,278,000 in non-current liabilities in the accompanying condensed balance sheet
at March 31, 2008. The Company recorded $376,000 of the $1,749,000 lease exit liability in current
liabilities and the remaining $1,373,000 in non-current liabilities in the accompanying condensed
balance sheet at December 31, 2007.
11. 2006 Restructuring
During 2006, the Company announced the implementation of a strategic restructuring of its
business operations to focus resources on advancing the current product pipeline and developing
products focused on respiratory disease, leveraging the Companys core expertise and intellectual
property. The Company accounted for the restructuring activity in accordance with SFAS 146. The
restructuring included a reduction in force, the majority of which were research personnel. The
Company recorded the final remaining charge of $98,000 from the 2006 restructuring during the three
month period ended March 31, 2007. The Company also paid the severance-related expenses in full by
the end of 2007. These charges are included in the restructuring and lease exit activities expense
line item in the accompanying condensed statements of operations.
13
12. Tekmira License Agreement
On February 13, 2008, the Company signed an amendment to its license agreement from December
2004 with Tekmira Pharmaceuticals Corporation (Tekmira), formerly known as Inex Pharmaceuticals
Corporation. Under the amended agreement, Tekmira granted the Company a license to certain
technology relating to the delivery of liposomal ciprofloxacin. The Company paid Tekmira $250,000
upon execution of the amendment. Should the Company utilize the technology licensed from Tekmira,
the Company may be required to make milestone payments of up to $4.75 million in the aggregate for
each disease indication, up to a maximum of two indications, pursued by the Company for liposomal
ciprofloxacin. Should the Company commercialize products incorporating the licensed technology,
Tekmira will have the right to additional royalty payments.
13. Feasibility Study
In March 2008, the Company entered into an agreement with an undisclosed party to conduct a
feasibility study. The purpose of the study is to evaluate in the laboratory the delivery of
certain compounds using the AERx system. The agreement has an initial one year term with potential
successive one year renewals. The Company will be fully reimbursed for its costs under the
agreement. The Company billed $50,000 upon execution of the agreement and recorded the amount in
deferred revenue in the accompanying condensed balance sheet at March 31, 2008.
14. Manufacturing and Supply Agreement
On August 8, 2007, the Company entered into a Manufacturing and Supply Agreement (the Enzon
Agreement) with Enzon Pharmaceuticals, Inc. (Enzon) related to its ARD-3100 and ARD-3150
programs, inhaled formulations of liposomal ciprofloxacin for the treatment and control of
respiratory infections common to patients with cystic fibrosis and bronchiectasis. Under the Enzon
Agreement, Enzon will manufacture and supply the Company with ciprofloxacin formulations and other
products that may be identified by management. For manufacturing the initial products, the Company
will pay Enzon costs and fees totaling $3,294,500 in addition to costs and fees for stability
studies or other services that may be agreed by both parties. The agreement commenced on August 8,
2007, and will extend for a period of five years, unless terminated earlier by either party.
During the three month period ending March 31, 2008, the Company incurred $0.2 million in costs
under the Enzon Agreement and $3.0 million from the inception of the contract through March 31,
2008. These costs were recorded in research and development expenses in the accompanying condensed
statements of operations.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below contains forward-looking statements that are based on the beliefs of
management, as well as assumptions made by, and information currently available to, management. Our
future results, performance or achievements could differ materially from those expressed in, or
implied by, any such forward-looking statements as a result of certain factors, including, but not
limited to, those discussed in this section as well as in the section entitled Risk Factors and
elsewhere in our filings with the Securities and Exchange Commission.
Our business is subject to significant risks including, but not limited to, our ability to
obtain additional financing, our ability to implement our new product development strategy, the
success of product development efforts, our dependence on collaborators for certain programs,
obtaining and enforcing patents important to our business, clearing the lengthy and expensive
regulatory approval process and possible competition from other products. Even if product
candidates appear promising at various stages of development, they may not reach the market or may
not be commercially successful for a number of reasons. Such reasons include, but are not limited
to, the possibilities that the potential products may be found to be ineffective during clinical
trials, may fail to receive
necessary regulatory approvals, may be difficult to manufacture on a large scale, are
uneconomical to market, may be precluded from commercialization by proprietary rights of third
parties or may not gain acceptance from health care professionals and patients.
Investors are cautioned not to place undue reliance on the forward-looking statements
contained herein. We undertake no obligation to update these forward-looking statements in light of
events or circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
14
Overview
We are an emerging specialty pharmaceutical company focused on the development and
commercialization of a portfolio of drugs delivered by inhalation for the treatment of severe
respiratory diseases by pulmonologists. Over the last decade, we have invested a large amount of
capital to develop drug delivery technologies, particularly the development of a significant amount
of expertise in pulmonary drug delivery. We have also invested considerable effort into the
generation of a large volume of laboratory and clinical data demonstrating the performance of our
AERx pulmonary drug delivery platform. We have not been profitable since inception and expect to
incur additional operating losses over at least the next several years as we expand product
development efforts, preclinical testing and clinical trial activities and possible sales and
marketing efforts and as we secure production capabilities from outside contract manufacturers. To
date, we have not had any significant product sales and do not anticipate receiving any revenues
from the sale of products in the upcoming year. As of March 31, 2008, we had an accumulated deficit
of $317.7 million. Historically, we have funded our operations primarily through public offerings
and private placements of our capital stock, proceeds from equipment lease financings, license fees
and milestone payments from collaborators, proceeds from the January 2005 restructuring transaction
with Novo Nordisk, borrowings from Novo Nordisk, sale of Intraject related assets and interest
earned on investments. On January 30, 2007, we closed the sale of 37,950,000 shares of common stock
in an underwritten public offering with net proceeds, after underwriting discount and expenses, of
approximately $33.2 million (See Note 7 of the notes to the condensed financial statements).
Historically, our development activities consisted primarily of collaborations and product
development agreements with third parties. The most notable collaboration has been with Novo
Nordisk on the AERx iDMS for the treatment of Type I and
Type II diabetes. This program began in 1998 and has included nine Phase 3 clinical trials in Type
I and Type II diabetes patients. On January 14, 2008, Novo Nordisk issued a press release
announcing the termination of all pending clinical trials for fast-acting inhaled insulin delivered
via the AERx iDMS. Also on January 14, 2008, we received a 120-day notice from Novo Nordisk
terminating the July 3, 2006 License Agreement between us and Novo Nordisk. Lastly, on April 30,
2008, Novo Nordisk announced that following recent reports on lung cancer in type II diabetes
patients treated with Exubera, an inhaled insulin product from Pfizer, the likelihood of achieving
a positive benefit/risk ratio for future pulmonary diabetes projects had become more uncertain, and
as a result, Novo Nordisk had decided to stop all research and development activities in the field.
Our current intentions are to seek collaborations for inhaled treatments of diabetes using the
AERx technology.
More recently, our business has focused on product development for treatment of respiratory
disease, including identifying opportunities that we could develop and commercialize in the United
States without a partner. We currently have five respiratory product candidates in development:
innovative treatments for infections associated with cystic fibrosis, bronchiectasis and inhalation
anthrax; smoking cessation treatment; and, in collaborations with other companies, inhalation
treatments for pulmonary arterial hypertension and for asthma and other chronic obstructive
diseases of airways. In selecting our development programs, we primarily seek drugs approved by
the United States Food and Drug Administration (FDA) that can be reformulated for both existing
and new indications in respiratory disease. Our intent is to use our pulmonary delivery methods and
formulations to improve their safety, efficacy and convenience of administration to patients. We
believe that this strategy will allow us to reduce cost, development time and risk of failure, when
compared to the discovery and development of new chemical entities. We intend to commercialize our
respiratory product candidates with our own focused sales and marketing force addressing pulmonary
specialty doctors in the United States, where we believe that a proprietary sales force will
enhance the return to our shareholders. Where our products can benefit a broader population of
patients in the United States or in other countries, we may enter into co-development, co-promotion
or other marketing arrangements with collaborators, thereby reducing costs and increasing revenues
through license fees, milestone payments and royalties.
15
Product Candidates
Product candidates in development include both our own proprietary products and products under
development with collaborators. They consist of approved drugs combined with our inhalation
delivery and/or formulation technologies. The following table shows the disease indication and
stage of development for each product candidate in our portfolio.
|
|
|
|
|
Product Candidate |
|
Indication |
|
Stage of Development |
Proprietary Programs Under Development |
|
|
|
|
ARD-3100 (Liposomal ciprofloxacin)
|
|
Cystic Fibrosis
|
|
Phase 2 |
ARD-3150 (Liposomal ciprofloxacin)
|
|
Bronchiectasis
|
|
Phase 2 in preparation |
ARD-1100 (Liposomal ciprofloxacin)
|
|
Inhalation Anthrax
|
|
Preclinical |
ARD-1600 (Nicotine)
|
|
Tobacco Smoking Cessation
|
|
Phase 2 in preparation |
Collaborative Programs Under Development |
|
|
|
|
ARD-1550 (Inhaled treprostinil) (1)
|
|
Pulmonary Arterial Hypertension
|
|
Bridging study |
ARD-1500 (Inhaled liposomal treprostinil)
|
|
Pulmonary Arterial Hypertension
|
|
Preclinical |
ARD-1300 (Hydroxychloroquine) (2)
|
|
Asthma
|
|
Phase 2 |
ARD-1700 (combination products) (3)
|
|
Asthma, COPD
|
|
Preclinical |
|
|
|
(1) |
|
A bridging clinical study began in April 2008 to compare
delivery with the AERx
Essence(R) system
against the nebulizer used in the completed Phase 3 TRIUMPH
(TReprostinil Sodium Inhalation Used in the Management of Pulmonary
Arterial Hypertention) study with our partner Lung
Rx, Inc., a wholly owned subsidiary of United Therapeutics Corporation. |
|
(2) |
|
A Phase 2a clinical study did not meet pre-specified clinical endpoints. The program is
currently under review by APT, a privately held biotechnology company. |
|
(3) |
|
The Asthma program is being conducted pursuant to the Collaboration Agreement with CyDex. |
In addition to these programs, we are continually evaluating opportunities for product
development where we can apply our expertise and intellectual property to produce better therapies
and where we believe the investment could provide significant value to our shareholders. We
periodically conduct feasibility studies with other parties in an effort to identify formulations
and combinations that may be suitable candidates for additional development.
16
Proprietary Programs Under Development:
Liposomal Ciprofloxacin
Ciprofloxacin has been approved by the FDA as an anti-infective agent and is widely used for
the treatment of a variety of bacterial infections. Today ciprofloxacin is delivered by oral or
intravenous administration. We believe that delivering this potent antibiotic directly to the lung
may improve its safety and efficacy in the treatment of pulmonary infections. We believe that our
novel sustained release formulation of ciprofloxacin may be able to maintain therapeutic
concentrations of the antibiotic within infected lung tissues, while reducing systemic exposure and
the resulting side effects seen with currently marketed ciprofloxacin products. To achieve this
sustained release, we employ liposomes, which are lipid-based nanoparticles dispersed in water that
encapsulate the drug during storage and release the drug slowly upon contact with fluid covering
the airways and the lung. In an animal experiment, ciprofloxacin delivered to the lung of mice
appeared to be rapidly absorbed into the bloodstream, with no drug detectable four hours after
administration. In contrast, the liposomal formulation of ciprofloxacin produced significantly
higher levels of ciprofloxacin in the lung at all time points and was still detectable at 12 hours.
We also believe that for certain respiratory disease indications it may be possible that a
liposomal formulation enables better interaction of the drug with the disease target, leading to
improved effectiveness over other therapies. We have at present three target indications that share
much of the laboratory and production development efforts, as well as a common safety data base.
ARD-3100 and ARD 3150 Liposomal Ciprofloxacin for the Treatment of Infections in Cystic
Fibrosis and Non-CF Bronchiectasis Patients
We have two proprietary liposomal ciprofloxacin programs for the treatment and control of
respiratory infections one common to patients with cystic fibrosis, or CF, and the other for
infections associated with non-cystic fibrosis bronchiectasis. CF is a genetic disease that causes
thick, sticky mucus to form in the lungs, pancreas and other organs. In the lungs, the mucus tends
to block the airways, causing lung damage and making these patients highly susceptible to lung
infections. According to the Cystic Fibrosis Foundation, CF affects roughly 30,000 children and
adults in the United States and roughly 70,000 children and adults worldwide. According to the
American Lung Association, the direct medical care costs for an individual with CF are currently
estimated to be in excess of $40,000 per year.
The inhalation route affords direct administration of the drug to the infected part of the
lung, maximizing the dose to the affected site and minimizing the wasteful exposure to the rest of
the body where it could cause side effects. Therefore, treatment of CF-related lung infections by
direct administration of antibiotics to the lung may improve both the safety and efficacy of
treatment compared to systemic administration by other routes, as well as improving patient
convenience as compared to injections. Oral and injectable forms of ciprofloxacin are approved for
the treatment of Pseudomonas aeruginosa, a lung infection to which CF patients are vulnerable.
Currently, there is only one inhalation antibiotic approved for the treatment of this infection. We
believe that local lung delivery via inhalation of ciprofloxacin in a sustained release formulation
could provide a convenient, effective and safe treatment of the debilitating and often
life-threatening lung infections that afflict patients with CF.
Our liposomal ciprofloxacin CF program represents the first program in which we intend to
retain full ownership and development rights for the United States. We believe we have the
preclinical development, clinical and regulatory expertise to advance this product through
development in the most efficient manner. We intend to commercialize this program in the United
States on our own.
We are also developing inhaled liposomal ciprofloxacin for pulmonary infections associated
with non-CF bronchiectasis a chronic pulmonary disease with symptoms similar to cystic fibrosis
affecting over 100,000 patients in the United States. This is an orphan drug disease with an unmet
medical need; there is currently no approved drug treatment in the USA for this indication.
Development
We have received orphan drug designations from the FDA for this product for the management of
CF, and for the treatment of respiratory infections associated with non-CF bronchiectasis. As a
designated orphan drug, liposomal ciprofloxacin is eligible for tax credits based upon its clinical
development costs, as well as assistance from the FDA to coordinate study design. The designation
also provides the opportunity to obtain market exclusivity for seven years from the date of New
Drug Application, or NDA, approval.
17
We initiated preclinical studies for liposomal ciprofloxacin in 2006 and we also continued to
work on new innovative formulations for this product with the view to maximize the safety, efficacy
and convenience to patients. In October 2007, we completed a Phase 1 clinical trial in 20 healthy
volunteers in Australia. This was a safety, tolerability and pharmacokinetic study that included
single dose escalation followed by dosing for one week. Administration of the liposomal
formulation by inhalation was well tolerated and no serious adverse reactions were reported. The
pharmacokinetic profile obtained by measurement of blood levels of ciprofloxacin following the
inhalation of the liposomal formulation was consistent with the profile from sustained release of
ciprofloxacin; the blood levels of ciprofloxacin were much lower than those that would be observed
following administration of therapeutic doses of ciprofloxacin by injection or via the
gastrointestinal tract. We believe that this is a desirable pharmacokinetic profile likely to
result in reduction of the incidence and severity of systemic side effects of ciprofloxacin and to
be less likely to lead to evolution of resistant micro-organisms.
Following the completion of the Phase 1 study, we initiated a multi-center 14-day treatment
Phase 2a trial in Australia and New Zealand in 24 CF patients to investigate safety, efficacy and
pharmacokinetics, with the primary efficacy endpoint being the reduction in the density of the
pathogenic microorganism Pseudomonas aeruginosa. Following the trial we intend to finalize
development plans and budgets for this program in conjunction with discussions with the FDA. In
order to expedite anticipated time to market and increase market acceptance, we have elected to
deliver our initial formulation of ciprofloxacin via nebulizer, as most CF patients already own a
nebulizer and are familiar with this method of drug delivery. We intend to examine the potential
for delivery of ciprofloxacin via our AERx delivery system as well. This program incorporates
formulation and manufacturing processes and safety data developed for our inhalation anthrax
program discussed below. We also intend to explore the utility of liposomal ciprofloxacin for the
treatment of other serious respiratory infections. In particular, we plan to conduct clinical
trials to treat infections in patients with non-CF bronchiectasis.
ARD-1100 Liposomal Ciprofloxacin for the Treatment of Inhalation Anthrax
The third of our liposomal ciprofloxacin programs is for the prevention and treatment of
pulmonary anthrax infections. Anthrax spores are naturally occurring in soil throughout the world.
Anthrax infections are most commonly acquired through skin contact with infected animals and animal
products or, less frequently, by inhalation or ingestion of spores. With inhalation anthrax, once
symptoms appear, fatality rates are high even with the initiation of antibiotic and supportive
therapy. Further, a portion of the anthrax spores, once inhaled, may remain dormant in the lung for
several months and germinate. Anthrax has been identified by the Centers for Disease Control as a
likely potential agent of bioterrorism. In the fall of 2001, when anthrax-contaminated mail was
deliberately sent through the United States Postal Service to government officials and members of
the media, five people died and many more became sick. These attacks highlighted the concern that
inhalation anthrax as a bioterror agent represents a real and current threat.
Ciprofloxacin has been approved by the FDA for use orally and via injection for the treatment
of inhalation anthrax (post-exposure) since 2000. Our ARD-1100 research and development program
has been funded by Defence Research and Development Canada, or DRDC, a division of the Canadian
Department of National Defence. We believe that our product candidate may potentially be able to
deliver a long-acting formulation of ciprofloxacin directly into the lung and could have fewer side
effects and be more effective to prevent and treat inhalation anthrax than currently available
therapies.
Development
We began our research into liposomal ciprofloxacin under a technology demonstration program
funded by the DRDC as part of their interest in developing products to counter bioterrorism. The
DRDC had already demonstrated the feasibility of inhaled liposomal ciprofloxacin for post-exposure
prophylaxis of Francisella tularensis, a potential bioterrorism agent similar to anthrax. Mice were
exposed to a lethal dose of F. tularensis and then 24 hours later were exposed via inhalation to a
single dose of free ciprofloxacin, liposomal ciprofloxacin or saline. All the mice in the control
group and the free ciprofloxacin group were dead within 11 days post-infection; in contrast, all
the mice in the liposomal ciprofloxacin group were alive 14 days post-infection. The same results
were obtained when the mice received the single inhaled treatment as late as 48 or 72 hours
post-infection. The DRDC has funded our development efforts to date and additional development of
this program is dependent on negotiating for and obtaining continued funding from DRDC or on
identifying other collaborators or sources of funding. We plan to use our preclinical and clinical
safety data
18
from our CF program to supplement the data needed to have this product candidate considered
for approval for use in treating inhalation anthrax and possibly other inhaled life-threatening
bioterrorism infections.
If we can obtain sufficient additional funding, we would anticipate developing this drug for
approval under FDA regulations relating to the approval of new drugs or biologics for potentially
fatal diseases where human efficacy studies cannot be conducted ethically or practically. These
regulations allow for a drug to be evaluated and approved by the FDA on the basis of demonstrated
safety in humans combined with studies in animal models to show effectiveness.
Smoking Cessation Therapy
ARD-1600 (Nicotine) Tobacco Smoking Cessation Therapy
According to the National Center for Health Statistics (NCHS), 21% of the U.S. population
age 18 and above currently smoke cigarettes. The World Health Organization estimates that 650
million people worldwide are smokers, which results in a health cost equivalent to $200 billion,
$75 billion in the U.S. alone. Further, the NCHS indicates that nicotine dependence is the most
common form of chemical dependence in this country. As a result, quitting tobacco use is difficult
and often requires multiple attempts, as users often relapse because of withdrawal symptoms. Our
goal is to develop an inhaled nicotine product that would address effectively the acute craving for
cigarettes and, through gradual reduction of the peak nicotine levels, wean-off the patients from
cigarette smoking and from the nicotine addiction.
Development
The initial laboratory work on this program was partly funded under grants from the National
Institute of Health.
We have recently completed the first human clinical trial delivering aqueous solutions of
nicotine using the palm-size AERx Essence system. Our randomized, open-label, single-site Phase 1
trial evaluated arterial plasma pharmacokinetics and subjective acute cigarette craving when one of
three nicotine doses was administered to 18 adult male smokers. Blood levels of nicotine rose much
more rapidly following a single-breath inhalation compared to published data on other approved
nicotine delivery systems. Cravings for cigarettes were measured on a scale from 0-10 before and
after dosing for up to four hours. Prior to dosing, mean craving scores were 5.5, 5.5 and 5.0,
respectively, for the three doses. At five minutes following inhalation of the nicotine solution
through the AERx Essence device, craving scores were reduced to 1.3, 1.7 and 1.3, respectively, and
did not return to pre-dose baseline during the four hours of monitoring. Nearly all subjects
reported an acute reduction in craving or an absence of craving immediately following dosing. No
serious adverse reactions were reported in the study.
We believe these results provide the foundation for further research with the AERx Essence
device as a means toward smoking cessation. We are currently seeking collaborations with government
and non-government organizations to further develop this product.
Collaborative Programs Under Development:
ARD-1550 Treprostinil for the Treatment of Pulmonary Arterial Hypertension
The ARD-1550 program is a collaboration with Lung Rx, Inc. (Lung Rx), a wholly-owned
subsidiary of United Therapeutics Corporation, and is investigating a sustained-release liposomal
formulation of a prostacyclin analogue for administration using our AERx delivery system for the
treatment of pulmonary arterial hypertension, or PAH. PAH is a rare disease that results in the
progressive narrowing of the arteries of the lungs, causing continuous high blood pressure in the
pulmonary artery and eventually leading to heart failure. According to Decision Resources, in 2003,
the more than 130,000 people worldwide affected by PAH purchased $600 million of PAH-related
medical treatments and sales are expected to reach $1.2 billion per year by 2013.
19
Prostacyclin analogues are an important class of drugs used for the treatment of pulmonary
arterial hypertension. However, the current methods of administration of these drugs are burdensome
on patients. Treprostinil is marketed by United Therapeutics under the name Remodulin* and is
administered by intravenous or subcutaneous infusion; Remodulin accounted for approximately $200
million of United Therapeutics Corporations revenue in 2007. We believe that our ARD-1550 product
candidate potentially could offer a non-invasive, more direct and patient-friendly approach to
treatment to replace or complement currently available treatments. Actelion Pharmaceuticals Ltd.
markets in the United States another prostacyclin analogue, iloprost, under the name Ventavis* that
is administered six to nine times per day using a nebulizer, with each treatment lasting four to
ten minutes. We believe administration of treprostinil by inhalation using our AERx delivery system
may be able to deliver an adequate dose for the treatment of PAH in a small number of breaths.
Based on our previous work with United Therapeutics, we also believe that in the future our
sustained release formulation may lead to a reduction in the number of daily administrations that
are needed to be effective when compared to existing therapies.
Development
We have conducted two collaborative research projects on inhaled treprostinil using Aradigms
AERx delivery system. The first project was with an aqueous formulation of treprostinil. The
second project involved development of a slow-acting liposomal formulation of treprostinil
(ARD-1500), with the view to achieve once-a-day dosing. On August 30, 2007, we signed an Exclusive
License, Development and Commercialization Agreement with Lung Rx pursuant to which we granted Lung
Rx an exclusive license to develop and commercialize inhaled treprostinil using our AERx Essence
technology for the treatment of PAH and other potential therapeutic indications. As a part of this
collaboration, we began a bridging study for this product, ARD-1550, in April 2008 to compare an
aqueous solution of treprostinil delivered by inhalation using the AERx Essence system to the
nebulizer used in the United Therapeutics recently completed Phase 3 trial.
ARD-1300 Hydroxychloroquine for the Treatment of Asthma
The ARD-1300 program was investigating a novel aerosolized formulation of hydroxychloroquine,
or HCQ, as a treatment for asthma under collaboration with APT, a privately held biotechnology
company. Data from studies in which HCQ was orally administered to humans suggested that HCQ could
be effective in the treatment of asthma. We and APT have hypothesized that targeted delivery of HCQ
to the airways may enhance the effectiveness of the treatment of asthma relative to systemic
delivery of HCQ while reducing side effects by decreasing exposure of the drug to other parts of
the body.
Development
APT has funded all activities in the development of this program. The ARD-1300 program
advanced into Phase 2 clinical trials following positive preclinical testing and Phase 1 clinical
results. The results of the Phase 2a clinical study of inhaled HCQ as a treatment for patients with
moderate-persistent asthma did not meet the pre-specified clinical efficacy endpoints. No serious
adverse effects were noted or associated with the aerosolized HCQ or with the AERx system. APT is
also studying the utility of nasally-administered HCQ for the treatment of allergic rhinitis.
20
ARD-1700 (combination products) and Other Potential Applications
We have demonstrated in human clinical trials to date effective deposition and, where
required, systemic absorption of a wide variety of drugs, including small molecules, peptides and
proteins, using our AERx delivery system. We intend to identify additional pharmaceutical product
opportunities that could potentially utilize our proprietary delivery systems for the pulmonary
delivery of various drug types, including proteins, peptides, oligonucleotides, gene products and
small molecules. We have demonstrated in the past our ability to successfully enter into
collaborative arrangements for our programs, and we believe additional opportunities for
collaborative arrangements exist outside of our core respiratory disease focus, for some of which
we have data as well as intellectual property positions. The following are descriptions of two
potential opportunities:
|
|
|
Cyclodextrin Combination Products for Asthma, Cystic Fibrosis and other Chronic Obstructive
Pulmonary Disease (COPD). Asthma is a common chronic disorder of the lungs characterized by airway
inflammation, airway hyper-responsiveness or airway narrowing due to certain stimuli. Despite
several treatment options, asthma remains a major medical problem associated with high morbidity
and large economic costs to the society. According to the American Lung Association, asthma
accounted for $14.7 billion in direct healthcare costs each year in the United States, of which the
largest single expenditure, at $6.2 billion, was prescription drugs. Primary symptoms of asthma
include coughing, wheezing, shortness of breath and tightness of the chest with symptoms varying in
frequency and degree. According to Datamonitor, in 2005 asthma affected 41.5 million people in
developed countries, with 9.5 million of those affected being children. The highest prevalence of
asthma occurs in the United States and the United Kingdom. According to the American Lung
Association, non-asthma COPD was the fourth leading cause of death in America, claiming the lives
of 118,171 Americans in 2004. In 2005, an estimated 8.9 million Americans reported a physician
diagnosis of chronic bronchitis, an obstructive disease of the lung. In August 2007, we and CyDex
began to collaborate on the development and commercialization of products that utilize our AERx
pulmonary delivery technology and CyDexs solubilization and stabilization technologies to deliver
inhaled corticosteroids, anticholinergics and beta-2 agonists for the treatment of asthma and COPD.
|
|
|
|
|
Pain Management System. Based on our internal work and a currently dormant collaboration
with GlaxoSmithKline, we have developed a significant body of preclinical and Phase 1 clinical data
on the use of inhaled morphine and fentanyl, and Phase 2 clinical data on inhaled morphine, with
our proprietary AERx delivery system for the treatment of breakthrough pain in cancer and
postsurgical patients.
|
|
|
|
|
Other Programs. We are currently examining our previously conducted preclinical and
clinical programs to identify molecules that may be suitable for further development consistent
with our current business strategy. In most cases, we have previously demonstrated the feasibility
of delivering these compounds via our proprietary AERx delivery system, but we have not been able
to continue development due to a variety of reasons, most notably the lack of funding provided from
collaborators. If we identify any such programs during this review, we will consider continuing the
development of such compounds on our own. |
21
Critical Accounting Policies and Estimates
We consider certain accounting policies related to revenue recognition, stock-based
compensation, impairment of long-lived assets, exit/disposal activities and income taxes to be
critical accounting policies that require the use of significant judgments and estimates relating
to matters that are inherently uncertain and may result in materially different results under
different assumptions and conditions. The preparation of financial statements in conformity with
United States generally accepted accounting principles requires us to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes to
the condensed financial statements. These estimates include useful lives for property and equipment
and related depreciation calculations, estimated amortization periods for payments received from
product development and license agreements as they relate to the revenue recognition and
assumptions for valuing options, warrants and incomes taxes. Our actual results could differ from
these estimates.
Revenue Recognition
Contract revenues consist of revenues from grants, collaboration agreements and feasibility
studies. We recognize revenue under the provisions of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104) and Emerging Issues Task
Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21).
Revenue for arrangements not having multiple deliverables, as outlined in EITF 00-21, is recognized
once costs are incurred and collectability is reasonably assured. Under some agreements our
collaborators have the right to withhold reimbursement of costs incurred until the work performed
under the agreement is mutually agreed upon. For these agreements, we recognize revenue upon
acceptance of the work and confirmation of the amount to be paid by the collaborator. Deferred
revenue represents the portion of all refundable and nonrefundable research payments received that
have not been earned. In accordance with contract terms, milestone payments from collaborative
research agreements are considered reimbursements for costs incurred under the agreements and,
accordingly, are recognized as revenue either upon completion of the milestone effort, when
payments are contingent upon completion of the effort, or are based on actual efforts expended over
the remaining term of the agreement when payments precede the required efforts. Costs of contract
revenues are approximate to or are greater than such revenues, and are included in research and
development expenses. We defer refundable development and license fee payments until specific
performance criteria are achieved. Refundable development and license fee payments are generally
not refundable once specific performance criteria are achieved and accepted.
Collaborative license and development agreements that require us to provide multiple
deliverables, such as a license, research and product steering committee services and other
performance obligations, are accounted for in accordance with EITF 00-21. Under EITF 00-21,
delivered items are evaluated to determine whether such items have value to our collaborators on a
stand-alone basis and whether objective reliable evidence of fair value of the undelivered items
exist. Deliverables that meet these criteria are considered a separate unit of accounting.
Deliverables that do not meet these criteria are combined and accounted for as a single unit of
accounting. The appropriate revenue recognition criteria are identified and applied to each
separate unit of accounting.
Accounting for Costs Associated with Exit or Disposal Activities
In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146), we recognize a liability for the cost associated with an exit or disposal
activity that is measured initially at its fair value in the period in which the liability is
incurred, except for a liability for one-time termination benefits that is incurred over time.
According to SFAS 146, costs to terminate an operating lease or other contracts are (a) costs to
terminate the contract before the end of its term or (b) costs that will continue to be incurred
under the contract for its remaining term without economic benefit to the entity. In periods
subsequent to initial measurement, changes to the liability are measured using the credit-adjusted
risk-free rate that was used to measure the liability initially.
Research and Development
Research and development expenses consist of costs incurred for company-sponsored,
collaborative and contracted research and development activities. These costs include direct and
research-related overhead expenses. Research and development expenses under collaborative and
government grants approximate the revenue recognized under such agreements. We expense research
and development costs as such costs are incurred.
22
Income Taxes
We make certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the calculation of certain tax assets
and liabilities, which arise from differences in the timing of recognition of revenue and expense
for tax and financial statement purposes. As part of the process of preparing our financial
statements, we are required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our current tax exposure under the most recent tax
laws and assessing temporary differences resulting from differing treatment of items for tax and
accounting purposes.
We assess the likelihood that we will be able to recover our deferred tax assets. We consider
all available evidence, both positive and negative, including our historical levels of income and
losses, expectations and risks associated with estimates of future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we
do not consider it more likely than not that we will recover our deferred tax assets, we will
record a valuation allowance against the deferred tax assets that we estimate will not ultimately
be recoverable. At March 31, 2008 and December 31, 2007, we believed that the amount of our
deferred income taxes would not be ultimately recovered. Accordingly, we recorded a full valuation
allowance for deferred tax assets. However, should there be a change in our ability to recover our
deferred tax assets, we would recognize a benefit to our tax provision in the period in which we
determine that it is more likely than not that we will recover our deferred tax assets.
Stock-Based Compensation Expense
We measure stock-based compensation at the grant date based on the awards fair value and we
recognize the expense ratably over the requisite vesting period, net of estimated forfeitures, for
all stock-based awards granted after January 1, 2006 and all stock based awards granted prior to,
but not vested as of, January 1, 2006.
We have elected to calculate an awards fair value based on the Black-Scholes option-pricing
model. The Black-Scholes model requires various assumptions, including expected option life and
volatility. If any of the assumptions used in the Black-Scholes model or the estimated forfeiture
rate change significantly, stock-based compensation expense may differ materially in the future
from that recorded in the current period.
Results of Operations
Three months ended March 31, 2008 and 2007
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Decrease |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties |
|
$ |
|
|
|
$ |
15 |
|
|
$ |
(15 |
) |
|
|
(100 |
)% |
Unrelated parties |
|
|
|
|
|
|
401 |
|
|
|
(401 |
) |
|
|
(100 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
|
|
|
$ |
416 |
|
|
$ |
(416 |
) |
|
|
(100 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We did not record any revenue for the three months ended March 31, 2008. During the three
months ended March 31, 2007, we recorded revenues from Novo Nordisk of $15,000. The reason for the
decrease in related party revenue was due to the conclusion of the restructuring agreement with
Novo Nordisk. Similarly, the primary reason for the decrease in unrelated party revenue was the
result of our refocus towards advancing our own product candidates, and to a lesser extent, timing
of our collaboration agreement activities. For the three months ended March 31, 2007, we recorded
collaborative revenues of $312,000 related to ARD-1500, $84,000 from our transition agreement with
Zogenix and $5,000 from our nozzle manufacture contract.
23
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Increase (Decrease) |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Research and development expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative |
|
$ |
336 |
|
|
$ |
419 |
|
|
$ |
(83 |
) |
|
|
(20 |
)% |
Self-initiated |
|
|
3,993 |
|
|
|
2,988 |
|
|
|
1,005 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses |
|
$ |
4,329 |
|
|
$ |
3,407 |
|
|
$ |
922 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses represent proprietary research expenses and costs related to
contract research revenue, which include salaries, payments to contract manufacturers and contract
research organizations, contractor and consultant fees, stock-based compensation expense and other
support costs including facilities, depreciation and travel. The decrease in collaborative program
expenses for the three months ended March 31, 2008 was due primarily to the transition from
contract research agreements to a greater focus on the development of our lead candidate ARD-3100.
Research and development expense for self-initiated projects increased during the three months
ending March 31, 2008 over the comparable period in the prior year as a result of the transition to
focus resources on advancing our current product candidates. The increase in research and
development costs during the three months ending March 31, 2008 consisted primarily of supply
manufacturing, clinical trial activities and a license fee payment to Tekmira Pharmaceuticals
Corporation. Stock-based employee compensation expense charged to research and development for the
three months ended March 31, 2008 and 2007 was $174,000 and $94,000, respectively. We expect that
our research and development expenses will increase over the next few quarters as we continue the
development of our lead candidates, ARD-3100 and ARD-3150.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
March 31, |
|
|
|
|
2008 |
|
2007 |
|
Decrease |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
$ |
1,549 |
|
|
$ |
1,987 |
|
|
$ |
(438 |
) |
|
|
(22 |
)% |
General and administrative expenses are comprised of salaries, legal fees including those
associated with the establishment and protection of our patents, insurance, marketing research,
contractor and consultant fees, stock-based compensation expense and other support costs including
facilities, depreciation and travel costs. General and administrative expenses for the three months
ended March 31, 2008 decreased over the comparable period in 2007 primarily as a result of the
reduction in building rent, stemming from the subleasing of a portion of our office space to Mendel
Biotechnology, Inc. (Mendel) in July 2007, a reduction in headcount, and lower stock-based
compensation expense resulting from a valuation change triggered when certain employees were
converted to consultants. Stock-based employee compensation expense recorded in general and
administrative expenses for the three months ended March 31, 2008 and 2007 was a credit of $43,000
and a charge of $160,000, respectively. We expect that our general and administrative expenses will
remain relatively constant or may decrease slightly over the next few quarters.
24
Restructuring and lease exit activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
March 31, |
|
|
|
|
2008 |
|
2007 |
|
Decrease |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and lease exit activities expense |
|
$ |
22 |
|
|
$ |
98 |
|
|
$ |
(76 |
) |
|
|
(78 |
)% |
Restructuring and lease exit activities expense for the three month period ended March 31,
2008 represented the accretion of interest associated with the exit obligation recorded upon the
subleasing of the office space to Mendel. The restructuring and lease exit activities expense
incurred for the comparable period in 2007 consisted of severance-related expenses relating to our
2006 restructuring efforts.
Interest income, interest expense and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Increase (decrease) |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, interest expense and other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
361 |
|
|
$ |
637 |
|
|
$ |
(276 |
) |
|
|
43 |
% |
Interest expense |
|
|
(98 |
) |
|
|
(96 |
) |
|
|
2 |
|
|
|
2 |
% |
Other expense, net |
|
|
(1 |
) |
|
|
(31 |
) |
|
|
(30 |
) |
|
|
(97 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, interest expense and other expense |
|
$ |
262 |
|
|
$ |
510 |
|
|
$ |
(248 |
) |
|
|
(49 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income for the three months ended March 31, 2008 decreased over the comparable period
in 2007 due to a lower average invested balance. Interest expense primarily reflects the interest
expense on the $7.5 million note payable with an interest rate of 5%, issued to Novo Nordisk in
July 2006. The decrease in other expenses primarily was the result of higher losses in 2007
relating to disposition of assets and realized losses from exchange rate transactions.
Liquidity and Capital Resources
As of March 31, 2008, we had cash, cash equivalents and short-term investments of $34.3
million and total working capital of $30.4 million. For the three months ended March 31, 2008, our
operating activities used net cash of $5.4 million and reflect our net loss of $5.6 million, offset
by non-cash charges including stock-based compensation expense and depreciation and amortization
expense. During the first quarter of 2008, cash used for payments of obligations relating largely
to manufacturing research and development contracts with Enzon Pharmaceuticals Inc. was offset by
collections from our collaborative contract with Lung Rx and from other contracts. For the three
months ended March 31, 2007, our operating activities used net cash of $4.1 million and reflect our
net loss of $4.6 million, offset by non-cash charges including stock-based compensation expense and
depreciation and amortization expense. During the first quarter of 2007, we used cash to pay
outstanding invoices, severance-related expenses, legal expenses related to our public offering and
for clinical trial expenses related to our ARD-3100 program. Collections from Defence Research and
Development Canada relating to our partnered program for ARD-1100 and expenses relating to
insurance and program costs paid in advance during a prior period partially offset the cash usage
during the quarter.
For
the three month period ended March 31, 2008, net cash provided by investing activities was
$6.2 million which was the result of proceeds from sales and maturities of our available-for-sale
investments offset in part by capital expenditures of $0.8 million. For the comparable period
ended March 31, 2007, net cash used in investing activities was $2.8 million. We used $0.3 million
for purchases of equipment and $3.0 million for the purchase of available-for-sale investments,
offset by $0.5 million in proceeds from sales and maturities of available-for-sale investments.
25
Net cash provided by financing activities for the three month period ending March 31, 2008 was
$5,000 and consisted of employee exercises of stock options. Net cash provided by financing
activities for the comparable period in 2007 was $33.2 million and consisted primarily of net
proceeds from our public offering concluded in January 30, 2007 and $55,000 in purchases under our
employee stock purchase plan.
As of March 31, 2008, we had an accumulated deficit of $317.7 million, working capital of
$30.4 million and shareholders equity of $24.9 million. We believe that cash, cash equivalents
and short-term investments on hand at March 31, 2008 will be sufficient to enable us meet our
obligations through at least the first quarter of 2009.
Off-Balance Sheet Financings and Liabilities
Other than contractual obligations incurred in the normal course of business, we do not have
any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or
contingent interests in transferred assets or any obligation arising out of a material variable
interest in an unconsolidated entity. We do not have any majority-owned subsidiaries.
Contractual Obligations
Our contractual obligations and future minimum lease payments that are non-cancelable at March
31, 2008 are disclosed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 and |
|
|
|
Total |
|
|
2008 (1) |
|
|
2009-2010 |
|
|
2011-2012 |
|
|
later |
|
|
|
(In thousands) |
|
Operating lease obligations |
|
$ |
18,247 |
|
|
$ |
1,783 |
|
|
$ |
4,532 |
|
|
$ |
4,060 |
|
|
$ |
7,872 |
|
Promissory note (2) |
|
|
10,543 |
|
|
|
|
|
|
|
|
|
|
|
3,514 |
|
|
|
7,029 |
|
Unconditional capital purchase obligations |
|
|
804 |
|
|
|
804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional purchase obligations |
|
|
4,482 |
|
|
|
4,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments |
|
|
34,076 |
|
|
|
7,069 |
|
|
|
4,532 |
|
|
|
7,574 |
|
|
|
14,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less-sublease payments from Mendel (3) |
|
|
(4,315 |
) |
|
|
(657 |
) |
|
|
(1,828 |
) |
|
|
(1,830 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments, net (3) |
|
$ |
29,761 |
|
|
$ |
6,412 |
|
|
$ |
2,704 |
|
|
$ |
5,744 |
|
|
$ |
14,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For nine months ending December 31, 2008 |
|
(2) |
|
Represents repayments of principal and interest on the Novo Nordisk promissory note. The Novo Nordisk promissory note contains a
number of covenants that include restrictions in the event of changes to corporate structure, change in control and certain asset
transactions. |
|
(3) |
|
Included to demonstrate the effect of the sublease with Mendel entered on July 18, 2007. Mendel has the option to terminate the
sublease early on September 1, 2012 for a termination fee of $225,000. In the event that the sublease is not terminated early in
2012, $4.0 million in additional payments will be received through August 2016. |
Recently Issued Accounting Pronouncements
In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
No. FAS 157-2 Effective Date of FASB Statement No. 157 (FSP FAS 157-2), which defers the
effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a recurring basis (at
least annually), for fiscal years beginning after November 15, 2008 and interim periods within
those fiscal years for items within the scope of FSP FAS 157-2. We do not expect that the adoption
of FSP FAS 157-2 will have a material impact on our financial position and results of operations.
26
In November 2007, the EITF issued EITF Issue No. 07-1, Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property (EITF
07-1). Companies may enter into arrangements with other companies to jointly develop,
manufacture, distribute, and market a product. Often the activities associated with these
arrangements are conducted by the collaborators without the creation of a separate legal entity
(that is, the arrangement is operated as a virtual joint venture). The arrangements generally
provide that the collaborators will share, based on contractually defined calculations, the profits
or losses from the associated activities. Periodically, the collaborators share financial
information related to product revenues generated (if any) and costs incurred that may trigger a
sharing payment for the combined profits or losses. The consensus requires collaborators in such an
arrangement to present the result of activities for which they act as the principal on a gross
basis and report any payments received from (made to) other collaborators based on other applicable
GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting
literature or a reasonable, rational, and consistently applied accounting policy election. EITF
07-1 is effective for collaborative arrangements in place at the beginning of the annual period
beginning after December 15, 2008. We do not expect that the adoption of EITF 07-1 will have a
material impact on our financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)),
which replaces FAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in
a business combination recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase; and determines
what information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. FAS 141(R) is to be applied prospectively to
business combinations for which the acquisition date is on or after an entitys fiscal year that
begins after December 15, 2008. We will assess the impact of SFAS 141(R) if and when a future
acquisition occurs.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes new
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated financial statements and
separate from the parents equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income statement. SFAS 160
clarifies that changes in a parents ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains a controlling financial interest. In
addition, this statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its noncontrolling interest.
SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on
or after December 15, 2008. Earlier adoption is prohibited. We do not believe that the adoption
of SFAS 160 will have an effect on our financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an Amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires
companies to provide qualitative disclosures about the objectives and strategies for using
derivatives, quantitative data about the fair value of and gains and losses on derivative
contracts, and details of credit-risk-related contingent features in their hedged positions. The
statement also requires companies to disclose more information about the location and amounts of
derivative instruments in financial statements; how derivatives and related hedges are accounted
for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities; and how the
hedges affect a companys financial position, financial performance and cash flows. SFAS 161 is
effective for years beginning after November 15, 2008. We are currently evaluating the impact, if
any, the adoption of SFAS 161 will have on our financial statements.
27
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
In the normal course of business, our financial position is routinely subject to a variety of
risks, including market risk associated with interest rate movement. We regularly assess these
risks and have established policies and business practices to protect against these and other
exposures. As a result, we do not anticipate material potential losses in these areas.
As of March 31, 2008, we had cash, cash equivalents and short-term investments of $34.3
million. Our short-term investments will likely decline by an immaterial amount if market interest
rates increase, and therefore, we believe our exposure to interest rate changes is immaterial.
Declines of interest rates over time will, however, reduce our interest income from short-term
investments.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, our chief
executive officer and chief financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as
of the end of the period covered by this report to ensure that information that we are required to
disclose in reports that management files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms.
Our disclosure controls and procedures are designed to provide reasonable assurance of
achieving their objectives, and our chief executive officer and chief financial officer have
concluded that these controls and procedures are effective at the reasonable assurance level. We
believe that a control system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the control system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within a company
have been detected.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during
our most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1A. RISK FACTORS
In addition to the other information contained in this Form 10-Q, and risk factors set forth
in our most recent SEC filings, the following risk factors should be considered carefully in
evaluating our business. Our business, financial condition, or results of operations could be
materially adversely affected by any of these risks. Additional risks not presently known to us or
that we currently deem immaterial may also impair our business and operations.
The risk factors included herein include any material changes to and supersede the risk
factors associated with our business previously disclosed in Item 1A to Part I of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2007. We have marked with an asterisk (*) those
risk factors that reflect substantive changes from the risk factors included in our Annual Report
Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31,
2007.
Risks Related to Our Business
We are an early-stage company.
28
You must evaluate us in light of the uncertainties and complexities present in an early-stage
company. All of our potential products are in an early stage of research or development. Our
potential drug delivery products require extensive research, development and pre-clinical and
clinical testing. Our potential products also may involve lengthy regulatory reviews before they
can be sold. Because none of our product candidates has yet received approval by the FDA, we
cannot assure you that our research and development efforts will be successful, any of our
potential products will be proven safe and effective or regulatory clearance or approval to sell
any of our potential products will be obtained. We cannot assure you that any of our potential
products can be manufactured in commercial quantities or at an acceptable cost or marketed
successfully. We may abandon the development of some or all of our product candidates at any time
and without prior notice. We must incur substantial up-front expenses to develop and commercialize
products and failure to achieve commercial feasibility, demonstrate safety, achieve clinical
efficacy, obtain regulatory approval or successfully manufacture and market products will
negatively impact our business.
We changed our product development strategy, and if we do not successfully implement this
strategy our business and reputation will be damaged.
Since our inception in 1991, we have focused on developing drug delivery technologies to be
partnered with other companies. In May 2006, we began transitioning our business focus from the
development of delivery technologies to the application of our pulmonary drug delivery
technologies and expertise to the development of novel drug products to treat or prevent
respiratory diseases. As part of this transition we have implemented workforce reductions in an
effort to reduce our expenses and improve our cash flows. We are in the early stages of
implementing various aspects of our strategy, and we may not be successful in implementing our
strategy. Even if we are able to implement the various aspects of our strategy, it may not be
successful.
We will need additional capital, and we may not be able to obtain it.
Our operations to date have consumed substantial amounts of cash and have generated no
product revenues. While our refocused development strategy will reduce capital expenditures, we
expect negative operating cash flows to continue for at least the foreseeable future. Even though
we do not plan to engage in drug discovery, we will nevertheless need to commit substantial funds
to develop our product candidates and we may not be able to obtain sufficient funds on acceptable
terms or at all. Our future capital requirements will depend on many factors, including:
|
|
|
our progress in the application of our delivery and formulation technologies, which may
require further refinement of these
technologies; |
|
|
|
|
the number of product development programs we pursue and the pace of each program; |
|
|
|
|
our progress with formulation development; |
|
|
|
|
the scope, rate of progress, results and costs of preclinical testing and clinical trials; |
|
|
|
|
the time and costs associated with seeking regulatory approvals; |
|
|
|
|
our ability to outsource the manufacture of our product candidates and the costs of doing
so; |
|
|
|
|
the time and costs associated with establishing in-house resources to market and sell
certain of our products; |
|
|
|
|
our ability to establish and maintain collaborative arrangements with others and the terms
of those arrangements; |
|
|
|
|
the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims, and |
|
|
|
|
our need to acquire licenses, or other rights for our product candidates. |
Since inception, we have financed our operations primarily through private placements and
public offerings of our capital stock, proceeds from equipment lease financings, contract research
funding and interest earned on investments. We believe that our cash, cash equivalents and short
term investments at March 31, 2008 will be sufficient to fund operations at least through the end
of the first quarter of 2009. We will need to obtain substantial additional funds before we would
be able to bring any of our product
29
candidates to market. Our estimates of future capital use are uncertain, and changing
circumstances, including those related to implementation of our new development strategy or
further changes to our development strategy, could cause us to consume capital significantly
faster than currently expected, and our expected sources of funding may not be sufficient. If
adequate funds are not available, we will be required to delay, reduce the scope of, or eliminate
one or more of our product development programs and reduce personnel-related costs, or to obtain
funds through arrangements with collaborators or other sources that may require us to relinquish
rights to certain of our technologies or products that we would not otherwise relinquish. If we
are able to obtain funds through the issuance of debt securities or borrowing, the terms may
restrict our operations. If we are able to obtain funds through the issuance of equity securities,
your interest will be diluted and our stock price may drop as a result.
We have a history of losses, we expect to incur losses for at least the foreseeable future, and we
may never attain or maintain profitability.
We have never been profitable and have incurred significant losses in each year since our
inception. As of March 31, 2008, we have an accumulated deficit of $317.7 million. We have not had
any product sales and do not anticipate receiving any revenues from product sales for at least the
next few years, if ever. While our recent shift in development strategy may result in reduced
capital expenditures, we expect to continue to incur substantial losses over at least the next
several years as we:
|
|
|
expand drug product development efforts; |
|
|
|
|
conduct preclinical testing and clinical trials; |
|
|
|
|
pursue additional applications for our existing delivery technologies; |
|
|
|
|
outsource the commercial-scale production of our products; and |
|
|
|
|
establish a sales and marketing force to commercialize certain of our proprietary
products if these products obtain regulatory approval. |
To achieve and sustain profitability, we must, alone or with others, successfully develop,
obtain regulatory approval for, manufacture, market and sell our products. We expect to incur
substantial expenses in our efforts to develop and commercialize products and we may never
generate sufficient product or contract research revenues to become profitable or to sustain
profitability.
Our dependence on collaborators may delay or terminate certain of our programs, and any such delay
or termination would harm our business prospects and stock price.
Our commercialization strategy for certain of our product candidates depends on our ability
to enter into agreements with collaborators to obtain assistance and funding for the development
and potential commercialization of our product candidates. Collaborations may involve greater
uncertainty for us, as we have less control over certain aspects of our collaborative programs
than we do over our proprietary development and commercialization programs. We may determine that
continuing a collaboration under the terms provided is not in our best interest, and we may
terminate the collaboration. Our existing collaborators could delay or terminate their
agreements, and our products subject to collaborative arrangements may never be successfully
commercialized. For example, Novo Nordisk has control over and responsibility for development and
commercialization of the AERx iDMS program. In January 2008, Novo Nordisk announced that it was
terminating the AERx iDMS program. Identifying new collaborators for the further development and
potential commercialization of the AERx iDMS program may take a significant amount of time and
resources and ultimately may not be successful. If, due to delays or otherwise, we do not receive
development funds or achieve milestones set forth in the agreements governing our collaborations,
if we cannot timely find replacement collaborators, or if any of our collaborators breach or
terminate their collaborative agreements or do not devote sufficient resources or priority to our
programs, our business prospects and our stock price would suffer.
Further, our existing or future collaborators may pursue alternative technologies or develop
alternative products either on their own or in collaboration with others, including our
competitors, and the priorities or focus of our collaborators may shift such that our programs
receive less attention or resources than we would like. Any such actions by our collaborators may
adversely affect our business prospects and ability to earn revenues. In addition, we could have
disputes with our existing or future collaborators regarding, for example, the interpretation of
terms in our agreements. Any such disagreements could lead to delays in the
30
development or commercialization of any potential products or could result in time-consuming
and expensive litigation or arbitration, which may not be resolved in our favor.
Even with respect to certain other programs that we intend to commercialize ourselves, we may
enter into agreements with collaborators to share in the burden of conducting clinical trials,
manufacturing and marketing our product candidates or products. In addition, our ability to apply
our proprietary technologies to develop proprietary drugs will depend on our ability to establish
and maintain licensing arrangements or other collaborative arrangements with the holders of
proprietary rights to such drugs. We may not be able to establish such arrangements on favorable
terms or at all, and our existing or future collaborative arrangements may not be successful.
The results of later stage clinical trials of our product candidates may not be as favorable as
earlier trials and that could result in additional costs and delay or prevent commercialization of
our products.
Although we believe the limited and preliminary data we have regarding our potential products
are encouraging, the results of initial preclinical testing and clinical trials do not necessarily
predict the results that we will get from subsequent or more extensive preclinical testing and
clinical trials. Clinical trials of our product candidates may not demonstrate that they are safe
and effective to the extent necessary to obtain regulatory approvals. Many companies in the
biopharmaceutical industry have suffered significant setbacks in advanced clinical trials, even
after receiving promising results in earlier trials. If we cannot adequately demonstrate through
the clinical trial process that a therapeutic product we are developing is safe and effective,
regulatory approval of that product would be delayed or prevented, which would impair our
reputation, increase our costs and prevent us from earning revenues.
If our clinical trials are delayed because of patient enrollment or other problems, we would incur
additional costs and postpone the potential receipt of revenues.
Before we or our collaborators can file for regulatory approval for the commercial sale of
our potential products, the FDA will require extensive preclinical safety testing and clinical
trials to demonstrate their safety and efficacy. Completing clinical trials in a timely manner
depends on, among other factors, the timely enrollment of patients. Our collaborators and our
ability to recruit patients depends on a number of factors, including the size of the patient
population, the proximity of patients to clinical sites, the eligibility criteria for the study
and the existence of competing clinical trials. Delays in planned patient enrollment in our
current or future clinical trials may result in increased costs, program delays, or both, and the
loss of potential revenues.
We are subject to extensive regulation, including the requirement of approval before any of our
product candidates can be marketed. We may not obtain regulatory approval for our product
candidates on a timely basis, or at all.
We, our collaborators and our products are subject to extensive and rigorous regulation by
the federal government, principally the FDA, and by state and local government agencies. Both
before and after regulatory approval, the development, testing, manufacture, quality control,
labeling, storage, approval, advertising, promotion, sale, distribution and export of our
potential products are subject to regulation. Pharmaceutical products that are marketed abroad are
also subject to regulation by foreign governments. Our products cannot be marketed in the United
States without FDA approval. The process for obtaining FDA approval for drug products is generally
lengthy, expensive and uncertain. To date, we have not sought or received approval from the FDA or
any corresponding foreign authority for any of our product candidates.
Even though we intend to apply for approval of most of our products in the United States
under Section 505(b)(2) of the United States Food, Drug and Cosmetic Act, which applies to
reformulations of approved drugs and that may require smaller and shorter safety and efficacy
testing than that for entirely new drugs, the approval process will still be costly,
time-consuming and uncertain. We, or our collaborators, may not be able to obtain necessary
regulatory approvals on a timely basis, if at all, for any of our potential products. Even if
granted, regulatory approvals may include significant limitations on the uses for which products
may be marketed. Failure to comply with applicable regulatory requirements can, among other
things, result in warning letters, imposition of civil penalties or other monetary payments, delay
in approving or refusal to approve a product candidate, suspension or withdrawal of regulatory
approval, product recall or seizure, operating restrictions, interruption of clinical trials or
manufacturing, injunctions and criminal prosecution.
Regulatory authorities may not approve our product candidates even if the product candidates meet
safety and efficacy endpoints in clinical trials or the approvals may be too limited for us to
earn sufficient revenues.
31
The FDA and other foreign regulatory agencies can delay approval of, or refuse to, approve
our product candidates for a variety of reasons, including failure to meet safety and efficacy
endpoints in our clinical trials. Our product candidates may not be approved even if they achieve
their endpoints in clinical trials. Regulatory agencies, including the FDA, may disagree with our
trial design and our interpretations of data from preclinical studies and clinical trials. Even if
a product candidate is approved, it may be approved for fewer or more limited indications than
requested or the approval may be subject to the performance of significant post-marketing studies.
In addition, regulatory agencies may not approve the labeling claims that are necessary or
desirable for the successful commercialization of our product candidates. Any limitation,
condition or denial of approval would have an adverse affect on our business, reputation and
results of operations.
Even if we are granted initial FDA approval for any of our product candidates, we may not be able
to maintain such approval, which would reduce our revenues.
Even if we are granted initial regulatory approval for a product candidate, the FDA and
similar foreign regulatory agencies can limit or withdraw product approvals for a variety of
reasons, including failure to comply with regulatory requirements, changes in regulatory
requirements, problems with manufacturing facilities or processes or the occurrence of unforeseen
problems, such as the discovery of previously undiscovered side effects. If we are able to obtain
any product approvals, they may be limited or withdrawn or we may be unable to remain in
compliance with regulatory requirements. Both before and after approval we, our collaborators and
our products are subject to a number of additional requirements. For example, certain changes to
the approved product, such as adding new indications, certain manufacturing changes and additional
labeling claims are subject to additional FDA review and approval. Advertising and other
promotional material must comply with FDA requirements and established requirements applicable to
drug samples. We, our collaborators and our manufacturers will be subject to continuing review and
periodic inspections by the FDA and other authorities, where applicable, and must comply with
ongoing requirements, including the FDAs Good Manufacturing Practices, or GMP, requirements. Once
the FDA approves a product, a manufacturer must provide certain updated safety and efficacy
information, submit copies of promotional materials to the FDA and make certain other required
reports. Product approvals may be withdrawn if regulatory requirements are not complied with or if
problems concerning safety or efficacy of the product occur following approval. Any limitation or
withdrawal of approval of any of our products could delay or prevent sales of our products, which
would adversely affect our revenues. Further continuing regulatory requirements involve expensive
ongoing monitoring and testing requirements.
Since one of our key proprietary programs, the ARD-3100 liposomal ciprofloxacin program, relies on
the FDAs granting of orphan drug designation for potential market exclusivity, the product may
not be able to obtain market exclusivity and could be barred from the market for up to seven
years.
The FDA has granted orphan drug designation for our proprietary liposomal ciprofloxacin for
the management of cystic fibrosis. Orphan drug designation is intended to encourage research and
development of new therapies for diseases that affect fewer than 200,000 patients in the United
States. The designation provides the opportunity to obtain market exclusivity for seven years from
the date of the FDAs approval of a new drug application, or NDA. However, the market exclusivity
is granted only to the first chemical entity to be approved by the FDA for a given indication.
Therefore, if another inhaled ciprofloxacin product were to be approved by the FDA for a cystic
fibrosis indication before our product, then we may be blocked from launching our product in the
United States for seven years, unless we are able to demonstrate to the FDA clinical superiority
of our product on the basis of safety or efficacy. We may seek to develop additional products that
incorporate drugs that have received orphan drug designations for specific indications. In each
case, if our product is not the first to be approved by the FDA for a given indication, we will be
unable to access the target market in the United States, which would adversely affect our ability
to earn revenues.
We have limited manufacturing capacity and will have to depend on contract manufacturers and
collaborators; if they do not perform as expected, our revenues and customer relations will
suffer.
We have limited capacity to manufacture our requirements for the development and
commercialization of our product candidates. We intend to use contract manufacturers to produce
key components, assemblies and subassemblies in the clinical and commercial manufacturing of our
products. We may not be able to enter into or maintain satisfactory contract manufacturing
arrangements. Specifically, our agreement with an affiliate of Novo Nordisk to supply devices and
dosage forms to us for use in the development of our products that incorporate our proprietary
AERx technology expired on January 27, 2008. We may not be able to find a replacement contract
manufacturer at satisfactory terms.
32
We may decide to invest in additional clinical manufacturing facilities in order to
internally produce critical components of our product candidates and to handle critical aspects of
the production process, such as assembly of the disposable unit-dose packets and filling of the
unit-dose packets. If we decide to produce components of any of our product candidates in-house,
rather than use contract manufacturers, it will be costly and we may not be able to do so in a
timely or cost-effective manner or in compliance with regulatory requirements.
With respect to some of our product development programs targeted at large markets, either
our collaborators or we will have to invest significant amounts to attempt to provide for the
high-volume manufacturing required to take advantage of these product markets, and much of this
spending may occur before a product is approved by the FDA for commercialization. Any such effort
will entail many significant risks. For example, the design requirements of our products may make
it too costly or otherwise infeasible for us to develop them at a commercial scale, or
manufacturing and quality control problems may arise as we attempt to expand production. Failure
to address these issues could delay or prevent late-stage clinical testing and commercialization
of any products that may receive FDA approval.
Further, we, our contract manufacturers and our collaborators are required to comply with the
FDAs GMP requirements that relate to product testing, quality assurance, manufacturing and
maintaining records and documentation. We, our contract manufacturers or our collaborators may not
be able to comply with the applicable GMP and other FDA regulatory requirements for manufacturing,
which could result in an enforcement or other action, prevent commercialization of our product
candidates and impair our reputation and results of operations.
We rely on a small number of vendors and contract manufacturers to supply us with specialized
equipment, tools and components; if they do not perform as we need them to, we will not be able to
develop or commercialize products.
We rely on a small number of vendors and contract manufacturers to supply us and our
collaborators with specialized equipment, tools and components for use in development and
manufacturing processes. These vendors may not continue to supply such specialized equipment,
tools and components, and we may not be able to find alternative sources for such specialized
equipment and tools. Any inability to acquire or any delay in our ability to acquire necessary
equipment, tools and components would increase our expenses and could delay or prevent our
development of products.
In order to market our proprietary products, we are likely to establish our own sales, marketing
and distribution capabilities. We have no experience in these areas, and if we have problems
establishing these capabilities, the commercialization of our products would be impaired.
We intend to establish our own sales, marketing and distribution capabilities to market
products to concentrated, easily addressable prescriber markets. We have no experience in these
areas, and developing these capabilities will require significant expenditures on personnel and
infrastructure. While we intend to market products that are aimed at a small patient population,
we may not be able to create an effective sales force around even a niche market. In addition,
some of our product development programs will require a large sales force to call on, educate and
support physicians and patients. While we intend to enter into collaborations with one or more
pharmaceutical companies to sell, market and distribute such products, we may not be able to enter
into any such arrangement on acceptable terms, if at all. Any collaborations we do enter into may
not be effective in generating meaningful product royalties or other revenues for us.
If any products that we or our collaborators may develop do not attain adequate market acceptance
by healthcare professionals and patients, our business prospects and results of operations will
suffer.
Even if we or our collaborators successfully develop one or more products, such products may
not be commercially acceptable to healthcare professionals and patients, who will have to choose
our products over alternative products for the same disease indications, and many of these
alternative products will be more established than ours. For our products to be commercially
viable, we will need to demonstrate to healthcare professionals and patients that our products
afford benefits to the patient that are cost-effective as compared to the benefits of alternative
therapies. Our ability to demonstrate this depends on a variety of factors, including:
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the demonstration of efficacy and safety in clinical trials; |
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the existence, prevalence and severity of any side effects; |
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the potential or perceived advantages or disadvantages compared to alternative treatments; |
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the timing of market entry relative to competitive treatments; |
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the relative cost, convenience, product dependability and ease of administration; |
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the strength of marketing and distribution support; |
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the sufficiency of coverage and reimbursement of our product candidates by governmental and
other third-party payors; and |
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the product labeling or product insert required by the FDA or regulatory authorities in
other countries. |
Our product revenues will be adversely affected if, due to these or other factors, the
products we or our collaborators are able to commercialize do not gain significant market acceptance.
We depend upon our proprietary technologies, and we may not be able to protect our potential
competitive proprietary advantage.
Our business and competitive position is dependent upon our and our collaborators ability to
protect our proprietary technologies related to various aspects of pulmonary drug delivery and
drug formulation. While our intellectual property rights may not provide a significant commercial
advantage for us, our patents and know-how are intended to provide protection for important
aspects of our technology, including methods for aerosol generation, devices used to generate
aerosols, breath control, compliance monitoring, certain pharmaceutical formulations, design of
dosage forms and their manufacturing and testing methods. In addition, we are maintaining as
non-patented trade secrets some of the key elements of our manufacturing technologies, for
example, those associated with production of disposable unit-dose packets for our AERx delivery
system.
Our ability to compete effectively will also depend to a significant extent on our and our
collaborators ability to obtain and enforce patents and maintain trade secret protection over our
proprietary technologies. The coverage claimed in a patent application typically is significantly
reduced before a patent is issued, either in the United States or abroad. Consequently, any of our
pending or future patent applications may not result in the issuance of patents and any patents
issued may be subjected to further proceedings limiting their scope and may in any event not
contain claims broad enough to provide meaningful protection. Any patents that are issued to us or
our collaborators may not provide significant proprietary protection or competitive advantage, and
may be circumvented or invalidated. In addition, unpatented proprietary rights, including trade
secrets and know-how, can be difficult to protect and may lose their value if they are
independently developed by a third party or if their secrecy is lost. Further, because development
and commercialization of pharmaceutical products can be subject to substantial delays, patents may
expire early and provide only a short period of protection, if any, following commercialization of
products.
In July 2006, we assigned 23 issued United States patents to Novo Nordisk along with
corresponding non-United States counterparts and certain related pending applications. In August
2006, Novo Nordisk brought suit against Pfizer, Inc. claiming infringement of certain claims in
one of the assigned United States patents. In December 2006, Novo Nordisks motion for a
preliminary injunction in this case was denied. Subsequently, Novo Nordisk and Pfizer settled
this litigation out of court. This and other patents assigned to Novo Nordisk may become the
subject of future litigation. The patents assigned to Novo Nordisk encompass, in some instances,
technology beyond inhaled insulin and, if all or any of these patents are invalidated, it could
harm our ability to obtain market exclusivity with respect to other product candidates.
We may infringe on the intellectual property rights of others, and any litigation could force us
to stop developing or selling potential products and could be costly, divert management attention
and harm our business.
We must be able to develop products without infringing the proprietary rights of other
parties. Because the markets in which we operate involve established competitors with significant
patent portfolios, including patents relating to compositions of matter, methods of use and
methods of drug delivery, it could be difficult for us to use our technologies or develop products
without infringing the proprietary rights of others. We may not be able to design around the
patented technologies or inventions of others and
34
we may not be able to obtain licenses to use patented technologies on acceptable terms, or at
all. If we cannot operate without infringing on the proprietary rights of others, we will not earn
product revenues.
If we are required to defend ourselves in a lawsuit, we could incur substantial costs and the
lawsuit could divert managements attention, regardless of the lawsuits merit or outcome. These
legal actions could seek damages and seek to enjoin testing, manufacturing and marketing of the
accused product or process. In addition to potential liability for significant damages, we could
be required to obtain a license to continue to manufacture or market the accused product or
process and any license required under any such patent may not be made available to us on
acceptable terms, if at all.
Periodically, we review publicly available information regarding the development efforts of
others in order to determine whether these efforts may violate our proprietary rights. We may
determine that litigation is necessary to enforce our proprietary rights against others. Such
litigation could result in substantial expense, regardless of its outcome, and may not be resolved
in our favor.
Furthermore, patents already issued to us or our pending patent applications may become
subject to dispute, and any disputes could be resolved against us. For example, Eli Lilly and
Company brought an action against us seeking to have one or more employees of Eli Lilly named as
co-inventors on one of our patents. This case was determined in our favor in 2004, but we may face
other similar claims in the future and we may lose or settle cases at significant loss to us. In
addition, because patent applications in the United States are currently maintained in secrecy for
a period of time prior to issuance, patent applications in certain other countries generally are
not published until more than 18 months after they are first filed, and publication of discoveries
in scientific or patent literature often lags behind actual discoveries, we cannot be certain that
we were the first creator of inventions covered by our pending patent applications or that we were
the first to file patent applications on such inventions.
We are in a highly competitive market, and our competitors have developed or may develop
alternative therapies for our target indications, which would limit the revenue potential of any
product we may develop.
We are in competition with pharmaceutical, biotechnology and drug delivery companies,
hospitals, research organizations, individual scientists and nonprofit organizations engaged in
the development of drugs and therapies for the disease indications we are targeting. Our
competitors may succeed before we can, and many already have succeeded, in developing competing
technologies for the same disease indications, obtaining FDA approval for products or gaining
acceptance for the same markets that we are targeting. If we are not first to market, it may be
more difficult for us and our collaborators to enter markets as second or subsequent competitors
and become commercially successful. We are aware of a number of companies that are developing or
have developed therapies to address indications we are targeting, including major pharmaceutical
companies such as Bayer, Eli Lilly, Genentech, Gilead Sciences, Merck & Co., Novartis and Pfizer.
Certain of these companies are addressing these target markets with pulmonary products that are
similar to ours. These companies and many other potential competitors have greater research and
development, manufacturing, marketing, sales, distribution, financial and managerial resources and
experience than we have and many of these companies may have products and product candidates that
are on the market or in a more advanced stage of development than our product candidates. Our
ability to earn product revenues and our market share would be substantially harmed if any
existing or potential competitors brought a product to market before we or our collaborators were
able to, or if a competitor introduced at any time a product superior to or more cost-effective
than ours.
If we do not continue to attract and retain key employees, our product development efforts will be
delayed and impaired.
We depend on a small number of key management and technical personnel. Our success also
depends on our ability to attract and retain additional highly qualified marketing, management,
manufacturing, engineering and development personnel. There is a shortage of skilled personnel in
our industry, we face intense competition in our recruiting activities, and we may not be able to
attract or retain qualified personnel. Losing any of our key employees, particularly our President
and Chief Executive Officer, Dr. Igor Gonda, who plays a central role in our strategy shift to a
specialty pharmaceutical company, could impair our product development efforts and otherwise harm
our business. Any of our employees may terminate their employment with us at will.
Acquisition of complementary businesses or technologies could result in operating difficulties and
harm our results of operations.
While we have not identified any definitive targets, we may acquire products, businesses or
technologies that we believe are complementary to our business strategy. The process of
investigating, acquiring and integrating any business or technology into our
35
business and operations is risky and we may not be able to accurately predict or derive the
benefits of any such acquisition. The process of acquiring and integrating any business or
technology may create operating difficulties and unexpected expenditures, such as:
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diversion of our management from the development and commercialization of our pipeline
product candidates; |
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difficulty in assimilating and efficiently using the acquired assets or personnel; and |
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inability to retain key personnel. |
In addition to the factors set forth above, we may encounter other unforeseen problems with
acquisitions that we may not be able to overcome. Any future acquisitions may require us to issue shares of our stock or other securities that dilute the ownership interests of our other
shareholders, expend cash, incur debt, assume liabilities, including contingent or unknown
liabilities, or incur additional expenses related to write-offs or amortization of intangible
assets, any of which could materially adversely affect our operating results.
If we market our products in other countries, we will be subject to different laws and we may not
be able to adapt to those laws, which could increase our costs while reducing our revenues.
If we market any approved products in foreign countries, we will be subject to different
laws, particularly with respect to intellectual property rights and regulatory approval. To
maintain a proprietary market position in foreign countries, we may seek to protect some of our
proprietary inventions through foreign counterpart patent applications. Statutory differences in
patentable subject matter may limit the protection we can obtain on some of our inventions outside
of the United States. The diversity of patent laws may make our expenses associated with the
development and maintenance of intellectual property in foreign jurisdictions more expensive than
we anticipate. We probably will not obtain the same patent protection in every market in which we
may otherwise be able to potentially generate revenues. In addition, in order to market our
products in foreign jurisdictions, we and our collaborators must obtain required regulatory
approvals from foreign regulatory agencies and comply with extensive regulations regarding safety
and quality. We may not be able to obtain regulatory approvals in such jurisdictions and we may
have to incur significant costs in obtaining or maintaining any foreign regulatory approvals. If
approvals to market our products are delayed, if we fail to receive these approvals, or if we lose
previously received approvals, our business would be impaired as we could not earn revenues from
sales in those countries.
We may be exposed to product liability claims, which would hurt our reputation, market position
and operating results.
We face an inherent risk of product liability as a result of the clinical testing of our
product candidates in humans and will face an even greater risk upon commercialization of any
products. These claims may be made directly by consumers or by pharmaceutical companies or others
selling such products. We may be held liable if any product we develop causes injury or is found
otherwise unsuitable during product testing, manufacturing or sale. Regardless of merit or
eventual outcome, liability claims would likely result in negative publicity, decreased demand for
any products that we may develop, injury to our reputation and suspension or withdrawal of
clinical trials. Any such claim will be very costly to defend and also may result in substantial
monetary awards to clinical trial participants or customers, loss of revenues and the inability to
commercialize products that we develop. Although we currently have product liability insurance, we
may not be able to maintain such insurance or obtain additional insurance on acceptable terms, in
amounts sufficient to protect our business, or at all. A successful claim brought against us in
excess of our insurance coverage would have a material adverse effect on our results of
operations.
If we cannot arrange for adequate third-party reimbursement for our products, our revenues will
suffer.
In both domestic and foreign markets, sales of our potential products will depend in
substantial part on the availability of adequate reimbursement from third-party payors such as
government health administration authorities, private health insurers and other organizations.
Third-party payors often challenge the price and cost-effectiveness of medical products and
services. Significant uncertainty exists as to the adequate reimbursement status of newly approved
health care products. Any products we are able to successfully develop may not be reimbursable by
third-party payors. In addition, our products may not be considered cost-effective and adequate
third-party reimbursement may not be available to enable us to maintain price levels sufficient to
realize a profit.
36
Legislation and regulations affecting the pricing of pharmaceuticals may change before our
products are approved for marketing and any such changes could further limit reimbursement. If any
products we develop do not receive adequate reimbursement, our revenues will be severely limited.
Our use of hazardous materials could subject us to liabilities, fines and sanctions.
Our laboratory and clinical testing sometimes involve use of hazardous and toxic materials.
We are subject to federal, state and local laws and regulations governing how we use, manufacture,
handle, store and dispose of these materials. Although we believe that our safety procedures for
handling and disposing of such materials comply in all material respects with all federal, state
and local regulations and standards, there is always the risk of accidental contamination or
injury from these materials. In the event of an accident, we could be held liable for any damages
that result and such liability could exceed our financial resources. Compliance with environmental
and other laws may be expensive and current or future regulations may impair our development or
commercialization efforts.
If we are unable to effectively implement or maintain a system of internal control over financial
reporting, we may not be able to
accurately or timely report our financial results and our stock price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of
our internal control over financial reporting as of the end of each fiscal year, and to include a
management report assessing the effectiveness of our internal control over financial reporting in
our annual report on Form 10-K for that fiscal year. Section 404 also currently requires our
independent registered public accounting firm, beginning with our fiscal year ending December 31,
2008, to attest to, and report on our internal control over financial reporting. Our ability to
comply with the annual internal control report requirements will depend on the effectiveness of
our financial reporting and data systems and controls across our company. We expect these systems
and controls to involve significant expenditures and to become increasingly complex as our
business grows and to the extent that we make and integrate acquisitions. To effectively manage
this complexity, we will need to continue to improve our operational, financial and management
controls and our reporting systems and procedures. Any failure to implement required new or
improved controls, or difficulties encountered in the implementation or operation of these
controls, could harm our operating results and cause us to fail to meet our financial reporting
obligations, which could adversely affect our business and reduce our stock price.
Risks Related to Our Common Stock
Our stock price is likely to remain volatile.
The market prices for securities of many companies in the drug delivery and pharmaceutical
industries, including ours, have historically been highly volatile, and the market from time to
time has experienced significant price and volume fluctuations unrelated to the operating
performance of particular companies. Prices for our common stock may be influenced by many
factors, including:
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investor perception of us; |
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research analyst recommendations and our ability to meet or exceed quarterly performance
expectations of analysts or investors; |
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failure to maintain existing or establish new collaborative relationships; |
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fluctuations in our operating results; |
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market conditions relating to our segment of the industry or the securities markets in
general; |
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announcements of technological innovations or new commercial products by us or our
competitors; |
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publicity regarding actual or potential developments relating to products under development
by us or our competitors; |
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developments or disputes concerning patents or proprietary rights; |
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delays in the development or approval of our product candidates; |
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regulatory developments in both the United States and foreign countries; |
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concern of the public or the medical community as to the safety or efficacy of our
products, or products deemed to have similar safety risk factors or other similar
characteristics to our products; |
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period-to-period fluctuations in financial results; |
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future sales or expected sales of substantial amounts of common stock by shareholders; |
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our ability to raise financing; and |
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economic and other external factors. |
In the past, class action securities litigation has often been instituted against companies
promptly following volatility in the market price of their securities. Any such litigation
instigated against us would, regardless of its merit, result in substantial costs and a diversion
of managements attention and resources.
Our common stock was delisted from the Nasdaq Capital Market; this delisting may reduce the
liquidity of our common stock and the price may decline.
On November 10, 2006, our common stock was delisted from the Nasdaq Capital Market due to
non-compliance with Nasdaqs continued listing standards. Our common stock is currently quoted on
the OTC Bulletin Board. This delisting may reduce the liquidity of our common stock, may cause
investors not to trade in our stock and may result in a lower stock price. In addition, investors
may find it more difficult to obtain accurate quotations of the share price of our common stock.
We have implemented certain anti-takeover provisions, which make it less likely that we would be
acquired and that you would receive a premium price for your shares.
Certain provisions of our articles of incorporation and the California Corporations Code
could discourage a party from acquiring, or make it more difficult for a party to acquire, control
of our company without approval of our board of directors. These provisions could also limit the
price that certain investors might be willing to pay in the future for shares of our common stock.
Certain provisions allow our board of directors to authorize the issuance, without shareholder
approval, of preferred stock with rights superior to those of the common stock. We are also
subject to the provisions of Section 1203 of the California Corporations Code, which requires us
to provide a fairness opinion to our shareholders in connection with their consideration of any
proposed interested party reorganization transaction.
We have adopted a shareholder rights plan, commonly known as a poison pill. We have also
adopted an Executive Officer Severance Plan and a Form of Change of Control Agreement, both of
which may provide for the payment of benefits to our officers in connection with an acquisition.
The provisions of our articles of incorporation, our poison pill, our severance plan and our
change of control agreements, and provisions of the California Corporations Code may discourage,
delay or prevent another party from acquiring us or reduce the price that a buyer is willing to
pay for our common stock.
We have never paid dividends on our capital stock, and we do not anticipate paying cash dividends
for at least the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We do not anticipate
paying any cash dividends on our common stock for at least the foreseeable future. We currently
intend to retain all available funds and future earnings, if any, to fund the development and
growth of our business. As a result, capital appreciation, if any, of our common stock will be
your sole source of potential gain for at least the foreseeable future.
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Item 6. EXHIBITS
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Exhibit |
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Number |
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Description |
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31.1
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Certification by the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2
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Certification by the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1
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Certification by the Companys Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
Aradigm, AERx, AERx Essence and AERx Strip are registered trademarks of Aradigm Corporation.
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* |
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Other names and brands may be claimed as the property of others. |
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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.
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ARADIGM CORPORATION
(Registrant)
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/s/ Igor Gonda
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Dr. Igor Gonda |
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President and Chief Executive Officer |
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/s/ Norman Halleen
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Norman Halleen |
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Dated: May 13, 2008 |
Interim Chief Financial Officer |
|
40
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
31.1
|
|
Certification by the Companys Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
31.2
|
|
Certification by the Companys Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
32.1
|
|
Certification by the Companys Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
41