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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
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(Mark One) |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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Commission File Number: 0-28402
Aradigm Corporation
(Exact Name of Registrant as Specified in Its Charter)
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California
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94-3133088 |
(State or Other Jurisdiction of
Incorporation or Organization) |
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(I.R.S. Employer
Identification No.) |
3929 Point Eden Way, Hayward, CA 94545
(Address of Principal Executive Offices)
Registrants telephone number, including area code:
(510) 265-9000
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, no par value
Indicate by check mark whether the registrant is a well-know
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No
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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
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and larger
accelerated filer in
Rule 12b-2 of the
Exchange Act. (check one):
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Large accelerated filero
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Accelerated filero
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Non-accelerated filerþ
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange Act). Yes o No
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The aggregate market value of registrants common stock
held by non-affiliates of the registrant, based upon the closing
price of a share of the registrants common stock on
June 30, 2005 was: $73,309,693
The number of shares of the registrants common stock
outstanding as of February 28, 2006 was: 14,563,454.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Items 10, 11, 12, 13 and 14 of Part III
incorporate information by reference from the Registrants
definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 18, 2006.
TABLE OF CONTENTS
1
This Annual Report on
Form 10-K contains
forward-looking statements, including, without limitation,
statements regarding timing and results of clinical trials, the
timing of regulatory approvals, the establishment of corporate
partnering arrangements, the anticipated commercial introduction
of our products and the timing of our cash requirements. These
forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ
materially from those in such forward-looking statements.
Potential risks and uncertainties include, without limitation,
those mentioned in this Report and, in particular, the factors
described below in Item 1A under the heading Risk
Factors.
PART I
Overview
Aradigm Corporation is a leading developer of innovative drug
delivery systems that enable patients to self-administer liquid
drugs that would otherwise be given by injection. Our hand-held
AERx delivery system is designed for the rapid and reproducible
delivery of a wide range of pharmaceutical drugs and biotech
compounds either to the lungs for respiratory conditions or
through the lung to treat systemic disease. Our pen-sized,
needle-free subcutaneous Intraject delivery system is designed
to comfortably and rapidly deliver drugs to the subcutaneous
layer of the skin, where it can gain access to the bloodstream.
We believe that our patient-friendly AERx and Intraject delivery
systems, which have been shown in clinical studies to achieve
performance equivalent to injection, will be welcome
alternatives to injection-based drug delivery. In addition, both
of our systems may improve therapeutic efficacy in cases where
other existing drug delivery methods, such as pills, transdermal
patches, inhalers or auto injectors, are too slow or imprecise.
According to IMS Health, recognized as a global source for
market intelligence, the worldwide market for biopharmaceuticals
is estimated to grow to $59 billion by 2008 with the
majority of biopharmaceutical therapies requiring parenteral
administration (injection). We believe that many of these
molecules could potentially be delivered using the AERx and
Intraject delivery systems.
Our novel and proprietary technologies are designed to deliver a
wide range of pharmaceuticals. The AERx delivery system combines
a single-use dosage form that delivers liquid medications
through small-particle aerosol generation when combined with a
breath-actuated inhalation device. Combining the delivery
efficiencies of the device and patient guidance through the
proper inhalation technique allows for efficient and
reproducible delivery of the aerosol drug to the deep lung. The
Intraject delivery system is a pen-sized, pre-filled, single-use
system that enables patients and healthcare workers to deliver
precise measured doses of drug to the subcutaneous layer of the
skin without the use of needles. With our established
technologies in late-stage clinical development, we are now
broadening and advancing our portfolio of candidates. Our
pipeline of candidates represents programs in late, mid and
early-stage clinical development. The following table shows the
technology platform, disease indication and stage of development
for each program.
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Platform/Indication |
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Stage of Development |
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AERx/Type 1 and Type 2 Diabetes
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In Phase 3 |
Intraject/Migraine
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Ready for Pivotal Bioequivalence Study |
AERx/HCQ/Asthma
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In Phase 2 |
AERx/Respiratory (Undisclosed)
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In Phase 1 |
AERx/Liposomal Ciprofloxacin (Bioterrorism)
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Preclinical |
Pulmonary Liposomal Ciprofloxacin (Cystic Fibrosis)
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Preclinical |
AERx/Smoking Cessation
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Preclinical |
AERx/Liposomal Treprostinil
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Preclinical |
2
AERx Diabetes Management System
The AERx insulin Diabetes Management System (AERx
iDMS) permits patients with diabetes to non-invasively
self-administer insulin. We believe that when patients are
provided a non-invasive delivery alternative to injection, they
will be more likely to self-administer insulin as often as
needed to keep tight control of their blood-glucose levels. This
product was being developed in collaboration with Novo
Nordisk A/S (Novo Nordisk,) a leader in the
field of diabetes care. In January 2005, we completed the
restructuring of the AERx iDMS program, pursuant to the
Restructuring Agreement entered into with Novo Nordisk and Novo
Nordisk Delivery Technologies Inc. (NNDT), a newly
created wholly owned subsidiary of Novo Nordisk, in September
2004. Under our current agreement with Novo Nordisk, Novo
Nordisk has assumed responsibility for the completion of
development, manufacturing and commercialization of the AERx
insulin product. We will be entitled to royalties on future
sales of the commercialized product.
Patients with diabetes often avoid or limit the amount of
insulin therapy because of needle phobia as well as the pain and
inconvenience of administering insulin by injection. The AERx
iDMS is being designed as a painless and convenient alternative
to insulin injection. This should enable patients with diabetes
to comply more effectively with their insulin therapy, thereby
reducing the risk of long-term complications. We also believe
that the features of the AERx iDMS will allow people with
diabetes to achieve more consistent and precise control over
their blood-glucose levels. A clinical study we conducted in
healthy, fasting volunteers has shown that the way an individual
breathes during drug delivery has a significant effect on the
pharmacokinetic profile of the delivered insulin. The
proprietary breath-control technology incorporated in the AERx
iDMS is expected to eliminate this potential variability as a
factor in the pulmonary delivery of insulin.
Standard injected insulin therapies presently require that doses
of insulin given by injection be adjusted in increments of one
international unit, which is a standard unit of measure for
insulin. We are not aware of any competitive pulmonary delivery
products under development that are being designed to provide
the same one unit dosing adjustability as the AERx iDMS. We
believe that our AERx iDMS can provide a non-invasive method for
delivery of insulin that would be very efficient and easily
reproduced and consistent with the current standards relating to
dose titration with insulin therapy.
Unregulated glucose levels in diabetes patients are associated
with a variety of short and long-term effects, including
blindness, kidney disease, heart disease, amputation resulting
from chronic or extended periods of reduced blood circulation to
body tissue and other circulatory disorders. Patients with Type
1 diabetes do not have the ability to produce their own insulin
and must take insulin from an external source to survive. To
avoid developing the long-term complications of the disease they
must also self-inject insulin regularly throughout the day to
simulate the natural pancreatic production of insulin in
response to meals. Patients with Type 2 diabetes are insulin
resistant and unable to efficiently use the insulin that their
bodies produce, but they do not initially need external insulin
to survive. However, patients with Type 2 diabetes have the same
requirement to control their blood glucose levels to avoid the
long-term complications of the disease. While many patients can
initially maintain control with oral medications, Type 2
diabetes is a progressive disease in which the ability to use
and in some cases make insulin gradually declines. Eventually,
most patients with Type 2 diabetes will require external insulin
to supplement their natural supply and maintain their health and
avoid the long-term complications associated with diabetes.
The Diabetes Control and Complications Trial (DCCT)
conducted from 1983 to 1993 in patients with Type 1 diabetes,
which was sponsored by National Institutes of Health, indicated
that insulin doses should be adjusted throughout the day in
response to frequently measured blood glucose levels. The DCCT
showed that keeping blood glucose levels as close to normal as
possible slows complications caused by diabetes. In fact, the
DCCT demonstrated that any sustained lowering of blood-glucose
levels is beneficial, even if the person has a history of poor
blood-glucose control. Separately, the United Kingdom
Prospective Diabetes Study, conducted from 1983 to 1993, has
also demonstrated that tighter blood-glucose control can provide
essentially the same benefits for patients with Type 2 diabetes.
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According to 2005 statistics from the American Diabetes
Association, approximately 20.8 million Americans suffer
from either Type 1 or Type 2 diabetes. Approximately 90-95% of
these Americans have Type 2 diabetes, and the prevalence of Type
2 diabetes has increased dramatically over the past decade due
to lifestyle factors such as poor diet and inactivity. Type
2 patients consume the majority of insulin used in the
United States due to their larger numbers and larger insulin
doses. However, given the less acute nature of Type 2 diabetes,
many of these patients are reluctant to take insulin by
injection. Through our convenient AERx iDMS, we believe we can
address this patient reluctance.
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Development and Commercialization Status |
In June 1998, we entered into a product development and
commercialization agreement with Novo Nordisk, the world leader
in diabetes care, covering the use of the AERx iDMS System for
the delivery of blood-glucose regulating medicines.
In November 2001, we successfully completed, with our partner
Novo Nordisk, Phase 2b clinical trials of our AERx iDMS,
which showed that the product is expected to be successfully
used to treat Type 2 diabetes patients with insulin delivered
via the pulmonary route. The Phase 2b trial was designed to
investigate the safety and efficacy of pulmonary insulin via the
AERx iDMS compared to intensified treatment with insulin
injections in patients with Type 2 diabetes. Approximately
100 patients were included for a
12-week period in the
study. The results of the study, announced in June 2002 at the
Annual Meeting of the American Diabetes Association in
San Francisco, California, showed the safety and efficacy
of the AERx iDMS to be comparable to an intensive subcutaneous
injection regimen of insulin.
During the third quarter of 2002, we initiated, with our partner
Novo Nordisk, the first study in our Phase 3 clinical
program, a two-year study in Type 1 diabetics examining the
long-term safety and efficacy of inhaled insulin. This study
compared meal-time delivery of regular human insulin
administered via the AERx iDMS to subcutaneously injected
rapid-acting insulin aspart. Both treatment arms provided
once-daily basal injections of NPH insulin. In April 2004,
Aradigm and Novo Nordisk announced results from a planned
1-year interim analysis
of this study. The primary endpoint of the study was safety, as
shown by a variety of pulmonary function tests and chest x-rays.
The pulmonary insulin arm of the study demonstrated the same
safety in these tests as subcutaneous insulin. In addition, the
trial demonstrated that the efficacy of AERx IDMS in terms of
HbA1c levels, a key marker in controlling blood glucose, was the
same as the control arm involving intensified insulin
injections. However, a secondary efficacy endpoint of intra-day
blood glucose control was found not to be equivalent between
regular human insulin delivered via the AERx iDMS and rapid
acting insulin administered subcutaneously.
To further examine this finding, Novo Nordisk initiated a
pharmacokinetic/pharmacodynamic (pk/pd) study in
these Type 1 patients. In June 2005, at the Annual Meeting
of the American Diabetes Association, Novo Nordisk announced
results of a study which demonstrated that the onset of action
of the AERx iDMS was not significantly different than that of
subcutaneous rapid acting insulin, but significantly different
from regular human insulin, while the duration of action is not
significantly different than regular human insulin, but
significantly longer than rapid acting insulin. These findings
support Novo Nordisks conclusion that inhaled insulin via
the AERx iDMS would be suitable as a meal-time insulin for Type
1 or Type 2 diabetics.
On January 26, 2005, we completed the restructuring of our
AERx iDMS program, pursuant to the Restructuring Agreement
entered into with NNDT.
This agreement expands Novo Nordisks role in the
development and commercialization of the AERx iDMS program, such
that Novo Nordisk is responsible for commercial launch and we
are entitled to receive a royalty on net sales. We are confident
in Novo Nordisks ability to successfully commercialize the
AERx iDMS.
We do not have any further material financial or operational
commitments for this program.
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Intraject Triptan
The Intraject delivery system is currently being developed to
deliver a class of drugs called triptans in a needle-free
alternative for migraine sufferers. To date, our studies have
shown an overall preference by patients for the Intraject system
over available needle-based therapy; we believe that this
application could offer significant benefits over currently
marketed products. We believe that the
easy-to-use, patient
friendly approach will assist patients in managing their
migraines by providing the fastest possible symptom relief
without the use of a needle. In November 2004, we announced
clinical results from a pilot pharmacokinetic study
demonstrating that Intraject with sumatriptan, a member of the
triptan family of drugs, was bioequivalent to the currently
injectable sumatriptan product.
Patients indicate that the most important attributes to migraine
therapy are effectiveness in treating the full range of migraine
symptoms and rapid pain relief. The Intraject Triptan delivery
system is being designed to address many of the issues affecting
injection of sumatriptan including ease of use and
needle-phobia. We believe Intraject will be the first
pre-filled, needle-free configuration on the market.
Intrajects ease of self-administration will translate into
better treatment options for patients. In addition, the ability
for a patient to self-administer will eliminate the need for
office visits and offer a more immediate alternative to
traditional injectable sumatriptan.
Although the injectable form of the triptan drug sumatriptan is
considered the leading treatment for migraine relief as a result
of its rapid and sustainable onset of pain relief, needles are
not popular with patients. And while oral tablets offer
ease-of-use, this route
is often not the best approach due to the nausea that
accompanies the migraine and the slower onset of relief. We
believe that migraine sufferer will recognize the benefit of
combining a patient-friendly, needle-free approach with the
efficacy profile of triptans as the leading class of migraine
therapy drugs.
Migraine is a primary neurological disorder and episodes can
last from four to 72 hours. According to healthcare market
research leader Datamonitor, migraines affect roughly 11% of the
adult population, or about 74 million people. It is
estimated that the average migraine sufferer experiences up to
12 attacks per year, with most attacks being categorized as
severe to very severe. Triptans have been shown to treat both
the pain and the symptoms, such as nausea, phonophobia and
photophobia, associated with migraines. We believe that with its
novel features, Intraject Triptan could capture a significant
part of the current injectable, oral and nasal migraine therapy
markets.
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Development and Commercialization Status |
Prior to our acquisition of the Intraject technology, associated
intellectual property and manufacturing equipment from Weston
Medical Group, PLC, (Weston) in May 2003, Weston had
conducted several clinical and preclinical studies with
Intraject, in which it was demonstrated that Intraject delivery
was bioequivalent to needle injections. After the acquisition of
the Intraject technology, we redesigned the system to overcome
potential issues with respect to reliability and
ease-of-use following
its commercialization. In October 2004, we announced positive
results from the Clinical Performance Verification
(CPV) trial using the final system configuration.
The results supported the conclusion that the reengineered
system demonstrated successful injection performance reliability
and was suitable for commercialization.
Following the results from the CPV trial, we initiated a pilot
pharmacokinetic study comparing Intraject sumatriptan to the
currently marketed needle-injected product. The trial was a
randomized, open-label, single-dose, crossover study evaluating
the pharmacokinetics of sumatriptan at three injection sites
(abdomen, thigh, and arm) in 18 healthy adult male and female
volunteers.
In November 2004, we completed the pilot pharmacokinetic study
with positive results, showing that sumatriptan delivered by
Intraject met all bioequivalence criteria and demonstrated
statistically equivalent pharmacokinetics to the marketed
injectable product. Specifically, the comparability of Intraject
to the subcutaneous needle-injected sumatriptan product was
established at all three injection sites using standard
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bioequivalence criteria of peak concentration achieved in blood
plasma (Cmax) and total drug concentration in blood plasma
achieved over time (AUC).
In June 2005, we completed a clinical study that showed that
Intraject with sumatriptan achieved bioequivalence to the
currently marketed subcutaneous-injected product and that
patients, who were naïve to using Intraject, could
self-administer themselves in the thigh, abdomen or arm.
In December 2005, we completed the manufacture of supplies of
Intraject sumatriptan to support final stability testing and
clinical trial requirements. The supplies of Intraject
sumatriptan were produced using our commercial-scale equipment
housed by our supply chain partners. With this milestone
achieved, and commercial-scale production now explicitly
demonstrated, we believe that we do not need to further invest
in this platform, pending partnering of the product. Upon
partnering, we can initiate the remaining pivotal bioequivalence
study.
We believe that the triptan family of drugs represents a
significant opportunity for the Intraject system and is the
focus of our current partnering discussions.
AERx Hydrochloroquine
Our AERx Hydrochloroquine (HCQ) program is
investigating a novel aerosolized formulation of HCQ as a
treatment for asthma. In oral formulations, HCQ is currently a
treatment for lupus and rheumatoid arthritis and seen as an
alternative to steroid therapy. It is our belief that a targeted
local pulmonary delivery application combined with a patented
formulation could result in an innovative asthma treatment.
Currently, the HCQ program is in Phase 2 clinical trials
and is partnered with APT Pharmaceuticals (APT), a
privately held biotechnology company. The program has advanced
following a positive Phase 1 study in healthy volunteers,
which has determined that AERx-delivered HCQ had a favorable
safety and tolerability profile.
Asthma is a common chronic disorder of the lungs characterized
by airway inflammation, airway hyperresponsiveness or airway
narrowing due to certain stimuli. For patients with asthma,
allergens, environmental stimuli or viral respiratory infections
could trigger an immune-mediated response that could lead to
reversible airway obstruction. Primary symptoms of asthma
include coughing, wheezing, shortness of breath and tightness of
the chest. Symptoms can vary widely in frequency in degree as
some patients have virtually no symptoms while others are
permanently afflicted. Despite several treatment options, asthma
remains a major medical problem associated with high morbidity
and large economic costs to the society. Many patients cannot
control their disease adequately with the current treatment
options and end up in hospital emergency rooms. HCQ administered
using the AERx system enables targeted delivery of the drug
directly to the lower airways, achieving immediately a high
concentration at the affected site while keeping the plasma
levels of HCQ low. We believe that this therapeutic product that
combines the advantages of an innovative formulation with the
targeted delivery of the AERx system has the potential to offer
significant advantages over existing asthma treatments.
According to Datamonitor, a leader in market intelligence, in
2005 asthma affected 41.5 million people, with the highest
prevalence occurring in the U.S. and U.K., with 9.5 million
of those affected being children. The annual treatment costs of
asthma, including indirect costs, are estimated to be
$16.1 billion in the US and $16.3 billion in the EU.
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Development and Commercialization Status |
Following favorable Phase 1 safety study results, we
entered into Phase 2 clinical trials. Phase 2 trials
are larger in size than Phase 1 and are designed to
determine the dosing safety and efficacy of the product.
APT is funding development of the clinical program and is
responsible for funding any activities we might undertake in
this program. We are continuing commercialization discussions,
which are dependent on future
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clinical results. We believe that this product may have similar
anti-inflammatory properties to inhaled steroids but with a
potentially improved safety profile.
Liposomal Ciprofloxacin
Each of our two liposomal ciprofloxacin programs combine a novel
patented formulation with a powerful anti-infective being
studied to treat bio-terrorism-related disease and infections
related to cystic fibrosis (CF). The first of our
two programs is our liposomal ciprofloxacin bioterrorism
program, which is partnered with the Canadian Department of
Defense to develop a treatment and prophylaxis for inhaled
anthrax. Ciprofloxacin, or cipro, as it is more commonly known,
is a widely used anti-infective agent used to treat a variety of
bacterial infections. As part of this partnership we have
licensed the rights to a formulation of the drug that is
designed to (1) enhance the duration of action of the drug
in the lung and (2) enable better interaction of the drug
with the disease target.
The second program utilizing liposomal ciprofloxacin is in the
treatment and control of respiratory infections in Cystic
Fibrosis (CF). Our intention is to advance this program through
clinical development and seek a partner at a point closer to
commercial launch.
CF affects roughly 30,000 children and adults in the United
States and roughly 60,000 worldwide. According to the Centers
for Disease Control, the majority of studies done in the early
1990s state that the annual direct medical care costs for
an individual with CF were $15,000 to $20,000 (1996 dollars).
CF is a genetic disease that commonly affects a persons
breathing and digestion patterns. The disease is caused by an
abnormal protein that does not allow the normal passage of
chloride into and out of certain cells, including those that
line the lungs and pancreas. As a result, these cells produce
thick, sticky mucus and other secretions. This mucus then clogs
the lungs, causing breathing problems and with those affected
individuals suffering from frequent lung infections could lead
to irreversible lung damage and possible death. When infections
occur, they are typically treated at home or in the hospitals
with a number of oral antibiotics or using nebulizers and
compressors for antibiotic inhalations, for which only one
product is approved. A greater choice of effective and safe
antibiotic therapy appears desirable.
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Development and Commercialization Status |
We expect to initiate preclinical studies for liposomal
ciprofloxacin in 2006.
The Liposomal Ciprofloxacin CF product is a self-initiated
program designed to be advanced into development and then
partnered at an appropriate time. We believe that the combined
features of the AERx delivery system including targeted local
lung delivery and a novel formulation of a powerful
anti-infective could effectively and safely treat many of the
lung infections that face patients with CF. We intend to
continue this program until we have demonstrated a proof of
concept, at which point, we may partner the program.
AERx Smoking Cessation
Our AERx Smoking Cessation product is based on the capabilities
of the AERx system to titrate and deliver accurate doses of
small droplet aerosols to the deep lung for systemic uptake.
When nicotine is combined with our delivery system, different
doses can be delivered providing patients and physicians with an
easy to use, efficient and accurate delivery system that is
ideally suited for downward titration of inhaled nicotine doses
over time. We believe that by creating a product that produces a
pharmacokinetic profile that mimics the high peaks resulting
from inhalation of tobacco smoke, we will be addressing an unmet
need for patients wanting to quit but unable to do so due to
their addiction.
According to Decision Resources, the smoking cessation market is
expected to increase to nearly $1.5 billion by 2007.
Currently the market is dominated by nicotine replacement in
multiple delivery forms
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including transdermal patches, gums, and nasal sprays. These
therapies, which are available over the counter, are designed to
wean smokers off the habit by providing a measured dose of
nicotine without the smoke and tar of a cigarette.
According to the American Heart Association, approximately
48 million Americans smoke cigarettes, most of whom either
want to quit or are actively trying to quit. Since 1965, more
than 40 percent of all adults who have ever smoked have
quit with more than four in five smokers saying that they want
to quit. With good smoking cessation programs, only 20 to
40 percent of participants who smoke more than 25
cigarettes a day are able to quit smoking and stay off
cigarettes for at least one year. We believe our product could
significantly improve the effectiveness of smoking cessation
programs and expand the market size for these treatments.
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Development and Commercialization Status |
We are currently working on formulation development and
finalizing the clinical development program.
We have signed an intellectual property access agreement with an
undisclosed global pharmaceutical company on this program
granting them access to our recently issued patents in the area
of the pulmonary delivery of nicotine to effect smoking
cessation. Any further activities we undertake on this program
would need to be funded by a partner or grant.
AERx Treprostinil
Our AERx Treprostinil product is a novel, sustained-release
inhaled liposomal formulation for the treatment of pulmonary
arterial hypertension (PAH).
Patients with PAH experience elevated blood pressure in the
pulmonary arteries. Symptoms of the disease include fatigue,
shortness of breath on exertion, chest pain and dizziness. When
left untreated, the median survival time following diagnosis may
be as short as three years.
According to Decision Resources, in 2003, PAH affected over
130,000 people worldwide with sales of related medical
treatments of $600 million per year and related medical
treatments expected to reach $1.2 billion by 2013.
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Development and Commercialization Status |
We expect to complete the first preclinical testing of selected
formulations within the next few months.
We have a commercial agreement with United Therapeutics, a
leader in cardiovascular therapies, to deliver an aerosolized
formulation of their drug treprostinil, marketed as Remodulin,
an approved and marketed intravenously or subcutaneously
delivered prostacyclin analogue. United Therapeutics has agreed
to fund our activities in this program. We believe that the AERx
delivery system offers a non-invasive and more direct approach
to treatment over the currently available methods.
Potential Product Applications
Our AERx and Intraject technology platforms are both positioned
to address multiple therapeutic disease areas and with compounds
that cannot be delivered orally or large molecules delivered by
injection. We have demonstrated to date, in many human clinical
trials, effective deposition and, where required, systemic
absorption of a wide variety of drugs including small molecules,
peptides and proteins. We are developing the hand-held AERx
system based on a comprehensive approach to pulmonary drug
delivery that includes drug formulation, aerosol generation,
patient breath control and compliance monitoring technologies.
We are currently developing AERx products for applications in
respiratory diseases such as asthma and chronic obstructive
pulmonary disease (COPD), as well as conducting investigations
in cardiovascular disease, neurological disease, and
inflammatory conditions. In addition, we are targeting the
development of the AERx system for the non-invasive delivery of
certain other drugs, including proteins, peptides and small
molecules.
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While we are assessing the feasibility of the AERx delivery
system with compounds in various therapeutic areas we do not
typically disclose information relating to the specifics of
these studies (including the drug or partner involved) until the
program moves into a later stage of development or at an earlier
time that is mutually agreed upon with the partner.
We also believe that substantial opportunities exist within
multiple disease areas for our Intraject system.
Intrajects ability to allow for a rapid, comfortable
administration in a patient-friendly format is well suited for
chronically delivered therapies that once needed to be
administered by physicians. While our initial application for
our Intraject delivery system is within the triptan class of
drugs, we have also identified and are pursuing multiple viscous
and non-viscous liquid drugs given by injection in the areas of
inflammatory, neurological and infectious diseases. To date, we
have demonstrated in clinical trials the applicability of our
platforms in a variety of diseases.
Drug Delivery Technology Background
Today an increasing number of drugs, including nearly all
biotech drugs, are delivered by injection. While injections are
quick and efficient, they have inherent limitations, including
inconvenience, discomfort and risk of infection. These
limitations have prompted drug manufacturers to explore
alternatives such as improved oral delivery formulations,
transdermal technologies, needle-free systems and pulmonary
delivery systems. We believe that our AERx and Intraject systems
can address these limitations.
Pulmonary Delivery Background
The natural ability of the lung to transfer molecules into the
bloodstream makes pulmonary drug delivery systems an alternative
method to injection. Originally developed to treat lung
diseases, pulmonary delivery deposits aerosolized (fine
particles or mists) medication in the large airways of the lung.
These aerosols were created in medical devices, such as
nebulizers, metered-dose inhalers and dry powder inhalers, for
inhalation by the patient. While these systems have been useful
in the treatment of certain diseases such as asthma, they
generate a wide range of particle sizes, only a portion of which
can reach the targeted lung tissues and they rely heavily on
proper patient breathing technique to ensure appropriate
delivery.
Considerable recent research has been devoted to developing a
means to create well-defined small-particle aerosols suitable
for efficient pulmonary delivery of drugs, either to treat lung
diseases or for absorption into the bloodstream for systemic
effect. To deliver a pharmaceutical to or through the lungs, the
drug must be transformed into an aerosol that can be inhaled by
the patient. In order for an aerosol to be delivered to the deep
lung, the individual particles must be small (three microns or
less in diameter) and the velocity of these particles must be
low as they pass through the upper airways and into the deep
lung. The particle velocity is largely determined by how fast
the patient is inhaling. Large or fast-moving particles
typically get deposited in the mouth or upper airways, where
they cannot be absorbed and may not be effective. Most drugs
being considered for pulmonary delivery are currently marketed
in stable liquid formulations. The older systems for
aerosolization of liquids nebulizers
suffer from many weaknesses, including inefficiency,
inconvenient use (lack of portability, long period of
administration.) The ability to make small micron size droplets
from a hand-held device that incorporates breath control is, in
our view, the preferred method of delivery of many medications.
For example, we believe the extra steps involved in making dry
powder formulations of drugs for use in dry powder inhalers will
make them more difficult and expensive to produce than
liquid-based formulations. In addition, todays dry-powder
delivery systems under development continue to rely on
individual patient breathing technique for the actual drug
delivery. It is well documented that the typical patient
frequently strays from proper inhalation technique and may not
be able to maintain a consistent approach over even moderate
periods of time after training. Since precise and reproducible
dosing with medications is necessary to ensure safety or
therapeutic efficacy, any variability in breathing technique
among patients or from dose to dose may negatively impact the
effectiveness of an inhaled drug.
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The Aradigm Solution for Pulmonary Delivery
We have demonstrated in the laboratory and in many human
clinical trials that our AERx enables pulmonary delivery of a
wide range of pharmaceuticals in liquid formulations for local
or systemic effect. Our proprietary AERx technologies focus
principally on delivering liquid medications through
small-particle aerosol generation and controlling
patient-inhalation technique for efficient and reproducible
delivery of the aerosol drug to the deep lung. We have developed
these proprietary technologies through an integrated approach
that combines expertise in physics, electrical engineering,
mechanical engineering, laser engineering and pharmaceutical
sciences. The key features of the AERx platform include:
The AERx system takes advantage of existing liquid-drug
formulations, reducing the time, cost and risk of formulation
development compared to dry-powder-based technologies. The
formulation technology of the AERx system allows us to use
conventional, sterile pharmaceutical manufacturing techniques.
We believe that this approach will result in lower cost
production methods than those used in dry powder systems because
we are able to bypass entirely the complex formulation processes
required for those systems. Moreover, the liquid drug
formulations used in AERx systems are expected to have the same
stability profile as the currently marketed versions of the same
drugs. Because of the nature of liquid formulations, the
excipients we use are standard and therefore minimize safety
concerns.
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Efficient, Precise Aerosol Generation |
Our proprietary technology produces the low-velocity,
small-particle aerosols necessary for efficient deposition of a
drug in the deep lung. Liquid drug formulations are aerosolized
from pre-packaged, single-use, disposable packets using the
hand-held AERx system. Each disposable packet is comprised of a
small blister package of the drug and an adjacent aerosolization
nozzle. The AERx device compresses the packet to push the drug
through the nozzle and thereby creates the aerosol. No
propellants are required since mechanical pressure is used to
generate the aerosol. Each packet is used only once to avoid
plugging or wearing that would degenerate aerosol quality if
reused. Through this technology, we believe we can achieve
highly efficient and reproducible aerosols. The AERx device also
has the ability to deliver a range of patient selected doses,
making it ideal for applications where the dose can change
between uses or over time.
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Automated Breath-Controlled Delivery |
Studies have shown that even well trained patients tend to
develop improper inhalation technique over time, resulting in
less effective therapy. The AERx electronic platform employs a
patented technology to measure the patients inhalation
flow rate through the mouthpiece of the hand-held device.
Indicator lights on the device guide the patient to inhale
slowly and evenly for optimal drug delivery. When the desired
flow-rate is established early in the breath, drug delivery is
automatically initiated. As a result, a consistent dose of
medication is delivered each time the product is used. The
flow-rate can be adjusted for different patient needs; for
example, a low-flow device has been developed for use by cystic
fibrosis patients. Novel flow-rate controls have also been
developed for our AERx Essence system, a second-generation
all-mechanical delivery device designed for topical lung
delivery and systematic delivery of small molecules.
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Subcutaneous Delivery Background |
While the concept of subcutaneous, needle-free drug delivery has
been around for several decades, early systems were powered by
large, complex and expensive air compressors and therefore
usually reserved for vaccine applications. Only recently have
research and advances in technology produced smaller, more
patient-friendly configurations and made subcutaneous,
needle-free delivery an attractive and viable option. Data from
clinical trials conducted using the Intraject system indicate
that the needle-free delivery of drugs to the subcutaneous
region of the skin allows for a speed of absorption into the
bloodstream equivalent to
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subcutaneous needle injections. We believe that effective and
convenient needle-free delivery could improve patient compliance
with prescribed therapy compared with the same therapy delivered
with needle injections.
The Aradigm Solution for Needle-Free Subcutaneous Delivery
Intraject, a pen-sized, pre-filled, single-use system, is
designed to enable patients and healthcare workers to deliver
precise measured doses of drug to the subcutaneous layer of the
skin without the use of needles. This system has two main parts:
the glass drug capsule with a fill volume of 0.5 ml and a
compact nitrogen gas power source called the actuator. Intraject
uses the actuator to create a high-velocity, fine liquid stream
that penetrates the skin to pass into the subcutaneous layer.
The Intraject system uses a pre-filled, fixed dose, a feature
that is ideal for those applications where the dose does not
change over the short term.
Ease-of-use is an
important benefit of the Intraject system. The patient or
healthcare worker first snaps the cap off of the system, flips
the safety lever, and then presses the Intraject directly to the
skin, thereby activating the system. The injection itself is
completed in less than 60 milliseconds.
We are developing this system to allow for the subcutaneous
needle-free delivery of a wide range of pharmaceuticals and
biopharmaceuticals. In clinical trials, patients have preferred
Intraject to the standard needle and syringe and were able to
self-administer the system.
In December, we announced the completion of production of
supplies for our pivotal bioequivalence trial for sumatriptan.
Key features of the Intraject platform include:
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Pre-filled and ready to use; |
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Lightweight and pocket-sized; and |
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Easy to operate. |
Intrajects clinical and regulatory development timelines
may be more abbreviated than traditional drug development
candidates. In the case of drugs that are already approved for
subcutaneous injection, bioequivalence studies are pivotal in
obtaining marketing approval. These studies and trials could be
conducted in as little as a few months. We believe that this is
another attractive feature to potential partners as they address
issues such as patent expiration and life cycle management
relating to their marketed products.
Our Strategy
Our goal is to become the leader in the development and
commercialization of pulmonary and needle-free drug delivery
products. Our strategy incorporates the following principal
elements:
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Identify Suitable Drug Delivery Candidates for our
Platforms |
We believe the AERx and Intraject platforms will be broadly
applicable to drugs intended for either local delivery to the
lung or systemic delivery.
Our strategy will be to maximize the number of commercial
product opportunities for each of our two systems and increase
the interest of potential partners in developing drugs for the
AERx and Intraject systems.
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Expand Existing Collaborative Relationships and Develop
New Collaborative Relationships |
In order to enhance our commercial opportunities and effectively
leverage our core scientific resources, our strategy is to enter
into multiple collaborative relationships with pharmaceutical
and biotech companies for the development and commercialization
of new products utilizing our technologies. In 2005 we continued
to see an increased interest in our technology platforms that
resulted in initiation of several early-stage
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feasibility studies, progression of a mid-stage program and the
signing of a commercial agreement. Through product development
collaborations, we seek access to proprietary pharmaceutical
compounds as well as to the resources necessary to conduct
late-stage clinical programs and obtain regulatory approvals. In
addition, we will continue pursuing relationships with companies
with established sales forces and distribution channels in our
target markets. By establishing such collaborative
relationships, we intend to introduce multiple new products
while avoiding the need to establish drug discovery research,
sales, marketing and large-scale commercialization capabilities.
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Enhance Our Strong Proprietary Position |
We believe that establishing a strong proprietary position in
pulmonary and needle-free drug delivery is important in order
for us to be competitive in our target markets. We are
establishing and intend to protect our strong intellectual
property position that includes inventions in the field of
pulmonary delivery and our AERx and Intraject systems. We
currently hold 211 issued United States and foreign patents and
136 pending worldwide applications. While there can be no
assurance that any of our patents will provide us with a
significant commercial advantage, these patents are intended to
provide protection for important aspects of our technologies and
maintenance of trade secrets associated with key elements of our
manufacturing technologies.
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Maintain Technological Leadership |
We are making a substantial research and development investment
to establish and maintain technological leadership in pulmonary
and needle-free drug delivery. This includes research and
development programs to design future generations of our
pulmonary and needle-free delivery systems. The goal of these
programs is to access a wider range of markets, broaden our
technology base, achieve manufacturing efficiencies and develop
next-generation delivery devices. We have invested in efforts to
accelerate development of the Intraject program by creating an
in-vitro/in-vivo correlation model intended to predict
the clinical performance of compounds we are testing. We are
supported by our Scientific Advisory Board, whose members are
leaders in drug delivery and clinical specialties of key
interest to us. We access scientific and medical experts in
academia, as needed, to support our scientific advisory board.
Research and Development Strategy
We plan to focus our future research and development efforts on
the development and commercialization of products on our AERx
and Intraject technology platforms, both through self-initiated
activities and collaborations with other parties. However,
future research and development expenditures cannot be predicted
reliably as we depend in part upon continued success and funding
levels supported by our existing development collaborations, as
well as entering into new collaborative agreements.
Sales and Marketing Strategy
We plan to establish additional collaborative relationships to
develop and commercialize our AERx and Intraject products.
Through these collaborations, we intend to access resources and
expertise to conduct late-stage clinical development and to
market and commercialize AERx and Intraject products. Ideal
development partners will generally have both a commercial
presence and a development presence in a given target market and
will also have committed to grow that market via our
drug-delivery technology. Where consistent with other
objectives, we plan to give preference to development partners
whose pipelines contain multiple products whose value could be
enhanced by our drug-delivery technologies.
In some cases, our strategy may be to take a program further in
development before securing a partner in order to achieve higher
royalties from the commercialization partner.
Manufacturing/ Commercialization Strategy
For both our AERx and Intraject platforms we have implemented a
Contract Manufacturing Organization (CMO) strategy
for production. This approach uses
best-in-class suppliers
from around the world
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whose expertise allows us to minimize risk and costs normally
incurred if we were to assume responsibility ourselves. In these
cases, we have secured agreements with several of these
manufacturers.
As of January 26, 2005, we completed the restructuring of
our AERx iDMS program, pursuant to the Restructuring Agreement
entered into with Novo Nordisk and NNDT. Under the terms of the
Restructuring Agreement, we have transferred our clinical strip
manufacturing and our AERx device manufacturing facilities to
NNDT, and NNDT has agreed to perform contract manufacturing
services for us for at least three years of
non-AERx iDMS devices
and AERx dosage forms filled with compounds provided by us in
support of initial clinical development by us of other AERx
products.
We believe that the manufacturing processes for the AERx
delivery system are now sufficiently advanced that additional
capacity can be replicated using the services of CMOs.
Therefore, we do not intend to build any additional facilities
for commercial AERx manufacturing, except at the specific of
request and with funding from our marketing partners.
Our Intraject manufacturing strategy employs a fully integrated
third party supply chain, in which outside suppliers are
responsible for key components, including final assembly. This
approach will use
best-in-class suppliers
from around the world whose expertise will allow us to minimize
risk and costs normally incurred if we were to assume
responsibility for manufacture ourselves. We have secured
supplier agreements with each of these manufacturers, many of
who worked on the Intraject program prior to our acquisition of
the Intraject technology. This approach will allow us to focus
on establishing core competencies in the area of research and
development.
There can be no assurance that we will not encounter
unanticipated delays or expenses in establishing high-volume
production capacity for AERx devices, AERx disposable drug
packets or components related to the Intraject system. Any such
delays or expenses could harm our business.
Intellectual Property and Other Proprietary Rights
Our business and competitive position is dependent upon our
ability to protect our proprietary technology and avoid
infringing on the proprietary rights of others. We have
conducted original research on a number of aspects relating to
pulmonary drug delivery. This research has led to novel ideas,
which in turn have resulted in 97 issued United States patents
as of February 28, 2006, with 18 additional United States
patent applications pending. In addition, we have purchased
three United States patents covering inventions that are
relevant to our inhalation technologies. We have also purchased
a portfolio of patents covering the Intraject technology, with
14 issued United States and 4 additional patent applications
pending. In total, we have 97 issued foreign patents and 114
foreign patent applications pending.
Our success will depend to a significant extent on our ability
to obtain and enforce patents, maintain trade secret protection
and operate without infringing on the proprietary rights of
third parties. Because the field of aerosolized drug delivery is
crowded and a substantial number of patents have been issued and
because patent positions can be highly uncertain and frequently
involve complex legal and factual questions, the breadth of
claims obtained in any application or the enforceability of our
patents cannot be predicted. Commercialization of pharmaceutical
products can also be subject to substantial delays as a result
of the time required for product development, testing and
regulatory approval.
Our current policy is to file patent applications covering what
we deem to be important technological developments that might
relate to our technologies or methods of using our products. We
also seek to protect some of these inventions through foreign
counterpart applications in selected other countries. Statutory
differences in patentable subject matter may limit the
protection we can obtain on some of our inventions outside of
the United States. For example, methods of treating humans are
not patentable in many countries outside of the United States.
These and other issues may limit the patent protection we will
be able to secure outside of the United States.
The coverage claimed in a patent application can be
significantly reduced before a patent is issued, either in the
United States or abroad. Consequently, we do not know whether
any of our pending or future patent applications will result in
the issuance of patents or, to the extent patents have been
issued or will be issued,
13
whether these patents will be subjected to further proceedings
limiting their scope, will provide significant proprietary
protection or competitive advantage, or will be circumvented or
invalidated.
Furthermore, patents already issued to us or our pending
applications may become subject to dispute, and any disputes
could be resolved against us. For example, Eli Lilly brought an
action against us seeking to have one or more employees of Eli
Lilly named as co-inventors on some of our patents. This case
was determined in our favor in 2004, but there can be no
assurance that we will not face other similar claims in the
future.
In addition, because patent applications in the United States
and in certain other countries generally are not published until
more than 18 months after they are first filed, and because
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 pending
patent applications or that we were the first to file patent
applications on such inventions.
Our policy is to require our officers, employees, consultants
and advisors to execute proprietary information and invention
and assignment agreements upon commencement of their
relationships with us. These agreements provide that all
confidential information developed or made known to the
individual during the course of the relationship shall be kept
confidential except in specified circumstances. These agreements
also provide that all inventions developed by the individual on
behalf of us shall be assigned to us and that the individual
will cooperate with us in connection with securing patent
protection on the invention if we wish to pursue such
protection. There can be no assurance, however, that these
agreements will provide meaningful protection for our
inventions, trade secrets or other proprietary information in
the event of unauthorized use or disclosure of such information.
We also execute confidentiality agreements with outside
collaborators and consultants. However, disputes may arise as to
the ownership of proprietary rights to the extent that outside
collaborators or consultants apply technological information
developed independently by them or others to our projects, or
apply our technology to other projects, and there can be no
assurance that any such disputes would be resolved in our favor.
We may incur substantial costs if we are required to defend
ourselves in patent suits brought by third parties. 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 there would be no
assurance that any license required under any such patent would
be made available to us on acceptable terms, if at all.
Litigation may also be necessary to enforce our patents against
others or to protect our know-how or trade secrets. Such
litigation could result in substantial expense, and there can be
no assurance that any litigation would be resolved in our favor.
Competition
We are in competition with pharmaceutical, biotechnology and
drug delivery companies, hospitals, research organizations,
individual scientists and nonprofit organizations engaged in the
development of alternative drug delivery systems or new drug
research and testing, as well as with entities producing and
developing injectable drugs. We are aware of a number of
companies currently seeking to develop new products and
non-invasive alternatives to injectable drug delivery, including
oral delivery systems, intranasal delivery systems, transdermal
systems, buccal, or mouth cavity, and colonic absorption
systems. Several of these companies may have developed or are
developing dry-powder devices that could be used for pulmonary
delivery and needle-free devices that could be used for
subcutaneous delivery. Many of these companies and entities have
greater research and development capabilities, experience,
manufacturing, marketing, financial and managerial resources
than we do. Accordingly, our competitors may succeed in
developing competing technologies, obtaining Food and Drug
Administration (FDA) approval for products or
gaining market acceptance more rapidly than we can.
We believe our technology and integrated pulmonary delivery
systems approach provides us with important competitive
advantages in the delivery of drugs compared with currently
known alternatives. While we believe that the capabilities of
our AERx and Intraject systems will provide us with certain
important
14
competitive advantages, new drugs or further developments in
alternative drug delivery methods may provide greater
therapeutic benefits, or comparable benefits at lower cost, in a
given drug application than the AERx or Intraject systems.
Several companies have developed or are developing products that
will compete with our technology platforms. Some are marketing
and developing dry-powder and other devices that could have
applications for pulmonary drug delivery, including Nektar
Therapeutics (formerly Inhale Therapeutic Systems, Inc.),
Alkermes Pharmaceuticals, Inc. and Mannkind Corporation. Two of
these companies also have collaborative arrangements with
corporate partners for the development of pulmonary delivery
systems for insulin. There are also several companies that are
marketing and/or developing needle-free injection systems,
including Antares Pharma Inc., Bioject Medical Technologies
Inc., Biovalve Technologies, Inc., Crossject and Penjet
Corporation. There can be no assurance that competitors will not
introduce products or processes competitive with or superior to
ours.
Government Regulation
All medical devices and drugs, including our products under
development, are subject to extensive and rigorous regulation by
the federal government, principally the FDA, and by state and
local governments. If these products are marketed abroad, they
also are subject to export requirements and to regulation by
foreign governments. The regulatory clearance process is
generally lengthy, expensive and uncertain. The Federal Food,
Drug, and Cosmetic Act, and other federal statutes and
regulations, govern or influence the development, testing,
manufacture, labeling, storage, approval, advertising,
promotion, sale and distribution of such products. Failure to
comply with applicable FDA and other regulatory requirements can
result in sanctions being imposed on us or the manufacturers of
our products, including warning letters, fines, product recalls
or seizures, injunctions, refusals to permit products to be
imported into or exported out of the United States, refusals of
the FDA to grant approval of drugs or to allow us to enter into
government supply contracts, withdrawals of previously approved
marketing applications and criminal prosecutions.
The activities required before a new drug product may be
marketed in the United States include preclinical and clinical
testing. Preclinical tests include laboratory evaluation of
product chemistry and other characteristics and animal studies
to assess the potential safety and efficacy of the product as
formulated. The FDA under a series of regulations called the
current Good Laboratory Practice regulations regulates
Preclinical studies. Violations of these regulations can, in
some cases, lead to invalidation of the studies, requiring such
studies to be replicated, thus extending time of development.
The pre-clinical work necessary to administer investigational
drugs to human subjects is summarized in an Investigational New
Drug Application to the FDA. FDA regulations provide that human
clinical trials may begin 30 days following submission of
an Investigational New Drug Application, unless the FDA advises
otherwise or requests additional information. There is no
assurance that the submission of an Investigational New Drug
Application will eventually allow a company to begin clinical
trials. Once trials have begun, either the FDA or we may place
them on clinical hold to stop them, because of
concerns, for example, about the conduct of the study or the
safety of the product being tested.
Clinical testing involves the administration of the drug to
healthy human volunteers or to patients under the supervision of
a qualified principal investigator, usually a physician,
pursuant to FDA-reviewed protocol. Each clinical study is
conducted under the auspices of an Institutional Review Board at
each of the institutions at which the study will be conducted.
An Institutional Review Board will consider, among other things,
ethical factors, the safety of human subjects, informed consent
requirements and the possible liability of the institution.
Human clinical trials typically are conducted in three
sequential phases, but the phases may overlap. Typically,
Phase 1 trials consist of testing the product in a small
number of healthy volunteers, primarily for safety, at one or
more dosage levels, as well as characterization of a drugs
pharmacokinetic and/or pharmacodynamic profile. In Phase 2
clinical trials, in addition to safety, the efficacy of the
product is usually evaluated in the patient population.
Phase 3 trials (also known as pivotal studies)
the basis for approval, typically involve additional testing for
safety and clinical efficacy in an expanded population at
geographically dispersed sites.
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A company seeking FDA approval to market a new drug must file a
New Drug Application (NDA) with the FDA pursuant to
the Federal Food, Drug and Cosmetic Act. In addition to reports
of the pre-clinical and clinical trials conducted under an
effective Investigational New Drug application, the NDA includes
Chemistry, Manufacturing and Controls (CMC)
information pertaining to the preparation of the drug substance
(active ingredient), analytical methods, drug product
formulation, details on the manufacture of finished products and
proposed product packaging, labeling and storage. Submission of
a new drug application does not assure FDA approval for
marketing. Based on the Prescription Drug User Fee Act, review
of NDAs should result in an action letter within ten months
after filing. However, the application approval process can take
a year or more to complete, although reviews of treatments for
cancer and other life-threatening diseases may be accelerated or
expedited. The process may take substantially longer if, among
other things, the FDA has questions or concerns about the
safety, efficacy or CMC of a product. In general, the FDA
requires at least two properly conducted, adequate and
well-controlled clinical studies demonstrating safety and
efficacy with sufficient levels of statistical assurance.
Notwithstanding the submission of safety and efficacy data, the
FDA ultimately may decide that the application does not satisfy
all of its regulatory criteria for approval. The FDA could also
determine that there is insufficient data or experience with
chronic administration of drugs delivered via the lung for
systemic effect to demonstrate that such chronic administration
is safe, and could require further studies. The FDA also may
require additional clinical tests (i.e., Phase 4 clinical
trials) following new drug application approval to confirm
safety and efficacy.
In addition, the FDA may in some circumstances impose
restrictions on the use of the drug that may be difficult and
expensive to administer. Product approvals may be withdrawn if
compliance with regulatory requirements is not maintained or if
problems occur after the product reaches the market. The FDA
also requires reporting of certain safety and other information
that becomes known to a manufacturer of an approved drug. The
product testing and approval process is likely to take a
substantial number of years and involves expenditure of
substantial resources. There is no guarantee that any approval
will be granted on a timely basis, or at all. Upon approval, a
prescription drug may only be marketed for the approved symptoms
in the approved dosage forms and at the approved dosage.
Among the other requirements for drug product approval is the
requirement that the prospective manufacturer conform to the
FDAs Good Manufacturing Practices (GMP)
regulations for drugs. In complying with the GMP regulations,
manufacturers must continue to expend time, money and effort in
production, record keeping and quality control to assure that
the product meets applicable specifications and other
requirements. The FDA periodically inspects manufacturing
facilities in the United States to assure compliance with
applicable GMP requirements. A companys failure to comply
with the GMP regulations or other FDA regulatory requirements
could have a material adverse effect on that companys
business.
Products marketed outside the United States that are
manufactured in the United States are subject to certain FDA
regulations, as well as regulation by the country in which the
products are to be sold. We also would be subject to foreign
regulatory requirements governing clinical trials and drug
product sales if products are marketed abroad. Whether or not
FDA approval has been obtained, approval of a product by the
comparable regulatory authorities of foreign countries must be
obtained prior to the marketing of the product in those
countries. The approval process varies from country to country
and the time required may be longer or shorter than that
required for FDA approval.
We are subject to numerous federal, state and local laws
relating to such matters as:
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controlled drug substances; |
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safe working conditions; |
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manufacturing practices; |
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environmental protection; |
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fire hazard control; and |
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disposal of hazardous or potentially hazardous substances. |
The United States Drug Enforcement Agency (DEA)
regulates controlled drug substances, such as morphine and other
narcotics. Establishments handling controlled drug substances
must be registered and inspected by the DEA and may be subject
to export, import, security and production quota requirements.
In addition, advertising and promotional materials are, in
certain instances, subject to regulation by the Federal Trade
Commission. There can be no assurance that we will not be
required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will
not have a material adverse effect upon our business.
Product development and approval within this regulatory
framework takes a number of years, involves the expenditure of
substantial resources and is uncertain. Many drug products
ultimately do not reach the market because they are not found to
be safe or effective or cannot meet the FDAs other
regulatory requirements. In addition, there can be no assurance
that the current regulatory framework will not change or that
additional regulation will not arise at any stage of our product
development that may affect approval, delay the submission or
review of an application or require additional expenditures by
us. There can be no assurance that we will be able to obtain
necessary regulatory clearances or approvals on a timely basis,
if at all, for any of our products under development, and delays
in receipt or failure to receive such clearances or approvals,
the loss of previously received clearances or approvals, or
failure to comply with existing or future regulatory
requirements could have a material adverse effect on our
business.
Scientific Advisory Board
We have assembled a Scientific Advisory Board comprised of
scientific and development advisors who provide expertise, on a
consulting basis, in the areas of pain management, allergy and
immunology, pharmaceutical development and drug delivery, but
are employed elsewhere on a full-time basis. As a result, they
can only spend a limited amount of time on our affairs. We
access scientific and medical experts in academia, as needed, to
support our scientific advisory board. The Scientific Advisory
Board assists us on issues related to potential product
applications, product development and clinical testing. Its
members, and their affiliations and areas of expertise, include:
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Affiliation |
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Area of Expertise |
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Peter R. Byron, Ph.D.
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Medical College of Virginia, Virginia Commonwealth
University |
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Aerosol Science/Pharmaceutics |
Peter S. Creticos, M.D.
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The Johns Hopkins University School of Medicine |
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Allergy/Immunology/Asthma |
Igor Gonda, Ph.D.
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Acrux Limited |
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Drug Delivery |
Robert E. Ratner, M.D.
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MedStar Research Institute |
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Endocrinology |
Employees
As of February 28, 2006, we had 103 employees. Of these, 73
are involved in research and development, product development
and commercialization; and 30 are involved in business
development, finance and administration. Our future success is
dependent on attracting and retaining highly skilled scientific,
sales and marketing and senior management personnel. Competition
for such skills is intense, and there is no assurance that we
will continue to be able to attract and retain high-quality
employees. Our employees are not represented by any collective
bargaining agreement. We consider our relations with our
employees to be excellent.
17
Corporate History and Website Information
We were incorporated in California in 1991. Our principal
executive offices are located at 3929 Point Eden Way, Hayward,
California 94545, and our main telephone number is
(510) 265-9000. Investors can obtain access to this annual
report on
Form 10-K, our
quarterly reports on
Form 10-Q, our
current reports on
Form 8-K and all
amendments to these reports, free of charge, on our website at
http://www.aradigm.com as soon as reasonably practicable after
such filings are electronically filed with the Securities and
Exchange Commission (SEC). The public may read and
copy any material we file with the SEC at the SECs Public
Reference Room at 450 Fifth Street, N.W.,
Washington, D.C., 20549. The public may obtain information
on the operations of the Public Reference Room by calling the
SEC at 1-800-SEC-0330.
The SEC maintains an Internet site, http://www.sec.gov that
contains reports, proxy and information statements and other
information regarding issuers that file electronically with the
SEC. We have adopted a code of ethics, which is part of our Code
of Business Conduct and Ethics that applies to all of our
employees, including our principal executive officer, our
principal financial officer and our principal accounting
officer. This code of ethics is posted on our website.
Directors and Executive Officers
The directors and executive officers of Aradigm and their ages
as of February 28, 2006 are as follows:
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Name |
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Age | |
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Position |
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| |
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V. Bryan Lawlis, Ph.D.
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|
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54 |
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|
President, Chief Executive Officer and Director |
Thomas C. Chesterman
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46 |
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Senior Vice President and Chief Financial Officer |
Steven J. Farr, Ph.D.
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47 |
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Senior Vice President, Chief Scientific Officer |
Bobba Venkatadri
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|
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62 |
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Senior Vice President, Operations |
Babatunde A. Otulana, M.D
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|
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49 |
|
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Vice President, Clinical & Regulatory Affairs |
John J. Turanin
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|
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48 |
|
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Vice President, Program Management and Corporate Planning |
Virgil D. Thompson(2)
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|
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66 |
|
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Director and Chairman of the Board |
Frank H. Barker(1)(3)
|
|
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75 |
|
|
Director |
Igor Gonda(2)
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|
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58 |
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Director |
Stephen O. Jaeger(1)(2)
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|
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61 |
|
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Director |
John Nehra(3)(4)
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|
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57 |
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Director |
Wayne I. Roe(1)(4)
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55 |
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Director |
Richard P. Thompson(3)(4)
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54 |
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Director |
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(1) |
Member of the Audit Committee. |
|
(2) |
Member of the Compensation Committee. |
|
(3) |
Member of the Nominating and Corporate Governance Committee. |
|
(4) |
Not standing for reelection at the May 2006 Annual
Shareholders Meeting |
V. Bryan Lawlis, Ph.D., has been a director since
February 2005 and has served as President and Chief Executive
Officer since August 2004. Dr. Lawlis served as President
and Operating Officer from June 2003 to August 2004 and as our
Chief Operating Officer from November 2001 to June 2003.
Previously, Dr. Lawlis founded Covance Biotechnology
Services, Inc., a contract biopharmaceutical manufacturing
operation, and served as its President and Chief Executive
Officer from 1996 to 1999, and as Chairman 1999 to 2001, when it
was sold to Diosynth, RTP, Inc., a division of Akzo Nobel, NV.
From 1981 to 1996, Dr. Lawlis was employed at Genencor,
Inc., and Genentech, Inc. His last position at Genentech was
Vice President of Process Sciences. Dr. Lawlis holds a B.A.
in Microbiology from the University of Texas at Austin, and a
Ph.D. in Biochemistry from Washington State University.
18
Thomas C. Chesterman has served as our Senior Vice
President and Chief Financial Officer since August 2002. From
1996 to 2002, Mr. Chesterman was Vice President and Chief
Financial Officer at Bio-Rad Laboratories, Inc., a life-science
research products and clinical diagnostics company. From 1993 to
1996, Mr. Chesterman was Vice President of Strategy and
Chief Financial Officer of Europolitan AB, a telecommunications
company. Mr. Chesterman holds a B.A. from Harvard
University, and an MBA in Finance and Accounting from the
University of California at Davis.
Stephen J. Farr, Ph.D., has served as our Senior
Vice President, Chief Scientific Officer since April 2003. Since
1995, Dr. Farr served in various positions at Aradigm
including as Director, Pharmaceutical Sciences, Senior Director
and Vice President, Pharmaceutical Sciences, and Vice President,
Research and Development. From September 1985 to December 1994,
Dr. Farr was Lecturer and later Senior Lecturer in the
Welsh School of Pharmacy, Cardiff University, United Kingdom.
Dr. Farr was a founder and director of Cardiff
Scintigraphics Ltd., a contract research organization.
Dr. Farr holds a B.Sc. in Pharmacy from De Montfort
University, and a Ph.D. in pharmaceutics from the University of
Wales. Dr. Farr is a Visiting Associate Professor in the
Department of Pharmaceutics, School of Pharmacy, Virginia
Commonwealth University, Richmond, Virginia.
Bobba Venkatadri has served as our Senior Vice President,
Operations, since June 2003. Mr. Venkatadri has over
30 years of U.S. and international senior executive
leadership experience in pharmaceutical and biotechnology
manufacturing. Prior to joining Aradigm, Mr. Venkatadri was
Executive Vice President of Operations for Diosynth RTP, Inc., a
division of Akzo Nobel AV from January 2001. Mr. Venkatadri
served as Chief Executive Officer of Molecular Biosystems, Inc.
from 1995 to 2000, and Executive Vice President of Centocor,
Inc. from 1992 to 1995. Mr. Venkatadri held multiple
positions with Warner-Lambert Company from 1967 to 1992
including, President of Warner-Lambert Indonesia, Vice President
of Warner-Lambert Puerto Rico, and Vice President,
U.S. Operations of Parke-Davis. Mr. Venkatadri holds a
Masters Degree in Pharmacy from Andhra University, India, and an
MBA in Finance from Fairleigh Dickinson University.
Babatunde A. Otulana, M.D., has served as our
Vice President, Clinical and Regulatory Affairs since October
1997. From 1991 to September 1997, Dr. Otulana was a
Medical Reviewer in the Division of Pulmonary Drug Products at
the Center for Drug Evaluation and Research, Food and Drug
Administration. Dr. Otulana currently serves as an
Assistant Clinical Professor in Pulmonary Medicine at the school
of Medicine, University of California, Davis. Dr. Otulana
obtained his M.D. from the University of Ibadan, Nigeria, and
completed a Pulmonary Fellowship at Papworth Hospital,
University of Cambridge, U.K., and at Howard University
Hospital, Washington, D.C.
John J. Turanin has served as our Vice President,
Corporate Planning and Program Management since May 2004. From
October 1996 to May 2004, Mr. Turanin held several
positions in business development and project management at
Aradigm and most recently was Director of Project Management.
From August 1987 to September 1996, Mr. Turanin held
several positions at Invacare Corporation, a leading
manufacturer of home medical equipment, where his last position
was Senior General Manager of Respiratory Products for Invacare.
Mr. Turanin holds an MBA from the University of Pittsburgh
and a B.A. in Business from Indiana University of Pennsylvania.
Virgil D. Thompson has been a director since June 1995
and has been Chairman of the Board since January 2005. Since
November 2002, Mr. Thompson has been President and Chief
Executive Officer of Angstrom Pharmaceuticals Inc., a
pharmaceutical company. From September 2000 to November 2002,
Mr. Thompson was President, Chief Executive Officer and
Director of Chimeric Therapies, Inc., a biotechnology company.
From May 1999 until September 2000, Mr. Thompson was the
President, Chief Operating Officer and a Director of
Bio-Technology General Corp. (now Savient Pharmaceuticals,
Inc.,) a pharmaceutical company. From January 1996 to April
1999, Mr. Thompson was the President and Chief Executive
Officer and a Director of Cytel Corporation, a biopharmaceutical
company. From 1994 to 1996, Mr. Thompson was President and
Chief Executive Officer of Cibus Pharmaceuticals, Inc., a drug
delivery device company. From 1991 to 1993, Mr. Thompson
was President of Syntex Laboratories, Inc., a pharmaceutical
company. Mr. Thompson holds a B.S. in Pharmacy from Kansas
University and a J.D. from
19
The George Washington University Law School. Mr. Thompson
is also a director of Questcor Pharmaceuticals, Inc. and Savient
Pharmaceuticals Inc.
Frank H. Barker has been a director since May 1999. From
January 1980 to January 1994, Mr. Barker served as a
company group chairman of Johnson & Johnson, Inc., a
diversified health care company and was Corporate Vice President
from January 1989 to January 1996. Mr. Barker holds a B.A.
in Business Administration from Rollins College, Winter Park,
Florida.
Igor Gonda, Ph.D. has been a director since September
2001. Dr. Gonda is the Chief Executive Officer and Managing
Director of Acrux Limited, a drug-delivery company in Melbourne,
Australia. Dr. Gonda was our Chief Scientific Officer until
December 2001 and previously held the position of Vice
President, Research and Development, from October 1995 until
July 2001. From February 1992 to September 1995, Dr. Gonda
was a Senior Scientist and Group Leader at Genentech, Inc. Prior
to that, Dr. Gonda held academic positions at the
University of Aston in Birmingham, UK, and the University of
Sydney, Australia. Dr. Gonda has a B.Sc. in Chemistry and a
Ph.D. in Physical Chemistry from Leeds University, UK.
Dr. Gonda is the Chairman of the Scientific Advisory Board
of Aradigm.
Stephen O. Jaeger has been a director since March 2004.
He has been the Chairman of eBT International, Inc., a former
software products and services company since 1999.
Mr. Jaeger also held the positions of President and Chief
Executive Officer from 1999 to December 2005. Prior to joining
eBT, Mr. Jaeger was the Executive Vice President and Chief
Financial Officer of Clinical Communications Group, Inc., a
provider of educational marketing services to the pharmaceutical
and biotech industries, from 1997 to 1998. From 1995 to 1997,
Mr. Jaeger served as Vice President, Chief Financial
Officer and Treasurer of Applera Corp., formerly know as Perkin
Elmer Corporation, an analytical instrument and systems company
with a focus on life science and genetic discovery. Prior to
1995, Mr. Jaeger was Chief Financial Officer and a director
of Houghton Mifflin Company and held various financial positions
with the British Petroleum Company, PLC, Weeks Petroleum Limited
and Ernst & Young LLP. Mr. Jaeger holds a B.A. in
Psychology from Fairfield University and an MBA in Accounting
from Rutgers University and is a Certified Public Accountant.
Mr. Jaeger is on the board of Savient Pharmaceuticals Inc.
and Arlington Tankers, Ltd. Mr. Jaeger is the Chairman of
and the designated financial expert on
Aradigms and Savients Audit Committees and is the
Chairman of Arlington Tankers Audit Committee.
John M. Nehra has been a director since December 2001.
Mr. Nehra is a Special Partner of New Enterprise Associates
10 Limited Partnership (NEA 10) and New Enterprise
Associates 11, Limited Partnership, both venture capital
partnerships, and a General Partner of NEA VI, NEA VII, NEA VIII
and NEA IX. Mr. Nehra is also the managing General Partner
of Catalyst Ventures, a venture capital partnership. Prior to
joining NEA 10 and its affiliated venture funds in 1989,
Mr. Nehra was Managing Director of Alex Brown &
Sons Inc., an investment banking firm. Upon joining Alex Brown
in 1975, Mr. Nehra was responsible for building the
firms healthcare research and healthcare banking practice,
and forming its capital markets group. Mr. Nehra holds a
B.A. from the University of Michigan. Mr. Nehra is a
director of Davita Inc. and also serves on the boards of several
privately held healthcare companies.
Wayne I. Roe has been a director since May 1999.
Mr. Roe was Senior Vice President of United Therapeutics
Corporation, a pharmaceutical manufacturer, from 1999 to 2000.
Mr. Roe was Chairman of Covance Health Economics and
Outcome Services, Inc., a strategic marketing firm, from 1996 to
1998. From June 1988 to March 1996, Mr. Roe was the
President of Health Technology Associates, a pharmaceutical
industry-consulting firm. Mr. Roe received a B.A. from
Union College, an M.A. from the State University of New York at
Albany and an M.A. from the University of Maryland. Mr. Roe
is also a director of Ista Pharmaceuticals Inc. and several
privately held companies.
Richard P. Thompson has been director since June 1994 and
served as our President and Chief Executive Officer from June
1994 to June 2003. He served as Chief Executive Officer from
June 2003 through July 2004 and Chairman of the Board from 2000
until January 2005. From 1991 to 1994, Mr. Thompson was
President of LifeScan, Inc., a diversified health care
subsidiary of Johnson & Johnson Company. He is
currently president and CEO of Luminous Medical, a private,
medical device company. In 1981, Mr. Thompson co-
20
founded LifeScan, which was sold to Johnson & Johnson
in 1986. Mr. Thompson holds a B.S. in Biological Sciences
from the University of California at Irvine and an MBA from
California Lutheran University.
Item 1A. Risk Factors
Except for historical information contained herein, the
discussion in this Report on
Form 10-K contains
forward-looking statements, including, without limitation,
statements regarding timing and results of clinical trials, the
establishment of corporate partnering arrangements, the
anticipated commercial introduction of our products and the
timing of our cash requirements. These forward-looking
statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in such
forward-looking statements. Potential risks and uncertainties
include, without limitation, those mentioned in this report and
in particular the factors described below.
We are an early-stage company.
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
products 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. Failure to achieve commercial feasibility,
demonstrate safety, achieve clinical efficacy, obtain regulatory
approval or successfully market products will negatively impact
our business.
We will need additional capital and our ability to find
additional funding is uncertain.
Our operations to date have consumed substantial and increasing
amounts of cash. We expect the negative cash flow from
operations to continue in the foreseeable future. We will need
to commit substantial funds to develop our technology and
proposed products. We will have to continue to conduct costly
and time-consuming research and preclinical and clinical testing
to develop, refine and commercialize our technology and proposed
products. Our future capital requirements will depend on many
factors, including:
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progress in researching and developing our technology, our drug
delivery systems and potential applications; |
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our ability to establish and maintain favorable collaborative
arrangements with others; |
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progress with preclinical studies and clinical trials; |
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time and costs to obtain regulatory approvals; |
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costs of development and the rate at which we expand our
production technologies; |
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costs of preparing, filing, prosecuting, maintaining and
enforcing patent claims; and |
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our need to acquire licenses or other rights to technology. |
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 existing cash and cash equivalent balances
at December 31, 2005, funding commitments from corporate
development partners, and interest earned on our investments
should be sufficient to meet our needs for at least the next
12 months. However, there can be no assurances that these
sources of funding will be sufficient, that our cash
requirements will not change or that funding commitments from
our corporate development partners will not be amended or
terminated.
21
We will need to raise additional capital to fund our capital
spending and operations before we become profitable. During
2006, we will be seeking additional funding through
collaborations, borrowing arrangements and/ or through public or
private equity financing, although additional equity financing
will be needed to avoid a shareholders equity deficit. We
cannot assure you that additional financing can be obtained on
acceptable terms, or at all. Dilution to shareholders may result
if funds are raised by issuing additional equity securities. If
adequate funds are not available during the first half of 2006,
we will be required to delay, to reduce the scope of, or to
eliminate one or more of our research and development programs,
or to obtain funds through arrangements with collaborative
partners or other sources that may require us to relinquish
rights to certain of our technologies or products that we would
not otherwise relinquish, and to reduce personnel related costs.
We have a history of losses and anticipate future losses.
We have never been profitable, and through December 31,
2005, we have incurred a cumulative deficit of approximately
$274.8 million and our shareholders equity is only
$7.2 million. We have not had any product sales and do not
anticipate receiving any revenue from product sales in 2006. We
expect to continue to incur substantial losses over at least the
next several years as we:
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expand our research and development efforts; |
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expand our preclinical and clinical testing activities; |
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pursue additional applications for our existing delivery
platforms; |
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expand our manufacturing efforts; and |
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plan and build our commercial production capabilities. |
To achieve and sustain profitability, we must, alone or with
others, develop, obtain regulatory approval for, manufacture,
market and sell products using our drug delivery platforms. We
cannot assure investors that we will generate sufficient product
or contract research revenue to become profitable or to sustain
profitability.
We may not be able to develop our products successfully.
Many of our products are at an early stage of development.
Before we can begin to sell our products commercially, we will
need to invest in substantial additional development and conduct
clinical testing. In order to further develop many of our
products, we will need to address engineering and design issues.
We cannot assure you that we will be successful in addressing
these designs, engineering and manufacturing issues.
Additionally, we will need to formulate and package drugs for
delivery by our AERx and Intraject systems. We cannot assure you
that we will be able to do this successfully.
Even if our delivery technologies have been successfully
developed and are commercially feasible for a range of large and
small molecule drugs, we cannot assure you that such
applications will be commercially acceptable. For our delivery
systems to be commercially viable, we will need to demonstrate
that drugs delivered by our systems:
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are safe and effective; |
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will not be subject to physical or chemical instability over
time and under differing storage conditions; and |
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do not suffer from other problems that would affect commercial
viability. |
While our development efforts are at different stages for
different products, we cannot assure you that we will
successfully develop any products. We may also abandon some or
all of our proposed products. If we cannot develop potential
products in a timely manner, our business will be impaired.
22
We may not be able to commercialize products successfully.
Our success in commercializing our products depends on many
factors, including acceptance by health care professionals and
patients. Their acceptance of our products will largely depend
on our ability to demonstrate our products ability to
compete with alternate delivery systems with respect to:
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safety; |
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efficacy |
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ease of use; and |
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price. |
There can be no assurance that our products will be competitive
with respect to these factors or that our partners will be able
to successfully market any of them in a timely manner.
We depend on collaborative partners and need additional
collaborative partners.
Our commercialization strategy depends on our ability to enter
into agreements with collaborative partners. In addition, our
development partners could terminate their agreements and we
have no assurance that we will receive any development and
milestone payments. If we do not receive development funds or
achieve milestones set forth in the agreements, or if any of our
development partners breach or terminate their agreement, our
business will be impaired.
The development and commercialization of the AERx iDMS will be
delayed if Novo Nordisk fails to conduct these activities in a
timely manner or at all.
Under the terms of our current agreements with Novo Nordisk,
Novo Nordisk and its affiliates assumed broad control and
responsibility with respect to:
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development and commercialization of the AERx diabetes
management products; and |
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management and operation of the manufacturing facility for the
AERx iDMS. |
We will also need to enter into agreements with other corporate
partners to conduct the clinical trials, manufacturing,
marketing and sales necessary to commercialize other potential
products on our AERx and Intraject systems. In addition, our
ability to apply our delivery systems to any proprietary drugs
will depend on our ability to establish and maintain corporate
partnerships or other collaborative arrangements with the
holders of proprietary rights to such drugs. We cannot assure
you that we will be able to establish such additional corporate
partnerships or collaborative arrangements on favorable terms or
at all, or that our existing or future corporate partnerships or
collaborative arrangements will be successful. We can not assure
you that our existing or future corporate partners or
collaborators will not pursue alternative technologies or
develop alternative products either on their own or in
collaboration with others, including our competitors. We could
have disputes with our existing or future corporate partners or
collaborators. Any such disagreements could lead to delays in
the research, 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. If any of our corporate partners or collaborators do not
develop or commercialize any product to which it has obtained
rights from us, our business could be impaired.
We have limited manufacturing experience.
We have validated only a single clinical manufacturing facility
for our single dosage forms for our AERx delivery system, and
responsibility for and control of this facility has transferred
to NNDT. We have limited future access to the NNDT manufacturing
facility.
23
Either our development partners or we will have to invest
significant amounts to attempt to provide for the high-volume
manufacturing required for multiple products, and much of this
spending will occur before our products are approved. There can
be no assurance that:
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the design requirements of our pulmonary and subcutaneous
systems will make it feasible for us to develop it beyond the
current prototype; |
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manufacturing and quality control problems will not arise as we
attempt to scale-up; or |
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any scale-up can be
achieved in a timely manner or at a commercially reasonable cost. |
Failure to address these issues could delay or prevent
late-stage clinical testing and commercialization of our
products.
We have limited capacity to manufacture key components of our
drug delivery systems. Under the terms of a Contract
Manufacturing Agreement we have entered into with NNDT, NNDT
agreed to supply devices and dosage forms to us for development
of our other AERx systems. This agreement expires at the end of
2007, and there can be no assurance that we will be able to
extend this agreement at satisfactory terms or that we will be
able to find a replacement supplier at satisfactory terms.
We may decide to invest in additional clinical manufacturing
facilities in order to internally produce critical components of
our drug delivery systems including the disposable nozzles,
assemble the disposable unit-dose packets and fill the drug into
the unit-dose packets.
We intend to use contract manufacturers to produce key
components, assemblies and subassemblies in the clinical and
commercial manufacturing of our delivery devices. There can be
no assurance that we will be able to enter into or maintain
satisfactory contract manufacturing arrangements. Certain
components of our products may be available, at least initially,
only from single sources. There can be no assurance that we
could find alternate suppliers for any of these components. A
delay of or interruption in production resulting from any supply
problem could have a material adverse effect on our business.
We rely on a small number of vendors and contract
manufacturers to supply us with specialized equipment, tools and
components.
We rely on a small number of vendors and contract manufacturers
to supply us with specialized equipment, tools and components
for use in our development and manufacturing processes. There
can be no assurances that these vendors will continue to supply
us with such specialized equipment, tools and components, nor
can there be any assurances that we could find alternative
sources for such specialized equipment and tools. A delay or
interruption in development or manufacturing resulting from our
inability to acquire the equipment, tools and components we need
could have a material adverse effect on our business.
We depend upon proprietary technology and the status of
patents and proprietary technology is uncertain.
Our business and competitive position is dependent upon our
ability to protect our proprietary technology and avoid
infringing on the proprietary rights of others. We have
conducted original research on a number of aspects relating to
pulmonary drug delivery. While we cannot assure you that any of
our patents will provide a significant commercial advantage,
these patents 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 trade secrets some
of the key elements of our manufacturing technologies;
particularly those associated with production of disposable
unit-dose packets for the AERx system.
In connection with our acquisition of assets from the Weston
Medical Group in May 2003, we acquired certain proprietary
technologies and other intellectual property relating to the
Intraject subcutaneous delivery system. While we have continued
to develop the technologies relating to the Intraject system, we
cannot assure you that our efforts to protect the proprietary
technologies and other intellectual property that we have
24
acquired from Weston Medical Group will provide adequate
protection or significant commercial advantage. To date we have
been unable to secure a partner for commercial-scale production
of any application of the Intraject system, and there can be no
assurance that we will be able to secure such a partner.
Our success will depend to a significant extent on our ability
to obtain and enforce patents, maintain trade secret protection
and operate without infringing on the proprietary rights of
third parties. Because the field of needle-free drug delivery is
crowded and a substantial number of patents have been issued and
because patent positions can be highly uncertain and frequently
involve complex legal and factual questions, the breadth of
claims obtained in any application or the enforceability of our
patents cannot be predicted. Commercialization of pharmaceutical
products can also be subject to substantial delays as a result
of the time required for product development, testing and
regulatory approval.
We also seek to protect some of these inventions through foreign
counterpart applications in selected other countries. Statutory
differences in patentable subject matter may limit the
protection we can obtain on some of our inventions outside of
the United States. For example, methods of treating humans are
not patentable in many countries outside of the United States.
These and other issues may limit the patent protection we will
be able to secure outside of the United States.
The coverage claimed in a patent application can be
significantly reduced before a patent is issued, either in the
United States or abroad. Consequently, we do not know whether
any of our pending or future patent applications will result in
the issuance of patents or, to the extent patents have been
issued or will be issued, whether these patents will be
subjected to further proceedings limiting their scope, will
provide significant proprietary protection or competitive
advantage, or will be circumvented or invalidated. Furthermore,
patents already issued to us or our pending applications may
become subject to dispute, and any disputes could be resolved
against us. For example, Eli Lilly and Company has 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 there can be no assurance
that we will not face other similar claims in the future. In
addition, because patent applications in the United States are
currently maintained in secrecy until patents issue, and patent
applications in certain other countries generally are not
published until more than 18 months after they are first
filed, and because 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 pending patent applications or that we were the first
to file patent applications on such inventions.
Our policy is to require our officers, employees, consultants
and advisors to execute proprietary information and invention
and assignment agreements upon commencement of their
relationships with us. We cannot assure you, however, that these
agreements will provide meaningful protection for our
inventions, trade secrets or other proprietary information in
the event of unauthorized use or disclosure of such information.
We also execute confidentiality agreements with outside
collaborators and consultants. However, disputes may arise as to
the ownership of proprietary rights to the extent that outside
collaborators or consultants apply technological information
developed independently by them or others to our projects, or
apply our technology to other projects, and we cannot assure you
that any such disputes would be resolved in our favor.
We may incur substantial costs if we are required to defend
ourselves in patent suits brought by third parties. 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 we cannot assure
you that any license required under any such patent would be
made available to us on acceptable terms, if at all. Litigation
may also be necessary to enforce our patents against others or
to protect our know-how or trade secrets. Such litigation could
result in substantial expense, and we cannot assure you that any
litigation would be resolved in our favor.
Sumatriptan is currently marketed under the trade name Imitrex
in oral, nasal and injectable forms and the injectable form is
covered by a series of patents, the first of which is scheduled
to come off patent in 2006 in Europe and 2007 in the United
States. There is an additional U.S. patent relating to the
injectable form of sumatriptan that does not expire until 2009,
though this patent has been challenged by multiple parties and
25
may be invalidated. There can be no assurance that this patent
will be invalidated, and if not, under certain circumstances we
will be unable to enter the U.S. market with Intraject
sumatriptan until 2009.
We may not obtain regulatory approval for our products on a
timely basis, or at all.
All medical devices and new drugs, including our products under
development, are subject to extensive and rigorous regulation by
the federal government, principally the FDA, and by state and
local government agencies. Such regulations govern the
development, testing, manufacture, labeling, storage, approval,
advertising, promotion, sale and distribution of such products.
Medical devices or drug products that are marketed abroad are
also subject to regulation by foreign governments.
The process for obtaining FDA approvals for drug products is
generally lengthy, expensive and uncertain. Securing FDA
approvals often requires applicants to submit extensive clinical
data and supporting information to the FDA. Even if granted, the
FDA can withdraw product clearances and approvals for failure to
comply with regulatory requirements or upon the occurrence of
unforeseen problems following initial marketing.
The activities required before a new drug product may be
marketed in the United States include pre-clinical and clinical
testing and submission of a new drug application with the FDA.
Preclinical tests include laboratory evaluation of product
chemistry and other characteristics and animal studies to assess
the potential safety and efficacy of the product as formulated.
Clinical testing involves the administration of the drug to
healthy human volunteers or to patients under the supervision of
a qualified principal investigator, usually a physician,
pursuant to a FDA-reviewed protocol.
Human clinical trials typically are conducted in three
sequential phases, but the phases may overlap. Phase 1
trials consist of testing the product in a small number of
patients or normal volunteers, primarily for safety, at one or
more dosage levels, as well as characterization of a drugs
pharmacokinetic and/or pharmacodynamic profile. In Phase 2
clinical trials, in addition to safety, the efficacy of the
product is usually evaluated in a patient population.
Phase 3 trials typically involve additional testing for
safety and clinical efficacy in an expanded population at
geographically disperse sites. All of the phases of clinical
studies must be conducted in conformance with FDAs
bioresearch monitoring regulations.
We cannot assure you that we will 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. Moreover, we cannot assure you that
any required approvals, once obtained, will not be withdrawn or
that we will remain in compliance with other regulatory
requirements. If we, or manufacturers of our components, fail to
comply with applicable FDA and other regulatory requirements,
we, and they, are subject to sanctions, including:
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|
|
warning letters; |
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|
|
fines; |
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|
|
product recalls or seizures; |
|
|
|
injunctions; |
|
|
|
refusals to permit products to be imported into or exported out
of the United States; |
|
|
|
withdrawals of previously approved marketing
applications; and |
|
|
|
criminal prosecutions. |
Manufacturers of drugs also are required to comply with the
applicable GMP requirements, which relate to product testing,
quality assurance and maintaining records and documentation. We
cannot assure you that we will be able to comply with the
applicable GMP and other FDA regulatory requirements for
manufacturing as we expand our manufacturing operations, which
would impair our business.
In addition, to market our products in foreign jurisdictions,
Aradigm and our partners must obtain required regulatory
approvals from foreign regulatory agencies and comply with
extensive regulations regarding safety and quality. We cannot
assure you that we will obtain regulatory approvals in such
26
jurisdictions or that we will not 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.
Because certain of our clinical studies involve narcotics, we
are registered with the DEA and our facilities are subject to
inspection and DEA export, import, security, and production
quota requirements. We cannot assure you that we will not be
required to incur significant costs to comply with DEA
regulations in the future or that such regulations will not
otherwise harm our business.
The results of preclinical and clinical testing are
uncertain.
Before we can file for regulatory approval for the commercial
sale of our potential AERx and Intraject products, the FDA will
require extensive preclinical and clinical testing to
demonstrate their safety and efficacy. We have tested prototype
patient-operated versions of our AERx and Intraject delivery
systems on a limited number of individuals in Phase 1 and
Phase 2 clinical trials and have initiated a Phase 3
clinical trial for the AERx iDMS. If we do not or cannot
complete current trials or progress to more advanced clinical
trials, we may not be able to commercialize our AERx or
Intraject products.
Completing clinical trials in a timely manner depends on, among
other factors, the enrollment of patients. 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 competitive clinical trials. Delays in planned
patient enrollment in our current or future clinical trials may
result in increased costs, program delays or both.
Although we believe the limited data we have regarding our
potential products is encouraging, the results of initial
preclinical and clinical testing do not necessarily predict the
results that we will get from subsequent or more extensive
preclinical and clinical testing. Furthermore, we cannot assure
you that clinical trials of these products will demonstrate that
these products are safe and effective to the extent necessary to
obtain regulatory approvals. Many companies in the
pharmaceutical and biotechnology industries have suffered
significant setbacks in advanced clinical trials, even after
promising results in earlier trials. If we cannot adequately
demonstrate that any therapeutic product we are developing is
safe and effective, regulatory approval of that product would be
delayed or prevented, which would impair our business.
We are also developing applications of our delivery platforms
for the delivery of other compounds. These applications are in
early stages of development and we do not yet know the degree of
testing and development that will be needed to obtain necessary
marketing approvals from the FDA and other regulatory agencies.
We cannot assure you that these applications will prove to be
viable or that any necessary regulatory approvals will be
obtained in a timely manner, if at all.
In addition, the FDA may require us to provide clinical data
beyond what is currently planned to demonstrate that the chronic
administration of drugs delivered via the lung for systemic
effect is safe. We cannot assure you that we will be able to
present such data in a timely manner, or at all.
We are in a highly competitive market and our competitors may
develop alternative therapies.
We are in competition with pharmaceutical, biotechnology and
drug delivery companies, hospitals, research organizations,
individual scientists and nonprofit organizations engaged in the
development of alternative drug delivery systems or new drug
research and testing, as well as with entities producing and
developing injectable drugs. We are aware of a number of
companies such as Alkermes Pharmaceuticals, Inc. and Nektar
Therapeutics (formerly Inhale Therapeutic Systems, Inc.) that
are currently seeking to develop new products and non-invasive
alternatives to injectable drug delivery, including oral
delivery systems, intranasal delivery systems, transdermal
systems, buccal and colonic absorption systems. Several of these
companies may have developed or are developing dry powder
devices that could be used for pulmonary delivery. Many of these
companies and entities have greater research and development
capabilities, experience, manufacturing, marketing, financial
and managerial resources than we do and many of these companies
may have applications for their delivery platforms that are in a
more advanced stage of
27
development than our applications. Accordingly, our competitors
may succeed in developing competing technologies, obtaining FDA
approval for products or gaining market acceptance more rapidly
than we can.
We depend on key personnel and must continue to attract and
retain key employees.
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 research and development
personnel. We face intense competition in our recruiting
activities and may not be able to attract or retain qualified
personnel. Losing any of these key employees could harm our
business and operations.
We may be exposed to product liability.
Researching, developing and commercializing medical devices and
therapeutic products entail significant product liability risks.
The use of our products in clinical trials and the commercial
sale of such products may expose us to liability claims. These
claims might be made directly by consumers or by pharmaceutical
companies or others selling such products.
Companies often address the exposure of such risk by obtaining
product liability insurance. Although we currently have product
liability insurance, there can be no assurance that we can
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 business.
Third-party reimbursement for our products is uncertain.
In both domestic and foreign markets, sales of our potential
products depend in part on the availability of reimbursement
from third-party payers such as government health administration
authorities, private health insurers and other organizations.
Third-party payers often challenge the price and
cost-effectiveness of medical products and services. Significant
uncertainty exists as to the reimbursement status of newly
approved health care products. We cannot assure you that any of
our products will be reimbursable by third-party payers. In
addition, we cannot assure you that our products will be
considered cost-effective or that adequate third-party
reimbursement will be available to enable us to maintain price
levels sufficient to realize a profit. 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.
We use hazardous materials.
Our operations involve use of hazardous and toxic materials,
chemicals and various radioactive compounds that generate
hazardous, toxic and radioactive wastes. Although we believe
that our safety procedures for handling and disposing of such
materials comply with all state and federal regulations and
standards, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. In the event of
such an accident, we could be held liable for any damages that
result and such liability could exceed the resources of our
business.
Our stock price is likely to remain volatile.
The market prices for securities of many companies in the drug
delivery industry, 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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|
|
analyst recommendations; |
|
|
|
fluctuations in our operating results; |
28
|
|
|
|
|
market conditions relating to the drug delivery industry; |
|
|
|
announcements of technological innovations or new commercial
products by us or our competitors; |
|
|
|
publicity regarding actual or potential developments relating to
products under development by us or our competitors; |
|
|
|
failure to establish new collaborative relationships; |
|
|
|
developments or disputes concerning patent or proprietary rights; |
|
|
|
delays in the development or approval of our product candidates; |
|
|
|
regulatory developments in both the United States and foreign
countries; |
|
|
|
public concern as to the safety of drug delivery technologies; |
|
|
|
period-to-period
fluctuations in financial results; |
|
|
|
future sales of substantial amounts of common stock by
shareholders; or |
|
|
|
economic and other external factors. |
In the past, class action securities litigation has often been
instituted against companies following periods of volatility in
the market price of their securities. Any such litigation
instigated against us could result in substantial costs and a
diversion of managements attention and resources.
We have implemented certain anti-takeover provisions.
Certain provisions of our articles of incorporation and the
California General Corporation Law could discourage a third
party from acquiring, or make it more difficult for a third
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 the board
of directors to authorize the issuance 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
General Corporation Law which requires a fairness opinion to be
provided 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 described above, our poison pill, our severance plan
and our change of control agreements, and provisions of the
California General Corporation Law may discourage, delay or
prevent a third party from acquiring us.
Item 1B. Unresolved Staff Comments
None
At December 31, 2005, we leased approximately
72,467 square feet of office space in an office park at
3929 Point Eden Way, Hayward, California. The lease for the
office space expires in 2016. A portion of this lease expense is
offset by a sublease to NNDT of $10,000 per month through
December 2006. Minimum payments under this lease, net of
sublease payments, will be approximately $1.7 million in
2006 and an aggregate of $22.8 million for the period 2006
through 2016. We believe that our existing facilities are
adequate to meet our requirements for the near term.
29
|
|
Item 3. |
Legal Proceedings |
There are no material pending legal proceedings.
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|
Item 4. |
Submission of Matters to a Vote of Security Holders |
There were no submission of matters to a vote of security
holders in the fourth quarter of the year-ended
December 31, 2005.
PART II
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|
Item 5. |
Market for the Registrants Common Stock and Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Market Information
Our common stock is traded on The Nasdaq National Market under
the symbol ARDM. The following table sets forth the
intra-day high and low sale prices for our common stock as
reported on The Nasdaq National Market for the periods indicated
below. On December 12, 2005 we announced that the Board of
Directors approved a one-for-five reverse stock split that
became effective at 5:00 pm PST on January 4, 2006. The
high and low sales prices on the following table are adjusted
for the one-for-five reverse stock split.
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|
|
|
|
|
|
|
|
|
|
High | |
|
Low | |
|
|
| |
|
| |
2004
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
13.70 |
|
|
$ |
9.05 |
|
|
Second Quarter
|
|
|
11.35 |
|
|
|
4.20 |
|
|
Third Quarter
|
|
|
6.40 |
|
|
|
3.30 |
|
|
Fourth Quarter
|
|
|
10.00 |
|
|
|
5.90 |
|
2005
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
8.65 |
|
|
$ |
5.60 |
|
|
Second Quarter
|
|
|
5.90 |
|
|
|
5.00 |
|
|
Third Quarter
|
|
|
6.05 |
|
|
|
4.95 |
|
|
Fourth Quarter
|
|
|
5.25 |
|
|
|
3.45 |
|
2006
|
|
|
|
|
|
|
|
|
|
First Quarter (through Feb. 28, 2006)
|
|
$ |
5.04 |
|
|
|
3.50 |
|
On February 28, 2006, there were 146 holders of record of
our common stock.
Dividend Policy
We have never declared or paid any cash dividends. We currently
intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate
paying any cash dividends in the foreseeable future.
30
Equity Compensation Plan Information
The following table summarizes our equity compensation plan
information as of December 31, 2005. Information is
included for the equity compensation plans approved by our
stockholders. There are no equity compensation plans not
approved by our stockholders.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
|
|
|
|
|
Available for | |
|
|
|
|
|
|
Future Issuance | |
|
|
Common Stock to | |
|
|
|
Under Equity | |
|
|
be Issued Upon | |
|
Weighted-Average | |
|
Compensation | |
|
|
Exercise of | |
|
Exercise Price of | |
|
Plans (Excluding | |
|
|
Outstanding Options | |
|
Outstanding Options | |
|
Securities Reflected | |
|
|
and Rights(1) | |
|
and Rights | |
|
in Column (a))(1) | |
Plan Category |
|
(a) | |
|
(b) | |
|
(c) | |
|
|
| |
|
| |
|
| |
Equity compensation plans approved by Aradigm stockholders
|
|
|
1,729,709 |
|
|
$ |
19.47 |
|
|
|
919,386 |
|
|
|
(1) |
Issued pursuant to the Companys 1996 Equity Incentive
Plan, the 1996 Non-Employee Directors Plan, and the 2005
Equity Incentive Plan. (See Note 6 of the Financial
Statements.) |
31
|
|
Item 6. |
Selected Financial Data |
The following selected financial data should be read in
conjunction with the Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the financial statements and notes thereto included in this
Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005(1) | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract and license revenues
|
|
$ |
10,507 |
|
|
$ |
28,045 |
|
|
$ |
33,857 |
|
|
$ |
28,967 |
|
|
$ |
28,916 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
30,174 |
|
|
|
46,477 |
|
|
|
49,636 |
|
|
|
54,680 |
|
|
|
58,836 |
|
|
General and Administrative
|
|
|
10,895 |
|
|
|
11,934 |
|
|
|
10,391 |
|
|
|
10,394 |
|
|
|
9,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
41,069 |
|
|
|
58,411 |
|
|
|
60,027 |
|
|
|
65,074 |
|
|
|
68,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(30,562 |
) |
|
|
(30,366 |
) |
|
|
(26,170 |
) |
|
|
(36,107 |
) |
|
|
(39,275 |
) |
Interest income
|
|
|
1,317 |
|
|
|
194 |
|
|
|
338 |
|
|
|
818 |
|
|
|
1,324 |
|
Other income(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,675 |
|
Other income (expenses)
|
|
|
30 |
|
|
|
(17 |
) |
|
|
(138 |
) |
|
|
(642 |
) |
|
|
(1,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(29,215 |
) |
|
|
(30,189 |
) |
|
|
(25,970 |
) |
|
|
(35,931 |
) |
|
|
(32,357 |
) |
Deemed dividend(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,722 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shareholders
|
|
$ |
(29,215 |
) |
|
$ |
(30,189 |
) |
|
$ |
(25,970 |
) |
|
$ |
(35,931 |
) |
|
$ |
(43,079 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share applicable to common
shareholders:
|
|
$ |
(2.01 |
) |
|
$ |
(2.37 |
) |
|
$ |
(2.59 |
) |
|
$ |
(5.94 |
) |
|
$ |
(9.89 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
14,513 |
|
|
|
12,741 |
|
|
|
10,039 |
|
|
|
6,052 |
|
|
|
4,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short term investments
|
|
$ |
27,694 |
|
|
$ |
16,763 |
|
|
$ |
29,770 |
|
|
$ |
31,443 |
|
|
$ |
71,164 |
|
Working capital
|
|
$ |
21,087 |
|
|
$ |
4,122 |
|
|
$ |
19,708 |
|
|
$ |
16,039 |
|
|
$ |
48,308 |
|
Total assets
|
|
$ |
39,497 |
|
|
$ |
79,741 |
|
|
$ |
95,218 |
|
|
$ |
97,129 |
|
|
$ |
132,100 |
|
Noncurrent portion of notes payable and capital lease obligations
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
497 |
|
|
$ |
2,427 |
|
Redeemable convertible preferred stock
|
|
$ |
23,669 |
|
|
$ |
23,669 |
|
|
$ |
23,669 |
|
|
$ |
30,665 |
|
|
$ |
30,735 |
|
Accumulated deficit
|
|
$ |
(274,838 |
) |
|
$ |
(245,623 |
) |
|
$ |
(215,436 |
) |
|
$ |
(189,443 |
) |
|
$ |
(153,535 |
) |
Total shareholders equity
|
|
$ |
7,171 |
|
|
$ |
35,753 |
|
|
$ |
52,970 |
|
|
$ |
41,410 |
|
|
$ |
71,149 |
|
|
|
(1) |
On January 26, 2005, we completed the restructuring of our
AERx iDMS program, pursuant to the Restructuring Agreement
entered into with Novo Nordisk and NNDT. In accordance with the
restructuring transaction, the Company received
$51.1 million in cash and applied $4.0 million of
deposits from Novo Nordisk in consideration for
$54.3 million of property and equipment at net book value,
$515,000 of inventory and $317,000 for prepaid and other assets.
As a result of the restructuring transaction, our contract
revenue from our development agreement with Novo Nordisk ceased
in 2005. Of the amount recorded in deferred revenue at
December 31, 2004, we recorded $11.3 million in the
first quarter of 2005, consisting of: project development
revenue of $2.1 million, deferred milestone revenue of
$5.2 million, and $4.0 million as partial payment for
the sale of the insulin development program assets in |
32
|
|
|
accordance with the restructuring agreement. We recorded no
material gain or loss was recorded as a result of sales of
assets. |
|
(2) |
Other income consists of the gain related to forgiveness of
outstanding notes and interest by Genentech, previously
classified as an extraordinary item. In 2002, the Company early
adopted Statement of Financial Accounting Standard
(SFAS) 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB 13 and Technical
Corrections, which requires the reclassification of this
type of extraordinary item as a component of operating results. |
|
(3) |
This represents the beneficial conversion feature, measured as
the difference between the fair market value of Aradigms
common stock and the discounted conversion price. We reported
the value of the beneficial conversion feature on the Statements
of Operations for the year ended December 31, 2001 as a
deemed dividend and included the value in the calculation of net
loss applicable to the common shareholders. |
|
|
Item 7. |
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 this report. This discussion should be read in
conjunction with the financial statements and notes to the
financial statements contained in this report.
Overview
Since our inception in 1991, we have been engaged in the
development of needle-free drug delivery systems. We have not
been profitable since inception and expect to incur additional
operating losses over the next several years as research and
development efforts, preclinical and clinical testing activities
and manufacturing
scale-up efforts expand
and as we plan and build our late-stage clinical and early
commercial production capabilities. To date, we have not had any
product sales and do not anticipate receiving any revenue from
the sale of products in 2006. As of December 31, 2005 we
had an accumulated deficit of $274.8 million. The sources
of working capital have been equity financings, equipment lease
financings, contract and license revenues and interest earned on
investments.
We have performed initial feasibility work on a number of
compounds and have been compensated for expenses incurred while
performing this work in several cases pursuant to feasibility
study agreements with third parties. Once feasibility is
demonstrated with respect to a potential product, we seek to
enter into development contracts with pharmaceutical corporate
partners.
During 2005, our collaborative agreement with Novo Nordisk and
NNDT contributed approximately 76% of our total contract
revenues. From the inception of our collaboration in June 1998
through December 31, 2005, we have received from Novo
Nordisk approximately $137.1 million in product development
payments, approximately $13.0 million in milestone payments
and $35.0 million from the purchase of our common stock by
Novo Nordisk and its affiliates. All product development and
milestone payments received to date have been recognized as
revenue.
On January 26, 2005, we completed the restructuring of its
AERx iDMS program, pursuant to the Restructuring Agreement
entered into with Novo Nordisk and NNDT. In accordance with the
restructuring transaction, we received $51.1 million in
cash and applied $4.0 million of deposits from Novo Nordisk
in consideration for $54.3 million of property and
equipment at net book value, $515,000 of inventory and $317,000
for prepaid and other assets. In addition, NNDT hired 126
Aradigm employees at the closing of the restructuring
transaction. Our expenses related to this transaction for legal
and other consulting costs were approximately $1.1 million.
We do not anticipate a material tax liability associated with
this transaction.
33
In connection with the restructuring transaction we entered into
various related agreements with Novo Nordisk and NNDT effective
January 26, 2005, including the following:
|
|
|
|
|
an amended and restated license agreement amending the
Development and License Agreement previously in place with Novo
Nordisk, expanding Novo Nordisks development and
manufacturing rights to the AERx iDMS program and providing for
royalties to us on future AERx iDMS net sales in lieu of a
percentage interest in the gross profits from the
commercialization of AERx iDMS; |
|
|
|
a three-year agreement under which NNDT agreed to perform
contract manufacturing for us of AERx iDMS-identical devices and
dosage forms filled with compounds we provide in support of our
preclinical and initial clinical development of other AERx
products; and |
|
|
|
an amendment of the stock purchase agreement in place with Novo
Nordisk, Inc. prior to the closing of the restructuring
transaction, deleting the provisions whereby we can require Novo
Nordisk to purchase certain amounts of common stock, imposing
certain restrictions on the ability of Novo Nordisk to sell
shares of our common stock previously purchased by Novo Nordisk,
and providing Novo Nordisk with certain registration and
information rights with respect to these shares. |
As a result of this transaction, we recorded our final project
development revenue from Novo Nordisk (approximately
$2.1 million for the first 26 days of 2005) and as we
were no longer obligated to continue work related to the
non-refundable milestone payment from Novo Nordisk related to
the commercialization of AERx, we recognized the remaining
balance of the deferred revenue associated with the milestone of
$5.2 million as revenue. Also, in 2005 we recorded revenue
of approximately $727,000 from NNDT related to transition and
support agreements.
As a result of the restructuring transaction, we were released
from our contractual obligations relating to future operating
lease payments for the two buildings assigned to NNDT and
accordingly reversed the deferred rent liability related to the
two buildings of $1.4 million, resulting in a reduction of
operating expenses in 2005.
As of February 28, 2005 Novo Nordisk, together with its
affiliates, beneficially owned 1,573,674 shares of our
common stock (10% of our total common stock outstanding on a
converted basis) and is considered a related party.
In May 2003, we announced the acquisition of selected assets
from Weston relating to Westons Intraject needle-free drug
delivery system. Weston developed a proprietary needle-free drug
delivery system, successfully moved it through the early-stage
development process and signed several commercial agreements. In
September 2002, Weston announced that it had encountered certain
performance problems associated with the systems
configuration and that its program would be delayed until those
problems could be resolved. Subsequently, Weston was unable to
secure the financing needed to continue its programs and was
forced into bankruptcy administration in February 2003. We
acquired select Weston assets, including the Intraject
technology, related manufacturing equipment with an approximate
book value of $22 million and intellectual property for a
total of approximately $2 million in initial purchase price
and approximately an additional $1 million in subsequent
transfer and additional capital costs. The purchase price and
additional costs were allocated to the major pieces of purchased
commercial equipment for the production of Intraject and were
recorded in property and equipment as construction in progress.
These assets, along with subsequent additions to the commercial
equipment will be depreciated at the time commercial
manufacturing begins. No costs or expense were allocated to
intellectual property or in process research and development on
a pro-rata basis, because of the lack of market information, the
stage of development and the immateriality of any allocation to
intellectual property or in process research and development
based on the substantial value of the tangible assets acquired.
In October 2004, we announced positive results from the Clinical
Performance Verification trial of our Intraject needle-free
delivery system in which the final design of the system
demonstrated an excellent delivery profile. Results showed that
the modified delivery system demonstrated successful injection
performance reliability and that the current design presented
commercially viable delivery parameters. Following the results
from the configuration trial, we initiated a pilot
pharmacokinetic study comparing
34
Intraject with Sumatriptan, a treatment for migraines, to the
currently marketed needle-injected product. The trial was a
randomized, open-label, single-dose, crossover study evaluating
the pharmacokinetics of sumatriptan at three injection sites
(abdomen, thigh, and arm) in 18 healthy adult male and female
volunteers. Results demonstrated that Intraject was
bioequivalent to the currently injectable product. In June 2005,
we announced results from a self-injection study comparing
Intraject Sumatriptan to the currently marketed subcutaneously
injected product. This trial was a randomized, open-label,
single-dose, crossover study evaluating the pharmacokinetics of
sumatriptan at three injection sites (abdomen, thigh, and arm)
in 24 healthy adult male and female volunteers naïve to
self-injection with Intraject. The data showed that Intraject
Sumatriptan was bioequivalent to the marketed injectable product
and that patients were able to self-administer using Intraject.
We have completed manufacture of supplies on commercial
equipment for pivotal bioequivalence studies. These
bioequivalence studies could be initiated in 2006 pending
partnering. There can be no assurance that the Intraject Triptan
development program or any other Intraject development program
will be successful.
We have additional programs in development with disclosed and
undisclosed partners. It is our policy not to disclose the
partner and/or the drug until a long-term development agreement
has been established; both parties agree to highlight a clinical
advancement in the program or under special circumstances in
which both parties agree to disclosure. In 2004 we executed a
development and licensing agreement with Defense R&D Canada
for the development of liposomal ciprofloxacin for the treatment
of respiratory infections including biological terrorism-related
inhalation anthrax. In 2005, we announced positive data from an
early stage trial of AERx and a novel aerosol formulation of
Hydroxychloroquine (HCQ) as a new class of treatment
for asthma and chronic obstructive pulmonary disease.
On January 4, 2006, we filed an amended and restated
certificate of incorporation with the California Secretary of
State effecting a
1-for-5 reverse split
of our common stock. All share and per share amounts have been
retroactively restated in the accompanying financial statements,
notes to the financial statements and elsewhere in this document
for all periods presented.
Critical Accounting Policies and Estimates
We consider certain accounting policies related to revenue
recognition and impairment of long-lived assets 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 U.S. 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 financial statements.
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 of
deferred revenue and assumptions for valuing options, warrants
and the beneficial conversion feature of preferred stock. Actual
results could differ from these estimates.
Contract revenues consist of revenue 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. Under the agreements, revenue is recognized
once costs are incurred and collectibility is reasonably
assured. Under some agreements our partners have the right to
withhold reimbursement of our costs incurred until the work
performed under the relative agreement is mutually agreed upon.
For these agreements revenue is recognized upon confirmation
from the partner of acceptance of work performed and payment
amount. 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
35
under the agreements and, accordingly, are generally recognized
as revenue either upon the 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 agreements when payments precede the required efforts. Costs
of contract revenues are approximate to or are greater than such
revenue and are included in research and development expenses.
Refundable development and license fee payments are deferred
until the specified performance criteria are achieved.
Refundable development and license fee payments are generally
not refundable once the specific performance criteria are
achieved and accepted.
|
|
|
Impairment of Long-Lived Assets |
We review for impairment whenever events or changes in
circumstances indicate that the carrying amount of property and
equipment may not be recoverable in accordance with
SFAS 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. Determination of recoverability is
based on an estimate of undiscounted future cash flows resulting
from the use of the asset and its eventual disposition. In the
event that such cash flows are not expected to be sufficient to
recover the carrying amount of the assets, the assets are
written down to their estimated fair values and the loss is
recognized on the Statements of Operations.
Results of Operations
|
|
|
Years Ended December 31, 2005, 2004 and 2003 |
Contract Revenues. We reported revenues from
collaborative contracts of $10.5 million in 2005, compared
to $28.0 million in 2004 and $33.9 million in 2003.
The 63% decrease in revenue in 2005 compared to 2004 is
primarily due to decreases in partner-funded project development
revenue from Novo Nordisk, which was $8.0 million in 2005
compared to $27.0 million in 2004 and offset by contract
revenue from other partner-funded programs, which totaled
$2.5 million in 2005 and $1.0 million in 2004. The
increase in other partner revenue was the result of initiating
four new feasibility projects in 2005. Revenue in 2003 consisted
of $33.5 million from partner-funded project development
revenue from Novo Nordisk and $311,000 from other partner-funded
project development programs. The $6.5 million reduction in
revenue from partners from 2003 to 2004 is due to the maturation
of the project and the subsequent ramping down. Costs associated
with contract-research revenue are included in research and
development expenses.
As a result of the restructuring of the AERx iDMS program, which
was completed on January 26, 2005, our iDMS contract
revenue from our development agreement with Novo Nordisk ended
in 2005. We recorded project development revenue from Novo
Nordisk for the first 26 days of 2005 of approximately
$2.1 million. As a result of the restructuring transaction
we are no longer obligated to continue work related to the
non-refundable milestone payment from Novo Nordisk related to
the commercialization of AERx and recognized $5.2 million,
the remaining balance of the deferred revenue associated with a
previously received milestone payment of $13.0 million, as
revenue in the first quarter of 2005. Subsequently, in 2005 we
recorded revenue of $727,000 from NNDT related to transition and
support agreements entered into in connection with the
restructuring transaction.
Research and Development Expenses. Research and
development expenses decreased in 2005 compared to 2004 and
2003. These expenses were $30.2 million in 2005 compared to
$46.5 million in 2004 and $49.6 million in 2003.
Spending for collaborative and self-initiated research and
development projects was as follows (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Research and Development Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative
|
|
$ |
6.0 |
|
|
$ |
28.2 |
|
|
$ |
33.5 |
|
|
Self-Initiated
|
|
|
24.2 |
|
|
|
18.3 |
|
|
|
16.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expense
|
|
$ |
30.2 |
|
|
$ |
46.5 |
|
|
$ |
49.6 |
|
|
|
|
|
|
|
|
|
|
|
36
Research and development expenses in 2005 decreased by
$16.3 million, or 35%, compared to 2004. The decrease in
research and development expenses is primarily due to a
reduction in headcount and facility costs associated with the
restructuring transaction with Novo Nordisk and cost reduction
programs. This was offset by the $5.9 million increase in
self-initiated development efforts primarily relating to
Intraject. Research and development expenses in 2004 decreased
by $3.2 million, or 6%, compared to 2003. The decrease in
research and development expenses is primarily due to cost
reduction programs, including a reduction in force implemented
in July 2003 in order to align our costs with the reduced
revenue from partners offset by a net increased self-initiated
program costs. A reduction in pulmonary delivery development
efforts was more than offset by increased spending on the
Intraject program. The reduced head count affected six months of
2003 and all of 2004.
These expenses represent proprietary research expenses as well
as the costs related to contract research revenue and include
salaries and benefits of scientific and development personnel,
laboratory supplies, consulting services and the expenses
associated with the development of manufacturing processes.
We have other on-going partner-funded and self-initiated
programs under development. In 2006 we expect research and
development expense to increase from 2005, however, future
research and development efforts for these partner-funded
programs are difficult to predict at this time due to their
early stage of development.
General and Administrative Expenses. General and
administrative expenses were $10.9 million in 2005 compared
to $11.9 million in 2004 and $10.4 million in 2003.
General and administrative expenses decreased in 2005 over 2004
by $1.0 million, or 8.0%, and increased in 2004 over 2003
by $1.5 million, or 14.0%, resulting primarily from legal
and consulting costs incurred in 2004 associated with the
restructuring transaction with Novo Nordisk, which closed on
January 26, 2005. Other than the restructuring transaction,
there were no significant corporate transactions in 2005, 2004
and 2003. In 2006 we expect general and administrative expenses
to remain consistent with 2005.
Interest Income. Interest income was approximately
$1.3 million in 2005 compared to $194,000 in 2004 and
$338,000 in 2003. The increase in interest income in 2005
compared to 2004 of $1.1 million is due to an increase in
interest rates earned and higher average invested balances in
2005. The average cash and investment balances were higher in
2005 primarily due to receipt of net proceeds of approximately
$11.7 million from a private placement of common stock in
December 2004 and net proceeds of approximately
$51.1 million from the closing of the restructuring
transaction with Novo Nordisk in January 2005. The decrease in
interest income in 2004 compared to 2003 by $150,000 was
primarily due to lower average cash and investment balances in
2004 and to a lesser extent a decrease in interest rates earned
on invested cash balances.
Other Income (Expense): Other income (expense) was
approximately $30,000 in 2005 compared to ($17,000) in 2004 and
($138,000) in 2003. The increase in other income
(expenses) in 2005 compared to 2004 is due primarily to the
$49,000 net gain on the sale of assets off-set by $12,000
loss on foreign exchange translation and $6,000 interest on a
loan associated with a copier lease. The decrease in other
expense in 2004 compared to 2003 is primarily due to lower
outstanding capital lease and equipment loan balances under
various equipment and lease lines of credit which were
completely paid off during 2004.
Liquidity and Capital Resources
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, proceeds from the sale of assets to Novo
Nordisk in connection with the restructuring transaction and
interest earned on investments. As of December 31, 2005, we
had cash and cash equivalents of approximately
$27.7 million.
Net cash used in operating activities in 2005 was
$34.6 million compared to $23.1 million in 2004 and
$24.7 million in 2003. The $11.5 million increase in
net cash used in 2005 compared to 2004 was primarily the result
of a slightly lower net loss in 2005 compared to 2004, down
$974,000, offset by lower depreciation expense incurred in the
2005, down $2.4 million from 2004 and changes in deferred
revenue activity of
37
$5.8 million and deferred rent activity of
$1.8 million. The reduction in depreciation expense, the
change in deferred revenue and the change in deferred rent were
primarily due to the restructuring agreement with Novo Nordisk
and NNDT. In 2005 we recognized less depreciation expense due to
the sale of AERx iDMS program-related assets to Novo Nordisk
pursuant to the restructuring transaction, recognized AERx iDMS
program related funding and milestone payments received in prior
years as revenue and recorded the reversal of deferred rent
liability for lease obligations associated with the AERx iDMS
program to the statement of operations as a credit to rent
expense. Additionally, 2005 activity in accounts payable and
accrued liabilities reflects a $2.0 million of operating
cash used when compared to 2004 activity. The smaller increase
in accounts payable results primarily from liabilities for
expenses associated with the private placement of equity in
December 2004, the restructuring transaction with Novo Nordisk,
and capital expenditures recorded at 2004 year-end.
The decrease in net cash used in operating activities in 2004
when compared to 2003 was the result of a higher net loss in
2004 compared to 2003 which was offset by changes in working
capital that resulted in decreased use of cash: a decrease in
other current assets, and increases in accounts payable,
deferred revenue and accrued compensation. The timing of rent
payments from end of month to first of month reduced prepayments
within other current assets. The increase in accounts payable
results primarily from liabilities for expenses associated with
the December 2004 private placement of equity, the restructuring
transaction with Novo Nordisk, and capital expenditures. The
smaller decrease in deferred revenue compared to the prior year
is due to our partners funding future development at a
lower level and the reduced rate of amortization of past
milestone payments. The increase in accrued compensation was the
result of the timing of the last payroll of the year.
Net cash provided by investing activities in 2005 was
$47.4 million compared to $6.5 million in 2004 and
cash used of $8.3 million in 2003. The 2005 increase in
cash provided from investing compared to 2004 is primarily due
to $50.3 million provided from the sale of assets to NNDT
in connection with the restructuring transaction with Novo
Nordisk that closed in January 2005, off-set by
$3.0 million increase in capital expenditures primarily
related to Intraject and $6.6 million decrease in proceeds
from sales and maturities of available-for-sale investments, net
of purchases.
The majority of the $14.9 million increase in cash provided
by investing activities in 2004 compared to 2003 was due to
liquidating available-for-sale investments. Short-term
investments at the end of 2004 were $2.5 million compared
to $11.4 at the end of 2003, reflecting an $8.9 million
transfer from short-term investments to cash and cash
equivalents. In addition, capital expenditures during 2004 of
$2.3 million for the acquisition of Intraject assets were
$3.1 million less than total capital expenditures in 2003.
Net cash provided by financing activities in 2005 was $592,000
compared to $12.6 million in 2004 and $28.5 million in
2003. Cash provided by financing activities in 2005 was from the
issuance of common stock upon exercise of stock options and
purchase of common stock under the employee stock purchase plan,
$500,000 and repayment of notes receivable from officers and
employees of $92,000. Financing activities in 2004 included the
sale of common stock through private placements in December
2004, which raised net proceeds of approximately
$11.7 million. In addition, net proceeds received from the
issuance of common stock upon exercise of stock options and
purchase of common stock under the employee stock purchase plan
was $911,000. The proceeds were offset by $427,000 of cash used
for capital lease obligations. Financing activities in 2003
included the sale of common stock through private placements in
March and November 2003, which raised net proceeds of
approximately $27.3 million. In addition, net proceeds
received from the issuance of common stock upon exercise of
warrants and stock options, and under the employee stock
purchase plan was $3.1 million. The proceeds were offset by
$1.8 million of cash used for capital lease obligations.
Our research and development efforts have and will continue to
require a commitment of substantial funds to conduct the costly
and time-consuming research and preclinical and clinical testing
activities necessary to develop and refine such technology and
proposed products and to bring any such products to market. Our
future capital requirements will depend on many factors,
including continued progress and the results of the research and
development of our technology and drug delivery systems, our
ability to establish
38
and maintain favorable collaborative arrangements with others,
progress with preclinical studies and clinical trials and the
results thereof, the time and costs involved in obtaining
regulatory approvals, the cost of development and the rate of
scale-up of our
production technologies, the cost involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims, and the
need to acquire licenses or other rights to new technology.
We continue to review our planned operations through the end of
2006, and beyond. We particularly focus on capital spending
requirements to ensure that capital outlays are not expended
sooner than necessary. If we make good progress in our
development programs, we would expect our cash requirements for
capital spending and operations to increase in future periods.
We currently expect our total capital outlays for 2006 will be
approximately $7.9 million. The majority of these outlays
will be associated with completing the commercial
scale-up of the
Intraject production processes. These outlays, however, are
contingent on our having partnered the Intraject technology and
our partner sharing some or all of the capital costs.
We have incurred significant operating losses and negative cash
flows from operations since our inception. At December 31,
2005, we have an accumulated deficit of $274.8 million,
working capital of $21.1 million, and shareholders
equity of $7.2 million. Management believes that cash and
cash equivalents on hand at December 31, 2005 together with
expected funding to be received under additional collaborative
arrangements, or equity or debt financing(s) will be sufficient
to enable us to meet our obligations through at least
January 1, 2007. If such additional expected funds are not
available during the first half of 2006, we will be required to
delay, reduce the scope of, or eliminate one or more of our
development programs or obtain funds through collaborative
arrangements with others that may require us to relinquish
rights of certain of our technologies, or programs that we would
otherwise seek to develop or commercialize ourselves, and to
reduce personnel related costs. The Company has developed
contingency plans to make these needed costs reductions upon
determination that funds will not be available in a timely
matter. Management plans to continue to fund the Company with
funds obtained through collaborative arrangements, equity
issuances and or debt arrangements, although our
shareholders equity will become negative absent additional
equity financing.
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
The following summarizes our contractual obligations at
December 31, 2005, and the effect such obligations are
expected to have on our liquidity and cash flows in future
periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period | |
|
|
| |
|
|
|
|
Less than | |
|
|
|
After | |
Contractual Obligations |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Unconditional purchase obligations
|
|
$ |
2,113 |
|
|
$ |
2,113 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Unconditional capital purchase obligations
|
|
|
1,015 |
|
|
|
1,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations(a)
|
|
|
22,811 |
|
|
|
1,660 |
|
|
|
4,677 |
|
|
|
4,541 |
|
|
|
11,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments
|
|
$ |
25,939 |
|
|
$ |
4,788 |
|
|
$ |
4,677 |
|
|
$ |
4,541 |
|
|
$ |
11,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
We have future commitments under one building lease. The lease
is for a building containing office, laboratory and
manufacturing facilities, and expires in 2016. A portion of
operating lease obligation is offset by a sublease to NNDT of
$10,000 per month for 24 months that commenced in
January 2005 and expires in December 2006. We were committed to
a second lease for a warehouse that expired December 31,
2005 and is not included above. Additionally, we entered into a
new copier lease agreement in July 2005 for $5,030 per
month for 60 months. |
39
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB)
issued SFAS No. 123R (revised 2004), Share-Based
Payment (SFAS 123R) on December 16,
2004, which is a revision of FASB Statement No. 123
(SFAS 123), Accounting for Stock Issued to
Employees, that requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the statement of operations based on their fair
values. Pro forma disclosure is no longer an alternative.
SFAS 123R supersedes Accounting Principles Board
(APB) No. 25, Accounting for Stock Issued
to Employees, (APB 25) and amends
SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS 123R is similar to the
approach described in SFAS 123. Under SFAS 123R,
share-based payments to employees result in a cost that will be
measured at fair value on the awards grant date, based on
the estimated number of awards that are expected to vest.
Compensation cost for awards that vest would not be reversed if
the awards expire without being exercised. When measuring fair
value, companies can choose an option-pricing model (e.g.,
Black-Scholes or binomial models) that appropriately reflects
their specific circumstances and the economics of their
transactions. Upon adoption of SFAS 123R public companies
are allowed to select from alternative transition methods, each
having different reporting implications. SFAS 123R is
effective for the fiscal year beginning after June 15,
2005, and applies to all outstanding and unvested share-based
payments as of the adoption date.
SFAS 123R permits public companies to adopt its
requirements using one of two methods: modified prospective
method or modified retrospective method. We adopted
FAS 123R using the modified prospective basis on
January 1, 2006, and will continue to use the Black-Scholes
option pricing model to calculate the fair value of the awards.
Under the modified prospective method, compensation cost is
recognized beginning with the effective date (a) based on
the requirements of SFAS 123R for all share-based payments
granted after the effective date and (b) based on the
requirements of SFAS 123 for all awards granted to
employees prior to the effective date of SFAS 123R that
remain unvested on the effective date. We will recognize in our
results of operations the compensation cost on a straight-line
basis over the requisite service period for the entire award for
both stock-based awards issued after December 31, 2005 and
prior to January 1, 2006.
As permitted by SFAS 123, we currently account for
share-based payments to employees using APB 25 intrinsic
value method and, as such, generally recognize no compensation
cost for employee stock options. The adoption of the
SFAS 123R fair value method will have a significant adverse
impact on our reported results of operations because the
stock-based compensation expense will be charged directly to our
statement of operations. At December 31, 2005 there are
636,869 unvested stock options currently outstanding. Our
adoption of FAS 123R is expected to result in compensation
expense that will increase basic net loss by approximately
$1.1 million to $1.5 million for 2006. If there are
any modifications or cancellations of the underlying unvested
securities, we may be required to accelerate, increase, or
cancel any remaining unearned stock-based compensation expense.
However, our estimate of future stock-based compensation expense
is affected by our stock price, the number of stock-based awards
our board of directors may grant in 2006, as well as a number of
complex and subjective valuation assumptions. These valuation
assumptions include, but are not limited to, the volatility of
our stock price and employee stock option exercise behaviors.
SFAS 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as
required under current standard. This requirement will likely
reduce net operating cash flow and increase net financing cash
flows in periods after adoption.
In October 2005, the FASB issued FSP FAS 123R-2,
Practical Accommodation to the Application of Grant Date.
The FSP provides an exception (that should not be analogized to)
to the application of the concept of mutual understanding
in the determination of whether a grant date (and, for an equity
award, a measurement date) has occurred. The exception permits
companies to measure compensation cost for equity awards to
employees on the Board approval date if certain conditions are
met, provided that the communication to the employee occurs
within a relatively short period of time from the
approval date. The guidance in this FSP is to be applied upon
initial adoption of Statement 123(R). An entity that
adopted Statement 123(R) prior to the
40
issuance of this FSP and did not apply the provisions of this
FSP should apply the guidance in this FSP to the first reporting
period after October 18, 2005, for which financial
statements or interim reports have not been issued.
In November 2005, the FASB issued FSP FAS 123R-3,
Transition Election and Accounting for Tax Effects. The
guidance provides a simplified method to calculate the
Additional Paid-In Capital (APIC) pool for the
beginning balance of excess tax benefits and the method of
determining the subsequent impact on the pool of option awards
that are outstanding and fully or partially vested upon the
adoption of SFAS No. 123R, Share-Based Payment,
beginning on January 1, 2006. In addition, this FSP
addresses that when the alternative APIC pool calculation is
used, tax benefits related to certain employee awards should be
included as a cash flow from financing activities and a cash
outflow from operating activities within the statements of cash
flows. The FSP allows companies up to one year from the later of
the adoption date of SFAS 123R or November 10, 2005 to
evaluate the available transition alternatives and make a
one-time election. We are in the process of evaluating the
impact of the new method provided by this guidance.
|
|
Item 7A. |
Quantitative and Qualitative Disclosure About Market
Risk |
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 December 31, 2005 and 2004, we had cash, cash
equivalents and short-term investments of $27.7 million and
$16.8 million, respectively, consisting of cash and highly
liquid, short-term investments. As of December 31, 2005 all
cash equivalents were invested in commercial paper maturing in
less than 90 days. The market value of our short-term
investments will decline by an immaterial amount if market
interest rates increase, and therefore, our exposure to interest
rate changes has been immaterial. Declines of interest rates
over time will, however, reduce our interest income from our
short-term investments.
41
|
|
Item 8. |
Financial Statements and Supplementary Data |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Aradigm Corporation
We have audited the accompanying balance sheets of Aradigm
Corporation as of December 31, 2005 and 2004, and the
related statements of operations, redeemable convertible
preferred stock and shareholders equity, and cash flows
for each of the three years in the period ended
December 31, 2005. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Aradigm Corporation at December 31, 2005 and 2004, and
the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2005, in
conformity with U.S. generally accepted accounting
principles.
Palo Alto, California
March 10, 2006
42
ARADIGM CORPORATION
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, | |
|
|
except share data) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
27,694 |
|
|
$ |
14,308 |
|
|
Short-term investments
|
|
|
|
|
|
|
2,455 |
|
|
Receivables
|
|
|
400 |
|
|
|
99 |
|
|
Current portion of notes receivable from officers and employees
|
|
|
62 |
|
|
|
67 |
|
|
Prepaid and other current assets
|
|
|
874 |
|
|
|
1,602 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
29,030 |
|
|
|
18,531 |
|
Property and equipment, net
|
|
|
9,875 |
|
|
|
60,555 |
|
Noncurrent portion of notes receivable from officers and
employees
|
|
|
129 |
|
|
|
216 |
|
Other assets
|
|
|
463 |
|
|
|
439 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
39,497 |
|
|
$ |
79,741 |
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND SHAREHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
3,034 |
|
|
$ |
2,469 |
|
|
Accrued clinical and cost of other studies
|
|
|
398 |
|
|
|
293 |
|
|
Accrued compensation
|
|
|
3,814 |
|
|
|
2,984 |
|
|
Deferred revenue
|
|
|
222 |
|
|
|
7,525 |
|
|
Other accrued liabilities
|
|
|
475 |
|
|
|
1,138 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,943 |
|
|
|
14,409 |
|
Noncurrent portion of deferred revenue
|
|
|
|
|
|
|
3,966 |
|
Noncurrent portion of deferred rent
|
|
|
714 |
|
|
|
1,943 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock, no par value;
5,000,000 shares authorized; issued and outstanding shares:
1,544,626 in 2005 and 2004; liquidation preference of $41,866 in
2005 and 2004
|
|
|
23,669 |
|
|
|
23,669 |
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock, no par value, 100,000,000 shares authorized;
issued and outstanding shares: 14,562,809 in 2005; 14,459,145 in
2004
|
|
|
282,004 |
|
|
|
281,387 |
|
|
Accumulated other comprehensive income (loss)
|
|
|
5 |
|
|
|
(10 |
) |
|
Accumulated deficit
|
|
|
(274,838 |
) |
|
|
(245,623 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
7,171 |
|
|
|
35,754 |
|
|
|
|
|
|
|
|
|
|
Total liabilities,redeemable convertible preferred stock and
shareholders equity
|
|
$ |
39,497 |
|
|
$ |
79,741 |
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
43
ARADIGM CORPORATION
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Contract and license revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
$ |
8,013 |
|
|
$ |
26,999 |
|
|
$ |
33,546 |
|
|
Unrelated parties
|
|
|
2,494 |
|
|
|
1,046 |
|
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
10,507 |
|
|
|
28,045 |
|
|
|
33,857 |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
30,174 |
|
|
|
46,477 |
|
|
|
49,636 |
|
|
General and administrative
|
|
|
10,895 |
|
|
|
11,934 |
|
|
|
10,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
41,069 |
|
|
|
58,411 |
|
|
|
60,027 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(30,562 |
) |
|
|
(30,366 |
) |
|
|
(26,170 |
) |
Interest income
|
|
|
1,317 |
|
|
|
194 |
|
|
|
338 |
|
Other income (expense)
|
|
|
30 |
|
|
|
(17 |
) |
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(29,215 |
) |
|
$ |
(30,189 |
) |
|
$ |
(25,970 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$ |
(2.01 |
) |
|
$ |
(2.37 |
) |
|
$ |
(2.59 |
) |
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
14,513 |
|
|
|
12,741 |
|
|
|
10,039 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
44
ARADIGM CORPORATION
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible | |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock | |
|
Common Stock | |
|
|
|
Accumulated Other | |
|
|
|
Total | |
|
|
| |
|
| |
|
Deferred |
|
Comprehensive | |
|
Accumulated | |
|
Shareholders | |
|
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Compensation |
|
Income/ (Loss) | |
|
Deficit | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
|
(In thousands, except share data) | |
Balances at December 31, 2002
|
|
|
2,001,236 |
|
|
$ |
30,665 |
|
|
|
6,231,522 |
|
|
$ |
230,853 |
|
|
$ |
|
|
|
$ |
21 |
|
|
$ |
(189,464 |
) |
|
$ |
41,410 |
|
Issuance of common stock for cash, net of issuance costs of
$7,353 including warrants valued at $5,657
|
|
|
|
|
|
|
|
|
|
|
5,354,588 |
|
|
|
27,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,312 |
|
Issuance of common stock through conversion of Series A
preferred stock
|
|
|
(456,610 |
) |
|
|
(6,996 |
) |
|
|
365,288 |
|
|
|
6,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,996 |
|
Issuance of common stock under the employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
110,606 |
|
|
|
596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
596 |
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
5,425 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Issuance of common stock upon exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
482,810 |
|
|
|
2,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,522 |
|
Issuance of options and warrants to purchase common stock for
services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116 |
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,970 |
) |
|
|
(25,970 |
) |
Net change in unrealized loss on available-for-sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003
|
|
|
1,544,626 |
|
|
|
23,669 |
|
|
|
12,550,239 |
|
|
|
268,406 |
|
|
|
|
|
|
|
(2 |
) |
|
|
(215,434 |
) |
|
|
52,970 |
|
Issuance of common stock for cash, net of issuance costs of $817
including warrants valued at $2,278
|
|
|
|
|
|
|
|
|
|
|
1,666,679 |
|
|
|
11,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,683 |
|
Issuance of common stock under the employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
167,946 |
|
|
|
911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
911 |
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
81 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Issuance of common stock upon exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
74,200 |
|
|
|
304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304 |
|
Issuance of options and warrants to purchase common stock for
services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82 |
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,189 |
) |
|
|
(30,189 |
) |
Net change in unrealized loss on available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
1,544,626 |
|
|
|
23,669 |
|
|
|
14,459,145 |
|
|
|
281,387 |
|
|
|
|
|
|
|
(10 |
) |
|
|
(245,623 |
) |
|
|
35,754 |
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible | |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock | |
|
Common Stock | |
|
|
|
Accumulated Other | |
|
|
|
Total | |
|
|
| |
|
| |
|
Deferred | |
|
Comprehensive | |
|
Accumulated | |
|
Shareholders | |
|
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Compensation | |
|
Income/ (Loss) | |
|
Deficit | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except share data) | |
Issuance of common stock under the employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
93,662 |
|
|
|
458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458 |
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
10,077 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
Adjustment to common stock shares for rounding of partial shares
from the reverse split
|
|
|
|
|
|
|
|
|
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant revaluation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 |
|
Issuance of options for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
6 |
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,215 |
) |
|
|
(29,215 |
) |
Net change in unrealized loss on available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
1,544,626 |
|
|
$ |
23,669 |
|
|
|
14,562,809 |
|
|
$ |
282,004 |
|
|
$ |
|
|
|
$ |
5 |
|
|
$ |
(274,838 |
) |
|
$ |
7,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
46
ARADIGM CORPORATION
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(29,215 |
) |
|
$ |
(30,189 |
) |
|
$ |
(25,970 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and accretion of investments
|
|
|
50 |
|
|
|
166 |
|
|
|
83 |
|
|
Depreciation and amortization
|
|
|
1,412 |
|
|
|
3,813 |
|
|
|
5,983 |
|
|
Loss on impairment and sale of property and equipment
|
|
|
268 |
|
|
|
544 |
|
|
|
|
|
|
Cost of warrants and common stock options for services
|
|
|
117 |
|
|
|
82 |
|
|
|
116 |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(301 |
) |
|
|
41 |
|
|
|
142 |
|
|
|
Prepaid and other current assets
|
|
|
728 |
|
|
|
308 |
|
|
|
(454 |
) |
|
|
Other assets
|
|
|
(24 |
) |
|
|
(51 |
) |
|
|
21 |
|
|
|
Accounts payable
|
|
|
565 |
|
|
|
1,584 |
|
|
|
(1,066 |
) |
|
|
Accrued compensation
|
|
|
830 |
|
|
|
963 |
|
|
|
(174 |
) |
|
|
Accrued liabilities
|
|
|
(558 |
) |
|
|
439 |
|
|
|
294 |
|
|
|
Deferred rent
|
|
|
(1,229 |
) |
|
|
620 |
|
|
|
215 |
|
|
|
Deferred revenue
|
|
|
(7,250 |
) |
|
|
(1,440 |
) |
|
|
(3,921 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(34,607 |
) |
|
|
(23,120 |
) |
|
|
(24,731 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(5,311 |
) |
|
|
(2,300 |
) |
|
|
(5,362 |
) |
Proceeds from sale of property and equipment to Novo Nordisk
Delivery Technologies, Inc., a related party
|
|
|
50,292 |
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale investments
|
|
|
(5,330 |
) |
|
|
(6,376 |
) |
|
|
(9,962 |
) |
Proceeds from sales and maturities of available-for-sale
investments
|
|
|
7,750 |
|
|
|
15,190 |
|
|
|
7,056 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in investing activities
|
|
|
47,401 |
|
|
|
6,514 |
|
|
|
(8,268 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
|
500 |
|
|
|
12,899 |
|
|
|
30,441 |
|
Forgiveness of (cash used in issuance of) notes receivable with
officers and employees
|
|
|
92 |
|
|
|
115 |
|
|
|
(93 |
) |
Payments on capital lease obligations and equipment loans
|
|
|
|
|
|
|
(427 |
) |
|
|
(1,822 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
592 |
|
|
|
12,587 |
|
|
|
28,526 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
13,386 |
|
|
|
(4,019 |
) |
|
|
(4,473 |
) |
Cash and cash equivalents at beginning of year
|
|
|
14,308 |
|
|
|
18,327 |
|
|
|
22,800 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
27,694 |
|
|
$ |
14,308 |
|
|
$ |
18,327 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
6 |
|
|
$ |
16 |
|
|
$ |
126 |
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of options and warrants to purchase common stock for
services
|
|
$ |
117 |
|
|
$ |
82 |
|
|
$ |
116 |
|
Issuance of common stock through conversion of Series A
preferred stock
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,996 |
|
Issuance of warrants in conjunction with private placement of
common stock
|
|
$ |
|
|
|
$ |
2,278 |
|
|
$ |
5,657 |
|
See accompanying Notes to Financial Statements.
47
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS
|
|
1. |
Summary of Significant Accounting Policies |
|
|
|
Organization and Basis of Presentation |
Aradigm Corporation (the Company) is a California
corporation engaged in the development and commercialization of
non-invasive drug delivery systems. Principal activities to date
have included obtaining financing, recruiting management and
technical personnel, securing operating facilities, conducting
research and development, and expanding commercial production
capabilities. The Company does not anticipate receiving any
revenue from the sale of products in the upcoming year. The
Company has incurred significant operating losses and negative
cash flows from operations since its inception. At
December 31, 2005, the Company has an accumulated deficit
of $274.8 million and working capital of $21.1 million
and shareholders equity of $7.2 million. Management
believes that cash and cash equivalents on hand at
December 31, 2005 together with expected funding to be
received under additional collaborative arrangements or equity
or debt financing(s) will be sufficient to enable the Company to
meet its obligations through at least January 1, 2007. If
such additional expected funds are not available during the
first half of 2006, the Company will be required to delay,
reduce the scope of, or eliminate one or more of its development
programs or obtain funds through collaborative arrangements with
others that may require the Company to relinquish rights of
certain of its technologies, or programs that the Company would
otherwise seek to develop or commercialize itself, and to reduce
personnel related costs. The Company has developed contingency
plans to make these needed cost reductions upon determination
that funds will not be available in a timely manner. Management
plans to continue to fund the Company with funds obtained
through collaborative arrangements, equity issuances and or debt
arrangements although our shareholders equity will become
negative absent additional equity financing.
The Company operates as a single operating segment.
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 of deferred revenue and assumptions for valuing
options, and warrants. Actual results could differ from these
estimates.
|
|
|
Cash and Cash Equivalents |
The Company considers all highly liquid investments purchased
with a maturity of three months or less from purchase date to be
cash equivalents. The Company places its cash and cash
equivalents in money market funds, commercial paper and
corporate notes.
Management determines the appropriate classification of the
Companys marketable securities, which consist solely of
debt securities, at the time of purchase and re-evaluates such
designation at each balance sheet date. All marketable
securities are classified as available-for-sale, carried at
estimated fair value and reported in either cash equivalents or
short-term investments. Unrealized gains and losses on
available-for-sale securities are excluded from earnings and
reported as a separate component of the statements of redeemable
convertible preferred stock and shareholders equity until
realized. Fair values of investments are based on quoted market
prices where available. Interest income is recognized when
earned and includes interest, dividends, amortization of
purchase premiums and discounts, and realized gains and losses
on sales of securities. The cost of securities sold is based on
the specific identification method. The Company regularly
48
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
reviews all of its investments for other-than-temporary declines
in fair value. When we determine that the decline in fair value
of an investment below our accounting basis is
other-than-temporary, the Company reduces the carrying value of
the securities held and records a loss in the amount of any such
decline. No such reductions have been required during any of the
periods presented.
Notes receivable are related to advances granted to employees
for relocation. All amounts classified as current are due within
12 months. All amounts classified as long-term are due no
later than April 2008. All balances are believed to be
collectible and are stated at approximate fair value at
December 31, 2005.
The Company records property and equipment at cost and
calculates depreciation using the straight-line method over the
estimated useful lives of the respective assets. Machinery and
equipment includes external costs incurred for validation of the
equipment. The Company does not capitalize internal validation
expense. Computer equipment and software includes capitalized
computer software. All of the Companys capitalized
software is purchased; the Company has not internally developed
computer software. Leasehold improvements are depreciated over
the shorter of the term of the lease or useful life of the
improvement.
The estimated useful lives of property and equipment are as
follows:
|
|
|
|
|
Machinery and equipment
|
|
|
5 to 7 years |
|
Furniture and fixtures
|
|
|
5 to 7 years |
|
Lab equipment
|
|
|
5 to 7 years |
|
Computer equipment and software
|
|
|
3 to 5 years |
|
Leasehold improvements
|
|
|
5 to 17 years |
|
|
|
|
Impairment of Long-Lived Assets |
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
reviews for impairment whenever events or changes in
circumstances indicate that the carrying amount of property and
equipment may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual
disposition. In the event that such cash flows are not expected
to be sufficient to recover the carrying amount of the assets,
the assets are written down to their estimated fair values and
the loss is recognized in the Statements of Operations.
Contract revenues consist of revenue 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. Under the agreements, revenue is recognized
once costs are incurred and collectibility is reasonably
assured. Under some agreements our partners have the right to
withhold reimbursement of our costs incurred until the work
performed under the relative agreement is mutually agreed upon.
For these agreements revenue is recognized upon confirmation
from the partner of acceptance of work performed and payment
amount. 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 generally recognized as revenue
either upon the completion of the milestone effort when payments
are contingent upon completion of the effort or are based on
actual efforts
49
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
expended over the remaining term of the agreements when payments
precede the required efforts. Costs of contract revenues are
approximate to or are greater than such revenue and are included
in research and development expenses. Refundable development and
license fee payments are deferred until the specified
performance criteria are achieved. Refundable development and
license fee payments are generally not refundable once the
specific performance criteria are achieved and accepted.
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.
Advertising costs are charged to general and administrative
expense as incurred. Advertising expenses for the years ended
December 31, 2005, 2004 and 2003 were $265,000, $223,000
and $199,000, respectively.
The Company has elected to follow Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and
related interpretations in accounting for its employee stock
options. Compensation expense is based on the difference, if
any, between the fair value of the Companys common stock
and the exercise price of the option or share right on the
measurement date, which is typically the date of grant. In
accordance with SFAS 123, Accounting for Stock-Based
Compensation, as amended by SFAS 148,
Accounting for Stock-Based Compensation
Transition and Disclosure, the Company has provided,
below, the pro forma disclosures of the effect on net loss and
loss per share as if SFAS 123 had been applied in measuring
compensation expense for all periods presented (in thousands,
except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net loss as reported
|
|
$ |
(29,215 |
) |
|
$ |
(30,189 |
) |
|
$ |
(25,970 |
) |
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based employee compensation expense included in reported
net loss
|
|
|
21 |
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense determined under
fair value based method for all awards
|
|
|
(3,066 |
) |
|
|
(4,585 |
) |
|
|
(5,400 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(32,260 |
) |
|
$ |
(34,774 |
) |
|
$ |
(31,370 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(2.01 |
) |
|
$ |
(2.37 |
) |
|
$ |
(2.59 |
) |
|
Pro forma
|
|
$ |
(2.22 |
) |
|
$ |
(2.73 |
) |
|
$ |
(3.12 |
) |
Pro forma information regarding net loss and basic and diluted
net loss per common share is required by SFAS 123, which
also requires that the information be determined as if the
Company had accounted for its employee and non-employee director
stock options granted using the fair value method prescribed by
this statement. The fair value of options was estimated at the
date of grant using the Black-Scholes option pricing model with
the following assumptions: a risk-free interest rate of 3.8%,
3.1%, and 2.5% for the years ended December 31, 2005, 2004
and 2003, respectively; a dividend yield of 0.0%; the annual
volatility factor of the
50
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
expected market price of the Companys common stock for
2005, 2004 and 2003 are 97.6%, 98.0%, and 98.0% respectively;
and a weighted average expected option life of four years. The
weighted average fair value of options granted during 2005, 2004
and 2003 with an exercise price equal to the fair value of the
Companys common stock on the date of grant was $4.08,
$5.50 and $3.75, respectively. Additionally, the weighted
average fair value of options granted during 2005 with an
exercise price greater than the fair value of the Companys
common stock on the day of grant was $3.82.
The Company accounts for options and warrants issued to
non-employees under SFAS 123 and Emerging Issues Task Force
Issue No. (EITF) 96-18, Accounting for Equity
Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services, using the Black-Scholes option pricing model.
The value of such non-employee options and warrants are
periodically re-measured over their vesting terms. The fair
value of options and warrants was remeasured at period end using
the Black-Scholes option pricing model with the following
assumptions: a risk-free interest rate of 2.0% to 4.0%; using
applicable U.S. Treasury rates; a dividend yield of 0.0%;
the annual volatility factor of 87% to 98%; and an average
expected life based on the terms of the option grant or
contractual term of the warrant of 1 to 4 years. Expense
recognized related to options and warrants issued to
non-employees was $117,000, $82,000, and $116,000 during the
years ended December 31, 2005, 2004, and 2003, respectively.
The Company uses the liability method to account for income
taxes as required by SFAS 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.
Basic net loss per share on a historical basis is computed using
the weighted-average number of shares of common stock
outstanding less the weighted-average number of shares subject
to repurchase. There were no shares subject to repurchase in the
years ended December 31, 2005, 2004 and 2003. No separate
diluted loss per share information has been presented in the
accompanying statements of operations since potential common
shares from stock options, warrants and redeemable convertible
preferred stocks are antidilutive. For the years ended
December 31, 2005, 2004 and 2003, the total number of
shares excluded, based on the treasury stock method, from
diluted loss per share relating to these securities was
1,241,936, 1,650,082, and 1,658,377 shares, respectively.
|
|
|
Significant Concentrations |
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents and short-term investments. Risks associated with
these instruments are mitigated by banking with and only
purchasing commercial paper from creditworthy institutions. The
maximum amount of loss due to credit risk associated with these
financial instruments is their respective fair values as stated
in the Balance Sheet.
The Company has development arrangements with various
collaborative partners. For the years ended December 31,
2005, 2004 and 2003, the Novo Nordisk AERx iDMS program
contributed approximately 76%, 96% and 99% of total contract
revenues, respectively. In January 2005, the Company completed
the restructuring of the AERx iDMS program, pursuant to the
Restructuring Agreement entered into with Novo Nordisk A/ S
(Novo Nordisk) and Novo Nordisk Delivery
Technologies, Inc. (NNDT) in September 2004. Under
our current agreements with Novo Nordisk, Novo Nordisk has
assumed responsibility of the completion of development,
manufacturing and commercialization of the AERx insulin product.
We will be entitled to receive royalties on future sales of the
commercialized product. Novo Nordisk, a publicly traded
51
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
Danish company, is considered to be a related party due to its
ownership interest in the Company. Novo Nordisk owned
approximately 10% of the Companys common stock on an as
converted basis as of December 31, 2005.
|
|
|
Comprehensive Income (Loss) |
SFAS 130, Reporting Comprehensive Income,
requires unrealized gains or losses on the Companys
available-for-sales securities to be recorded in other
comprehensive income (loss). Total comprehensive loss has been
disclosed on the balance sheet and in the statement of
redeemable convertible preferred stock and shareholders
equity.
|
|
|
Recent Accounting Pronouncements |
The Financial Accounting Standards Board (FASB)
issued SFAS No. 123R (revised 2004), Share-Based
Payment (SFAS 123R) on December 16,
2004, which is a revision of FASB Statement No. 123
(SFAS 123), Accounting for Stock Issued to
Employees, that requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the statement of operations based on their fair
values. Pro forma disclosure is no longer an alternative.
SFAS 123R supersedes Accounting Principles Board
(APB) No. 25, Accounting for Stock Issued
to Employees, (APB 25) and amends
SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS 123R is similar to the
approach described in SFAS 123. Under SFAS 123R,
share-based payments to employees result in a cost that will be
measured at fair value on the awards grant date, based on
the estimated number of awards that are expected to vest.
Compensation cost for awards that vest would not be reversed if
the awards expire without being exercised. When measuring fair
value, companies can choose an option-pricing model (e.g.,
Black-Scholes or binomial models) that appropriately reflects
their specific circumstances and the economics of their
transactions. Upon adoption of SFAS 123R public companies
are allowed to select from alternative transition methods, each
having different reporting implications. SFAS 123R is
effective for the fiscal year beginning after June 15,
2005, and applies to all outstanding and unvested share-based
payments as of the adoption date.
SFAS 123R permits public companies to adopt its
requirements using one of two methods: modified prospective
method or modified retrospective method. The Company adopted
FAS 123R using the modified prospective basis on
January 1, 2006, and will continue to use the Black-Scholes
option pricing model to calculate the fair value of the awards.
Under the modified prospective method, compensation cost is
recognized beginning with the effective date (a) based on
the requirements of SFAS 123R for all share-based payments
granted after the effective date and (b) based on the
requirements of SFAS 123 for all awards granted to
employees prior to the effective date of SFAS 123R that
remain unvested on the effective date. We will recognize in our
results of operations the compensation cost for stock-based
awards issued after December 31, 2005 on a straight-line
basis over the requisite service period for the entire award.
For stock-based awards issued prior to January 1, 2006, we
amortize the related compensation costs using the straight-line
method.
As permitted by SFAS 123, we currently account for
share-based payments to employees using APB 25 intrinsic
value method and, as such, generally recognize no compensation
cost for employee stock options. The adoption of the
SFAS 123R fair value method will have a significant adverse
impact on our reported results of operations because the
stock-based compensation expense will be charged directly to our
statement of operations. At December 31, 2005 there are
636,869 unvested stock options currently outstanding. Our
adoption of FAS 123R is expected to result in compensation
expense that will increase net loss by approximately
$1.1 million to $1.5 million for 2006. If there are
any modifications or cancellations of the underlying unvested
securities, we may be required to accelerate, increase, or
cancel any remaining unearned stock-based compensation expense.
However, our estimate of future stock-based compensation expense
is
52
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
affected by our stock price, the number of stock-based awards
our board of directors may grant in 2006, as well as a number of
complex and subjective valuation assumptions. These valuation
assumptions include, but are not limited to, the volatility of
our stock price and employee stock option exercise behaviors.
SFAS 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as
required under current standard. This requirement will likely
reduce net operating cash flow and increase net financing cash
flows in periods after adoption.
In October 2005, the FASB issued FSP FAS 123R-2,
Practical Accommodation to the Application of Grant Date.
The FSP provides an exception (that should not be analogized to)
to the application of the concept of mutual understanding
in the determination of whether a grant date (and, for an equity
award, a measurement date) has occurred. The exception permits
companies to measure compensation cost for equity awards to
employees on the Board approval date if certain conditions are
met, provided that the communication to the employee occurs
within a relatively short period of time from the
approval date. The guidance in this FSP is to be applied upon
initial adoption of Statement 123(R). An entity that
adopted Statement 123(R) prior to the issuance of this FSP
and did not apply the provisions of this FSP should apply the
guidance in this FSP to the first reporting period after
October 18, 2005, for which financial statements or interim
reports have not been issued.
In November 2005, the FASB issued FSP FAS 123R-3,
Transition Election and Accounting for Tax Effects. The
guidance provides a simplified method to calculate the
Additional Paid-In Capital (APIC) pool for the
beginning balance of excess tax benefits and the method of
determining the subsequent impact on the pool of option awards
that are outstanding and fully or partially vested upon the
adoption of SFAS No. 123R, Share-Based Payment,
beginning on January 1, 2006. In addition, this FSP
addresses that when the alternative APIC pool calculation is
used, tax benefits related to certain employee awards should be
included as a cash flow from financing activities and a cash
outflow from operating activities within the statements of cash
flows. The FSP allows companies up to one year from the later of
the adoption date of SFAS 123R or November 10, 2005 to
evaluate the available transition alternatives and make a
one-time election. We are in the process of evaluating the
impact of the new method provided by this guidance.
Certain reclassifications of prior year amounts have been made
to conform to current-year presentation. We reclassified amounts
from investing activity to operating activity in order to
separately disclose amortization and accretion of investments on
the Statement of Cash Flows. We made clarification in regards to
the liquidation preference of preferred stock to include the
accumulated undeclared dividends of 6% in note 6 and on the
Balance Sheet.
53
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
|
Cash and Cash Equivalents and Investments |
The following summarizes the fair value of cash and cash
equivalents and investments (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Money market fund
|
|
$ |
1,321 |
|
|
$ |
800 |
|
|
Commercial paper
|
|
|
26,373 |
|
|
|
13,508 |
|
|
|
|
|
|
|
|
|
|
$ |
27,694 |
|
|
$ |
14,308 |
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$ |
|
|
|
|
|
|
|
Corporate and Government notes
|
|
|
|
|
|
$ |
2,455 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
2,455 |
|
|
|
|
|
|
|
|
All short-term investments at December 31, 2004 mature in
less than one year.
As of December 31, 2005 and 2004, the difference between
the fair value and the amortized cost of available-for-sale
securities was $5,000 gain and $10,000 loss, respectively. The
individual gross unrealized gains and individual gross
unrealized losses for 2005 and 2004 were immaterial.
|
|
3. |
Property and Equipment |
Property and equipment consist of the following (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Machinery and equipment
|
|
$ |
4,505 |
|
|
$ |
14,364 |
|
Furniture and fixtures
|
|
|
1,150 |
|
|
|
1,917 |
|
Lab equipment
|
|
|
2,539 |
|
|
|
4,086 |
|
Computer equipment and software
|
|
|
3,790 |
|
|
|
6,256 |
|
Leasehold improvements
|
|
|
1,564 |
|
|
|
12,225 |
|
|
|
|
|
|
|
|
Property and Equipment at cost
|
|
|
13,548 |
|
|
|
38,848 |
|
Less accumulated depreciation and amortization
|
|
|
(10,201 |
) |
|
|
(27,740 |
) |
|
|
|
|
|
|
|
|
Net depreciable assets
|
|
|
3,347 |
|
|
|
11,108 |
|
Construction in progress
|
|
|
6,528 |
|
|
|
49,447 |
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
9,875 |
|
|
$ |
60,555 |
|
|
|
|
|
|
|
|
Depreciation expense was $1.4 million, $3.8 million,
and $6.0 million in 2005, 2004, and 2003, respectively.
On January 26, 2005, the Company completed the
restructuring of its AERx iDMS program, pursuant to the
Restructuring Agreement entered into with Novo Nordisk and NNDT.
In accordance with the restructuring transaction, the Company
received $51.1 million in cash and applied
$4.0 million of deposits
54
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
from Novo Nordisk in consideration for $54.3 million of
property and equipment at net book value, $515,000 of inventory
and $317,000 for prepaid and other assets.
|
|
4. |
Leases, Commitments and Contingencies |
Subsequent to completion in January 2005 of the restructuring
transaction between the Company and Novo Nordisk, the Company
had commitments under two leases. The first lease is for a
building containing office, laboratory and manufacturing
facilities, and expires in 2016. A minor portion of this lease
expense is offset by a sublease to NNDT of $10,000 per
month through December 2006. The second lease, which expired in
December 2005, is for a warehouse. Additionally, the Company
entered into a new copier lease agreement in July 2005 for
$5,030 per month for 60 months. Future minimum lease
payments non-cancelable at December 31, 2005 for the
remaining lease agreements are as follows (amounts in thousands):
|
|
|
|
|
|
|
Operating | |
|
|
Leases | |
|
|
| |
Year ending December 31:
|
|
|
|
|
2006
|
|
$ |
1,660 |
|
2007
|
|
|
2,306 |
|
2008
|
|
|
2,371 |
|
2009
|
|
|
2,318 |
|
2010
|
|
|
2,223 |
|
2011 and thereafter
|
|
|
11,933 |
|
|
|
|
|
Total minimum lease payments
|
|
$ |
22,811 |
|
|
|
|
|
The Companys operating lease has a rent escalation clause
and accordingly, the Company recognizes rent expense on a
straight-line basis. At December 31, 2005 and 2004, the
Company had $714,000 and $1.9 million of deferred rent,
respectively. The overall reduction in deferred rent is due to
reversing of $1.4 million expense associated with the
deferred rent on two buildings transferred to NNDT as part of
the restructuring agreement. A portion of the lease commitment
for 2006 is offset by a sublease to NNDT of $10,000 per
month through December 2006.
For the years ended December 31, 2005, 2004 and 2003,
building rent expense, net of sublease income, under operating
leases totaled $1.3 million, $5.5 million, and
$5.4 million, respectively.
At December 31, 2005, the Company had contractual
non-cancelable purchase commitments for capital equipment
purchases, $1.0 million, and services, $2.1 million.
The Company from time to time enters into contracts that
contingently require the Company to indemnify parties against
third party claims. These contracts primarily relate to:
(i) real estate leases, under which the Company may be
required to indemnify property owners for environmental and
other liabilities, and other claims arising from the
Companys use of the applicable premises, and
(ii) agreements with the Companys officers, directors
and employees, under which the Company may be required to
indemnify such persons from certain liabilities arising out of
such persons relationships with the company. To date, the
Company has made no payments related to such indemnifications
and no liabilities have been recorded for these obligations on
the balance sheets as of December 31, 2005 or 2004.
55
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
From time to time, the Company is involved in litigation arising
out of the ordinary course of its business. Currently there are
no known claims or pending litigation expected to have a
material effect on the Companys overall financial
position, results of operations, or liquidity.
|
|
5. |
Redeemable Convertible Preferred Stock and Common Stock
Warrants |
The Company completed a $48.4 million preferred stock
financing in December 2001. Under the terms of the financing the
Company sold to a group of investors 2,001,236 shares of
Series A redeemable convertible preferred stock
(preferred stock) at a purchase price of
$24.20 per share. Each share of preferred stock, together
with accrued and unpaid dividends, is convertible at the option
of the holder into 0.8 shares of common stock. The Company
also issued warrants to the investors to purchase approximately
1,040,642 shares of common stock at an exercise price of
$34.85 per share. Issuance costs of approximately
$3.0 million were accounted for as a reduction to proceeds
from the preferred stock financing. The warrants are exercisable
through December 2006.
In March, June and July 2003, certain holders of shares of the
Companys preferred stock elected to convert an aggregate
of 456,610 shares of preferred stock to common stock. The
Company issued 365,288 shares of common stock in connection
with the conversion.
During the two year period following the original issue dates
holders of preferred stock are entitled to dividends, at an
annual rate of 6%, payable only when and if declared by the
Board of Directors. Such dividends are cumulative and accrue
whether or not they are declared. At the option of the Company,
dividends may be paid in either cash or in shares of common
stock, which will be valued at a price equal to the then current
market price. The current market price of the common stock on
any dividend payment date shall be based on the closing price of
the Companys common stock as quoted on the Nasdaq Stock
Market. There were no dividends declared as of December 31,
2005 or 2004.
The conversion rate of the preferred stock is fixed and not
subject to any adjustments except for stock splits, stock
dividends, combinations, reorganizations, mergers or other
similar events. Each share of outstanding preferred stock will
automatically convert into common stock upon either the closing
of a registered underwritten public offering covering the offer
and sale of common stock with gross proceeds to the Company
exceeding $25 million or the date on which the common stock
closing bid price has been above $52.9375 per share for at
least twenty consecutive trading days.
Upon any liquidation, dissolution, redemption or winding up of
the Company, whether voluntary or involuntary, the holders of
outstanding preferred stock will be entitled to a liquidation
preference, 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) to the holders of preferred stock. Any remaining assets
will be available for distribution to holders of common stock.
Each holder of preferred stock shall have a number of votes
equal to the number of shares of common stock issuable upon
conversion of such holders shares of preferred stock and
shall have voting rights and powers equal to the voting rights
and powers of the Companys common stock. At
December 31, 2005 the total liquidation preference of all
outstanding preferred stock, consisting of the original issue
price plus accrued dividends, was approximately
$41.9 million.
|
|
|
Summary of Preferred Stock Accounting |
The preferred stock agreement provides that a mandatory
redemption is triggered if a change in control occurs.
Accordingly, in accordance with EITF D-98, Classification
and Measurement of Redeemable Securities, which clarifies
Rule #5-02.28 of
Regulation S-X
previously adopted in accounting series Release
56
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
No. 268, Presentation in Financial Statements of
Redeemable Preferred Stock, the Company has classified the
preferred stock outside of permanent equity.
In a private placement in December 2004, the Company issued
1,666,679 shares of common stock at a price of
$7.50 per share and warrants to
purchase 416,669 shares of common stock at
$10.50 per share, for aggregate consideration of
approximately $12.5 million. The warrants are exercisable
at the election of the warrant holders for a four-year term. The
Company valued the warrants as of December 2004, the date of
financing, using the Black-Scholes option pricing model using
the following assumptions: estimated volatility of 88%,
risk-free interest rate of 3.6%, no dividend yield, and an
expected life of four years, and recorded approximately
$2.3 million as issuance costs related to the private
placement. These warrants are exercisable through December 2008.
In November 2003 the Company issued 1,556,110 shares of
common stock at $9.00 per share and warrants to
purchase 389,027 shares of common stock at
$12.50 per share to certain investors for an aggregate
purchase price of approximately $14.0 million in a private
placement. The warrants are exercisable at the election of the
warrant holders for a four-year term. The Company valued the
warrants as of November 2003, the date of financing, using the
Black-Scholes option pricing model using the following
assumptions: estimated volatility of 88%, risk-free interest
rate of 2.5%, no dividend yield, and an expected life of four
years, and recorded approximately $2.6 million as issuance
costs related to the private placement. These warrants are
exercisable through November 2007.
In March 2003, the Company issued 3,798,478 shares of
common stock at $3.95 per share and warrants to
purchase 854,654 shares of the common stock at
$5.35 per share to certain investors for an aggregate
purchase price of approximately $15.0 million in a private
placement. The warrants are exercisable at the election of the
warrant holders for a four-year term. The Company valued the
warrants as of March 2003, the date of financing, using the
Black-Scholes option pricing model using the following
assumptions: estimated volatility of 84%, risk-free interest
rate of 2.5%, no dividend yield, and an expected life of four
years, and recorded approximately $1.9 million as issuance
costs related to the private placement. In addition, in
connection with this private placement, the Company issued
warrants (replacement warrants) to purchase an
aggregate of 803,205 shares of its common stock at
$5.60 per share to certain of the investors in the private
placement in exchange for the cancellation of an equal number of
warrants to purchase shares of the common stock at
$34.85 per share, held by the same investors. The Company
valued the replacement warrants as of March 2003, the date of
the replacement, using the Black-Scholes option pricing model
using the following assumptions: estimated volatility of 84%,
risk-free interest rate of 2.5%, no dividend yield, and an
expected life of 3.8 years, and recorded an additional
$1.1 million as issuance costs related to the private
placement. These warrants are exercisable through March 2007.
In June 2004, the Company filed a Certificate of Amendment to
the Companys amended and restated Articles of
Incorporation with the Secretary of State of the State of
California to increase the Companys authorized number of
shares of common stock from 100,000,000 to
150,000,000 shares. The additional shares of common stock
authorized by the amendment have rights identical to the common
stock of the Company outstanding immediately before the filing
of the amendment. Issuances of common stock from the additional
authorized shares do not affect the rights of the holders of the
Companys common stock and preferred stock outstanding
immediately before the filing of the amendment, except for
effects that may be incidental to increasing the number of
shares of the Companys common stock outstanding, such as
dilution of the earnings per share and voting rights of holders
of other common stock.
In January 2006, the Company filed a Certificate of Amendment to
the Companys amended and restated Articles of
Incorporation with the Secretary of State of the State of
California to decrease the Companys authorized number of
shares of common stock from 150,000,000 to
100,000,000 shares.
57
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
On January 4, 2006, the Company filed an amended and
restated certificate of incorporation with the California
Secretary of State affecting a
1-for-5 reverse split
of the Companys common stock. All share and per share
amounts have been retroactively restated in the financial
statements and these accompanying notes for all periods
presented.
At December 31, 2005, the Company had 2,119,766 shares
of its common stock reserved for issuance upon exercise of
common stock warrants, 2,649,095 shares reserved for
issuance upon exercise of options under all plans,
1,235,701 shares reserved for issuance upon conversion of
preferred stock and 452,400 available authorized shares under
the Employee Stock Purchase Plan.
|
|
|
Other Common Stock Warrants |
During 2004 the Company received net proceeds of approximately
$304,000 and issued an aggregate of 74,200 shares of common
stock in connection with the exercise of warrants.
In January 2004, the Company amended the payment terms of the
operating lease for its primary offices. In consideration for
the amended lease agreement, Aradigm replaced common stock
warrants to purchase 27,000 shares of common stock at
$50.80 $108.60 per share with new common stock
warrants with an exercise price equal to $8.55 per share.
The $88,000 incremental fair value of the replacement warrants,
as defined as the fair value of the new warrant less the fair
value of the old warrant on date of replacement, is being
amortized to operating expenses on a straight-line basis over
the remaining life of the lease. The fair value of the warrants
was measured as of January 2004, the date of the amendment,
using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rates between 1.3% and 2.4%; a
dividend yield of 0.0%; annual volatility factor of 88%; and a
weighted average expected life based on the terms on the
contractual term of the warrants from 1 to 3.5 years.
During 2003 the Company received net proceeds of approximately
$2.5 million and issued an aggregate of 482,810 shares
of common stock in connection with the exercise of warrants.
In March 2003, the Company issued warrants in connection with a
financial relations service agreement that entitles the holder
to purchase 5,000 shares of common stock which are
exercisable at $6.55 per share and vests over the
48 month service period of which 938 shares vested
during the year ended December 31, 2003. In 2004, the
Company terminated the financial service relationship and
accelerated the vesting schedule for all remaining
4,062 shares. The Company valued the warrants as of March
2003, the date of agreement, using the Black-Scholes option
pricing model using the following assumptions: estimated
volatility of 88%, risk-free interest rate of 2.0%, no dividend
yield, and an expected life of four years. The fair value of
these warrants is re-measured as the underlying warrants vest
and is being expensed over the vesting period of the warrants.
For the year ended December 31, 2004 the Company recorded
$22,000 of expense in connection with these warrants. These
warrants are exercisable through March 2008.
In October 2002, the Company issued warrants in connection with
a financial relations service agreement that entitles the holder
to purchase 15,000 shares of common stock, 5,000 of
which are exercisable at $9.95 per share, 5,000 shares
of which are exercisable at $11.95 per share and
5,000 shares of which are exercisable at $13.95 per
share. At the execution of the agreement 3,000 shares
immediately vested and the remaining shares shall vest based on
the achievement of various performance benchmarks set forth in
the agreement: all benchmarks were achieved as of March 2004.
The Company valued the warrants as of October 2002,the date of
agreement, using the Black-Scholes option pricing model using
the following assumptions: estimated volatility of 88%,
risk-free interest rate of 2.0%, no dividend yield, and an
expected life of four years. The fair value of these warrants is
re-measured as the underlying warrants vest and is being
expensed over the vesting
58
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
period of the warrants. For the year ended December 31,
2003 the Company recognized $77,000 of expense associated with
these warrants. In the year ended December 31, 2004, due to
all benchmarks being achieved during the year, the Company
reversed previously recognized expense of $48,000. The warrants
are exercisable through October 2007.
|
|
|
1996 Equity Incentive Plan, 2005 Equity Incentive Plan and
1996 Non-Employee Directors Plan |
In April 1996, the Companys Board of Directors adopted and
the Companys shareholders approved the 1996 Equity
Incentive Plan (the 1996 Plan), which amended and
restated on earlier Stock Option Plan. The original plan
reserved 960,000 shares for future grants. During May 2001,
the Companys shareholders approved an amendment to the
Plan to include an evergreen provision. In 2003, the 1996 Plan
was amended, to increase the maximum number of shares available
for issuance under the evergreen feature of the 1996 Plan by
400,000 shares to 2.0 million. The evergreen provision
automatically increased the number of shares reserved under the
1996 Plan, subject to certain limitations, by 6% of the issued
and outstanding Common Stock of the Company or such lesser
number of shares as determined by the Board of Directors on the
date of the annual meeting of shareholders of each fiscal year
beginning 2001 and ending 2005. The aggregate reserved for
grants was 2.96 million shares.
Options granted under the 1996 Plan may be immediately
exercisable if permitted in the specific grant approved by the
Board of Directors and, if exercised early, the issued shares
may be subject to repurchase provisions. The shares acquired
generally vest over a period of four years from the date of
grant. The 1996 Plan also provides for a transition from
employee to consultant status without termination of the vesting
period as a result of such transition. Any unvested stock issued
is subject to repurchase agreements whereby the Company has the
option to repurchase unvested shares upon termination of
employment at the original issue price. The common stock has
voting rights but does not have resale rights prior to vesting.
The Company has repurchased a total of 7,658 shares in
accordance with these agreements through December 31, 1998.
Subsequently, no grants with early exercise provision have been
made under the 1996 Plan and no shares have been repurchased.
During 2005, the Company granted options to
purchase 279,420 shares of common stock under the 1996
Plan, none of which included an early exercise provision. As of
December 31, 2005, the Company had 1,662,883 options
outstanding under the 1996 Plan.
In March 2005, the Companys Board of Directors adopted and
in May 2005 the Companys shareholders approved the 2005
Equity Incentive Plan (the 2005 Plan), which
amended, restated and retitled the 1996 Plan. All outstanding
awards granted under the 1996 Plan remain subject to the terms
of the 1996 Plan. All stock awards granted on or after the
adoption date are subject to the terms of the 2005 Plan. No
shares were added to the share reserve under the 2005 Plan other
than the shares available for future issuance under the 1996
Plan. As of March 21, 2005, the Company had
2,918,638 shares of common stock authorized for issuance
under the 1996 Plan. Options (net of canceled or expired
options) covering an aggregate of 1,999,252 shares of the
Companys Common Stock had been granted under the 1996
Plan, and the remaining 965,026 shares available for future
grant under the 1996 Plan became available for future grant
under to the 2005 Plan.
As of December 31, 2005, the Company had
965,026 shares of common stock authorized for issuance
under the 2005 Plan. Options granted under the 2005 Plan expire
no later than 10 years from the date of grant. Options
granted under the 2005 Plan may be either incentive or
non-statutory stock options. For incentive and non-statutory
stock option grants, the option price shall be at least 100% and
85%, respectively, of the fair value on the date of grant, as
determined by the Board of Directors. If at any time the Company
grants an option, and the optionee directly or by attribution
owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, the option price
shall be at least 110% of the fair value and shall not be
exercisable more than five years after the date of grant.
59
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
Options granted under the 2005 Plan may be immediately
exercisable based if permitted in the specific grant approved by
the Board of Directors and, if exercised early may be subject to
repurchase provisions. The shares acquired generally vest over a
period of four years from the date of grant. The 2005 Plan also
provides for a transition from employee to consultant status
without termination of the vesting period as a result of such
transition. Under the 2005 Plan, employees may exercise options
in exchange for a note payable to the Company, if permitted
under the applicable grant. As of December 31, 2005 there
were no outstanding notes receivable from shareholders. Any
unvested stock issued is subject to repurchase agreements
whereby the Company has the option to repurchase unvested shares
upon termination of employment at the original issue price. The
common stock has voting rights but cannot be resold prior to
vesting. No grants with early exercise provisions have been made
under the 2005 Plan and no shares have been repurchased. During
2005, the Company granted options to
purchase 46,040 shares of common stock under the 2005
Plan.
The 1996 Non-Employee Directors Stock Option Plan (the
Directors Plan) had 45,000 shares of
common stock authorized for issuance. Options granted under the
Directors Plan expire no later than 10 years from
date of grant. The option price shall be at 100% of the fair
value on the date of grant as determined by the Board of
Directors. The options generally vest quarterly over a period of
one year. During 2000, the Board of Directors approved the
termination of the Directors Plan. No more options can be
granted under the plan after its termination. The termination of
the Directors Plan will have no effect on the options
already outstanding. There was no activity in the
Directors Plan during the year ended December 31 2005
and as of December 31, 2005, 21,186 outstanding options
with exercise prices ranging from $41.25 $120.63
remained with no additional shares available for grant.
The following is a summary of activity under the 1996 Plan, the
2005 Plan and the Directors Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
|
| |
|
|
Shares | |
|
|
|
Weighted | |
|
|
Available | |
|
|
|
Average | |
|
|
for Grant | |
|
Number of | |
|
Price | |
|
Exercise | |
|
|
of Options | |
|
Shares | |
|
Per Share | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2002
|
|
|
117,619 |
|
|
|
1,175,752 |
|
|
|
$1.65 $120.65 |
|
|
$ |
40.25 |
|
|
Options authorized
|
|
|
608,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(362,550 |
) |
|
|
362,550 |
|
|
|
$4.55 $ 10.80 |
|
|
$ |
6.45 |
|
|
Options exercised
|
|
|
|
|
|
|
(5,426 |
) |
|
|
$1.65 $ 4.75 |
|
|
$ |
2.10 |
|
|
Options cancelled
|
|
|
236,111 |
|
|
|
(236,111 |
) |
|
|
$4.75 $116.90 |
|
|
$ |
39.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
599,704 |
|
|
|
1,296,765 |
|
|
|
$1.85 $120.65 |
|
|
$ |
31.15 |
|
|
Options authorized
|
|
|
762,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(697,760 |
) |
|
|
697,760 |
|
|
|
$3.80 $ 12.00 |
|
|
$ |
7.75 |
|
|
Options exercised
|
|
|
|
|
|
|
(81 |
) |
|
|
$4.75 $ 7.10 |
|
|
$ |
6.20 |
|
|
Options cancelled
|
|
|
111,274 |
|
|
|
(111,274 |
) |
|
|
$1.85 $117.85 |
|
|
$ |
31.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
775,992 |
|
|
|
1,883,170 |
|
|
|
$2.15 $120.65 |
|
|
$ |
22.20 |
|
Options authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(325,460 |
) |
|
|
325,460 |
|
|
|
$4.30 $ 7.95 |
|
|
$ |
5.97 |
|
Options exercised
|
|
|
|
|
|
|
(10,077 |
) |
|
|
$2.17 $ 4.75 |
|
|
$ |
4.39 |
|
Adjustment for rounding of reverse split
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
468,854 |
|
|
|
(468,854 |
) |
|
|
$2.83 $120.63 |
|
|
$ |
21.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
919,386 |
|
|
|
1,729,709 |
|
|
|
$2.83 $120.63 |
|
|
$ |
19.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Weighted | |
|
Average | |
|
|
|
Weighted | |
|
Average | |
|
|
|
|
Average | |
|
Remaining | |
|
|
|
Average | |
|
Remaining | |
|
|
|
|
Exercise | |
|
Contractual | |
|
|
|
Exercise | |
|
Contractual | |
Exercise Price Range |
|
Number | |
|
Price | |
|
Life (in years) | |
|
Number | |
|
Price | |
|
Life (in years) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
$ 2.83 $ 5.30
|
|
|
349,385 |
|
|
$ |
5.02 |
|
|
|
8.0 |
|
|
|
197,911 |
|
|
$ |
4.98 |
|
|
|
7.8 |
|
$ 5.35 $ 6.25
|
|
|
350,700 |
|
|
$ |
5.89 |
|
|
|
8.9 |
|
|
|
55,727 |
|
|
$ |
5.90 |
|
|
|
8.5 |
|
$ 6.50 $ 12.00
|
|
|
364,370 |
|
|
$ |
10.48 |
|
|
|
8.1 |
|
|
|
194,103 |
|
|
$ |
9.97 |
|
|
|
8.0 |
|
$13.00 $ 24.10
|
|
|
349,410 |
|
|
$ |
20.66 |
|
|
|
6.1 |
|
|
|
329,255 |
|
|
$ |
20.76 |
|
|
|
6.1 |
|
$25.55 $120.63
|
|
|
315,844 |
|
|
$ |
59.56 |
|
|
|
3.7 |
|
|
|
315,844 |
|
|
$ |
59.56 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,729,709 |
|
|
$ |
19.47 |
|
|
|
7.1 |
|
|
|
1,092,840 |
|
|
$ |
26.44 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded deferred compensation of approximately
$21,000 for the difference between the grant price and the fair
value of certain of the Companys common stock options
granted in 2005. Deferred compensation was fully amortized as of
December 31, 2005.
|
|
|
Employee Stock Purchase Plan |
Employees generally are eligible to participate in the Purchase
Plan if they have been continuously employed by the Company for
at least 10 days prior to the first day of the offering
period and are customarily employed at least 20 hours per
week and at least five months per calendar year and are not a 5%
or greater stockholder. Shares may be purchased under the
Purchase Plan at 85% of the lesser of the fair market value of
the common stock on the grant date or purchase date. Employee
contributions, through payroll deductions, are limited to the
lesser of fifteen percent of earnings or $25,000.
As of December 31, 2005 a total of 597,600 shares have
been issued under the Purchase Plan, leaving a balance of
452,400 available authorized shares. Under
SFAS No. 123, pro forma compensation cost is reported
for the fair value of the employees purchase rights, which
was estimated using the Black-Scholes model and the following
assumptions for 2005; expected volatility of 87.1%; risk-free
interest rates of 3.57%; an average expected life of
1.16 years and a dividend yield of 0.0%. The
weighted-average fair value of the purchase rights granted was
$2.90 per share in 2005 and in 2004 and $2.80 in 2003.
Pro-forma compensation expense of $485,000, $623,000, and
$245,000 for the years ended December 31, 2005, 2004, and
2003 respectively, associated with shares granted under the
Employee Stock Purchase Plan has been included in the disclosure
entitled Stock Based Compensation in Note 1.
|
|
7. |
Employee Benefit Plans |
The Company has a 401(k) Plan which stipulates that all
full-time employees with at least
30-days of employment
can elect to contribute to the 401(k) Plan, subject to certain
limitations, up to $14,000 annually on a pretax basis. Subject
to a maximum dollar match contribution of $7,000 per year,
the Company will match 50% of the first 6% of the
employees contribution on a pretax basis. The Company
expensed total employer matching contributions of $283,000,
$461,000, and $483,000 in 2005, 2004 and 2003, respectively.
|
|
8. |
Collaborative Agreements |
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. In addition, the agreement provides Novo Nordisk
with an option to develop the technology for delivery of other
compounds.
61
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
Under the terms of the agreement, Novo Nordisk has been granted
exclusive rights to worldwide sales and marketing rights for any
products developed under the terms of the agreement.
In 1998, the Company raised $5.0 million through the sale
of common stock to Novo Nordisk at a 25% premium to the fair
market price. In June 2001, the Company raised an additional
$5.0 million through the sale of common stock to Novo
Nordisk at the fair market price. In October 2001, the Company
entered into a new common stock purchase agreement with Novo
Nordisk Pharmaceuticals. Under the new agreement, Novo Nordisk
Pharmaceuticals committed to purchase up to $45.0 million
of the Companys common stock at fair market value
specified in the agreement, of which $20.0 million was
invested initially. In July 2002, the Company raised
$5.0 million through the sale of common stock to Novo
Nordisk Pharmaceuticals under the terms of the agreement. Under
the terms of the development agreement in place between the
Company and Novo Nordisk before completion of the restructuring
transaction, noted below, Novo Nordisk was to fund all product
development costs incurred by the Company under the terms of the
agreement, while Novo Nordisk and the Company agreed to co-fund
final development of the AERx device. The Company was to be the
initial manufacturer of all the products covered by the
agreement and was to receive a share of the overall gross
profits resulting from Novo Nordisks sales of the products.
On January 26, 2005, the Company completed the
restructuring of its AERx iDMS program, pursuant to the
Restructuring Agreement entered into with Novo Nordisk and NNDT.
In accordance with the restructuring transaction, the Company
received $51.1 million in cash and applied
$4.0 million of deposits from Novo Nordisk in consideration
for $54.3 million of property and equipment at net book
value, $515,000 of inventory and $317,000 for prepaid and other
assets. In addition, NNDT hired 126 Aradigm employees at the
closing of the restructuring transaction. The Companys
expenses related to this transaction for legal and other
consulting costs were approximately $1.1 million.
In connection with the restructuring transaction, the Company
entered into various related agreements with Novo Nordisk and
NNDT, effective January 26, 2005, including the following:
|
|
|
|
|
an amended and restated license agreement amending the
Development and License Agreement previously in place with Novo
Nordisk, expanding Novo Nordisks development and
manufacturing rights to the AERx iDMS program and providing for
royalties to the Company on future AERx iDMS net sales and |
|
|
|
a three-year agreement under which NNDT will perform contract
manufacturing for the Company of AERx iDMS-identical devices and
dosage forms filled with compounds provided by the Company in
support of preclinical and initial clinical development by the
Company of other AERx products. |
Through December 31, 2005, the Company received from Novo
Nordisk approximately $150.1 million in product development
and milestone payments and, the Company has recognized the total
amount as contract revenue.
For the years ended December 31, 2005, 2004 and 2003, the
Company recognized contract revenues of $8.0 million,
$27.0 million, and $33.5 million, respectively.
The Company receives revenue from other partner-funded programs.
These programs are generally early-stage feasibility programs
and may not necessarily develop into long-term development
agreements with the partners.
Significant partner payments, contract and milestone revenues
and deferred revenue are as follows (amounts in thousands):
62
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Deferred revenue beginning balance
|
|
$ |
11,491 |
|
|
$ |
12,931 |
|
|
$ |
16,852 |
|
Partner payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Novo Nordisk
|
|
|
727 |
|
|
|
25,373 |
|
|
|
29,625 |
|
Other partner-funded programs
|
|
|
2,530 |
|
|
|
1,232 |
|
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
Total partner payments
|
|
|
3,257 |
|
|
|
26,605 |
|
|
|
29,936 |
|
|
|
|
|
|
|
|
|
|
|
Contract revenue recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Novo Nordisk
|
|
|
8,013 |
|
|
|
26,999 |
|
|
|
33,546 |
|
Other partner-funded programs
|
|
|
2,494 |
|
|
|
1,046 |
|
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
Total contract revenue recognized
|
|
|
10,507 |
|
|
|
28,045 |
|
|
|
33,857 |
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue at December 31, 2004 recognized on
January 26, 2005 as payment for assets pursuant to the
restructuring agreement with Novo Nordisk,
|
|
|
4,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue ending balance
|
|
|
222 |
|
|
|
11,491 |
|
|
|
12,931 |
|
Less: Noncurrent portion of deferred revenue
|
|
|
|
|
|
|
(3,966 |
) |
|
|
(5,040 |
) |
|
|
|
|
|
|
|
|
|
|
Current portion of deferred revenue
|
|
$ |
222 |
|
|
$ |
7,525 |
|
|
$ |
7,891 |
|
|
|
|
|
|
|
|
|
|
|
As a result of the restructuring transaction, the Companys
contract revenue from its development agreement with Novo
Nordisk ceased in 2005. Of the amount recorded in deferred
revenue at December 31, 2004, the Company recorded
$11.3 million in the first quarter of 2005 as: project
development revenue of $2.1 million, deferred milestone
revenue of $5.2, and $4.0 million partial payment for the
sale of the insulin development program assets in accordance
with the restructuring agreement.
|
|
9. |
Related Party Transactions |
Novo Nordisk and its affiliate, Novo Nordisk Pharmaceuticals,
Inc., are considered related parties and at December 31,
2005 own 1,573,674 shares of our common stock representing
approximately 10.8% of the Companys total outstanding
common stock (10% on an as-converted basis).
|
|
|
Development and License Agreement |
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. Under the terms of the agreement, Novo Nordisk has
been granted exclusive rights to worldwide sales and marketing
rights for any products developed under the terms of the
agreement. Through December 31, 2005, the Company received
from Novo Nordisk approximately $150.1 million in product
development and milestone payments and, of this amount, the
Company has recognized all of these funds as contract revenue.
Novo Nordisk was funding all product development costs incurred
by the Company under the terms of the agreement, while Novo
Nordisk and the Company were co-funding final development of the
AERx device. Under its agreements with Novo Nordisk in effect at
December 31, 2004, the Company was to have been the initial
manufacturer of all the products covered by the agreement and
was to receive a share of the overall gross profits resulting
from Novo Nordisks sales of the products.
On January 26, 2005, the Company completed the
restructuring of our AERx iDMS program, pursuant to the
Restructuring Agreement entered into with Novo Nordisk and NNDT,
a newly created wholly owned subsidiary of Novo Nordisk. Under
the terms of the Restructuring Agreement we sold certain
equipment,
63
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
leasehold improvements and other tangible assets currently
utilized in the AERx iDMS program to NNDT for a cash payment of
approximately $55.3 million in which we received net
proceeds of $51.3 million after applying a refund of cost
advances of approximately $4.0 million previously made by
Novo Nordisk. In addition, NNDT hired 126 Aradigm employees at
the closing of the restructuring transaction. Our expenses
related to this transaction for legal and other consulting costs
were approximately $1.1 million. In connection with the
restructuring transaction, we entered into various related
agreements with Novo Nordisk and NNDT, effective
January 26, 2005, including the following:
|
|
|
|
|
an amended and restated license agreement amending the
Development and License Agreement previously in place with Novo
Nordisk, expanding Novo Nordisks development and
manufacturing rights to the AERx iDMS program and providing for
royalties to us on future AERx iDMS net sales and |
|
|
|
a three-year agreement under which NNDT agreed to perform
contract manufacturing for us of AERx iDMS-identical devices and
dosage forms filled with compounds provided by us in support of
preclinical and initial clinical development by us of other AERx
products. |
For the years ended December 31, 2005, 2004 and 2003, the
Company recognized contract revenues of $8.0 million,
$27.0 million, and $33.5 million, respectively.
Receivables in the amount of $126,000 were due to the Company
from Novo Nordisk at December 31, 2005. Payables in the
amount of $237,000 were due to Novo Nordisk from the Company at
December 31, 2005. No amounts were due to the Company from
Novo Nordisk at December 31, 2004.
|
|
|
Securities Purchase Agreements |
In 1998, the Company raised $5.0 million through the sale
of common stock to Novo Nordisk at a 25% premium to the fair
market price. In June 2001, the Company raised an additional
$5.0 million through the sale of common stock to Novo
Nordisk at the fair market price. In October 2001, the Company
entered into a new common stock purchase agreement with Novo
Nordisk Pharmaceuticals. Under the new agreement, Novo Nordisk
Pharmaceuticals committed to purchase up to $45.0 million
of the Companys common stock at fair market value
specified in the agreement, of which $20.0 million was
invested initially. In July 2002, the Company raised
$5.0 million through the sale of common stock to Novo
Nordisk Pharmaceuticals under the terms of the agreement. Since
the inception of the collaboration in June 1998 through
December 31, 2005, the Company raised $35.0 million
through the sale of common stock to Novo Nordisk.
In connection with the restructuring transaction, the Company
entered into an amendment of the common stock purchase agreement
in place with Novo Nordisk, Inc. deleting the provisions whereby
we can require Novo Nordisk to purchase certain amounts of
common stock and imposing certain restriction on the ability of
Novo Nordisk to sell shares of our common stock that it holds.
There is no provision for income taxes because the Company has
incurred operating losses. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and
the amounts used for tax purposes.
64
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
Significant components of the Companys deferred tax assets
are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net operating loss carry forward
|
|
$ |
91,800 |
|
|
$ |
73,900 |
|
Deferred revenue
|
|
|
100 |
|
|
|
4,600 |
|
Research and development credits
|
|
|
14,400 |
|
|
|
14,400 |
|
Capitalized research and development
|
|
|
3,100 |
|
|
|
7,100 |
|
Other
|
|
|
1,300 |
|
|
|
1,800 |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
110,700 |
|
|
|
101,800 |
|
Valuation allowance
|
|
|
(110,700 |
) |
|
|
(101,800 |
) |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Management believes that, based on a number of factors, it is
more likely than not that the deferred tax asset will not be
realized. Accordingly, a full valuation allowance has been
recorded for all deferred tax assets at December 31, 2005,
2004, and 2003. The valuation allowance increased for each of
the years ended December 31 by $8.9 million for 2005,
$13.2 million for 2004, and $14.6 million for 2003.
As of December 31, 2005, the Company had federal net
operating loss carry forwards of approximately
$238.0 million and federal research and development tax
credits of approximately $9.8 million, which expire in the
years 2006 through 2025.
As of December 31, 2005, the Company had California net
operating loss carry forwards of approximately
$148.2 million, which expire in the years 2006 through
2015, and California research and development tax credits of
approximately $6.3 million, which do not expire and
California Manufacturers Investment Credit of
approximately $700,000, which expire in the years 2006 through
2013.
The Tax Reform Act of 1986 limits the annual use of net
operating loss and tax credit carry forwards in certain
situations where changes occur in stock ownership of a company.
In the event the Company has a change in ownership, as defined,
the annual utilization of such carry forwards could be limited.
65
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
12. |
Quarterly Results of Operations (Unaudited) |
Following is a summary of the quarterly results of operations
for the years ended December 31, 2005 and 2004 (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Contract and license revenues
|
|
$ |
7,714 |
|
|
$ |
1,212 |
|
|
$ |
719 |
|
|
$ |
862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
7,070 |
|
|
|
7,317 |
|
|
|
6,471 |
|
|
|
9,316 |
|
|
General and administrative
|
|
|
3,235 |
|
|
|
2,713 |
|
|
|
2,326 |
|
|
|
2,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
10,305 |
|
|
|
10,030 |
|
|
|
8,797 |
|
|
|
11,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,591 |
) |
|
|
(8,818 |
) |
|
|
(8,078 |
) |
|
|
(11,075 |
) |
Interest income
|
|
|
288 |
|
|
|
350 |
|
|
|
342 |
|
|
|
337 |
|
Other income and expense
|
|
|
(37 |
) |
|
|
(8 |
) |
|
|
8 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,340 |
) |
|
|
(8,476 |
) |
|
|
(7,728 |
) |
|
|
(10,671 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$ |
(0.16 |
) |
|
$ |
(0.58 |
) |
|
$ |
(0.53 |
) |
|
$ |
(0.73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
14,459 |
|
|
|
14,512 |
|
|
|
14,518 |
|
|
|
14,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Contract and license revenues
|
|
$ |
6,643 |
|
|
$ |
7,078 |
|
|
$ |
6,352 |
|
|
$ |
7,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,887 |
|
|
|
11,412 |
|
|
|
11,407 |
|
|
|
11,771 |
|
|
General and administrative
|
|
|
2,536 |
|
|
|
3,167 |
|
|
|
3,217 |
|
|
|
3,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
14,423 |
|
|
|
14,579 |
|
|
|
14,624 |
|
|
|
14,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,780 |
) |
|
|
(7,501 |
) |
|
|
(8,272 |
) |
|
|
(6,813 |
) |
Interest income
|
|
|
66 |
|
|
|
49 |
|
|
|
45 |
|
|
|
34 |
|
Interest expense
|
|
|
(10 |
) |
|
|
(5 |
) |
|
|
(3 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(7,724 |
) |
|
|
(7,457 |
) |
|
|
(8,230 |
) |
|
|
(6,778 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$ |
(0.61 |
) |
|
$ |
(0.59 |
) |
|
$ |
(0.65 |
) |
|
$ |
(0.52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
12,588 |
|
|
|
12,706 |
|
|
|
12,713 |
|
|
|
12,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
Not applicable.
|
|
Item 9A. |
Controls and Procedures |
Evaluation of disclosure controls and procedures: Based
on their evaluation of our disclosure controls and procedures
(as defined in the rules promulgated under the Securities
Exchange Act of 1934, as amended, our chief executive officer
and our chief financial officer concluded that our disclosure
controls and procedures were effective as of the end of the
period covered by this report.
We believe that a controls system, no matter how well designed
and operated, cannot provide absolute assurance that the
objectives of the controls 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. Our disclosure controls and procedures are designed to
provide reasonable assurance of achieving their objectives, and
our chief executive officer and our chief financial officer have
concluded that these controls and procedures are effective at
the reasonable assurance level.
Changes in internal controls: There were no significant
changes in our internal controls over financial reporting during
the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B. Other
Information
None
67
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
Identification of Directors; Audit Committee Information;
Code of Ethics
The information required by this Item concerning (i) the
Companys directors, (ii) the identification of the
members of the Companys audit committee, (iii) the
identification of the Audit Committee Financial Expert and
(iv) the Companys Code of Ethics is incorporated by
reference from the section captioned Proposal 1:
Election of Directors contained in the Companys
Definitive Proxy Statement related to the Annual Meeting of
Shareholders to be held May 18, 2006, to be filed by the
Company with the Securities and Exchange Commission (the
Proxy Statement).
Identification of Executive Officers
The information required by this Item concerning our executive
officers is set forth in Part I of this Report.
Section 16(a) Compliance
The information regarding compliance with Section 16(a) of
the Securities Exchange Act of 1934, as amended, required by
this Item is incorporated by reference from the section
captioned Section 16(a) Beneficial Ownership
Reporting Compliance in the Proxy Statement.
|
|
Item 11. |
Executive Compensation |
The information required by this Item is incorporated by
reference from the sections captioned Compensation of
Executive Officers, Compensation of Directors,
Compensation Committee Interlocks and Insider
Participation, the Report of the Compensation Committee
and the Proxy Graph contained in the Proxy Statement.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information required by this Item is incorporated by
reference from the section captioned Security Ownership of
Certain Beneficial Owners and Management and Equity
Compensation Plan Information contained in the Proxy
Statement.
|
|
Item 13. |
Certain Relationships and Related Transactions |
The information required by this Item is incorporated by
reference from the sections captioned Certain
Transactions and Compensation of Executive
Officers contained in the Proxy Statement.
|
|
Item 14. |
Principal Accountant Fees and Services |
The information required by this item is incorporated by
reference from the section captioned Proposal 3:
Ratification of Selection of Independent Registered Public
Accounting Firm in the Proxy Statement.
68
PART IV
|
|
Item 15. |
Exhibits and Financial Statements Schedules |
(a)(1) Financial Statements.
Included in Part II of this Report:
|
|
|
|
|
|
|
Page in | |
|
|
Form 10-K | |
|
|
| |
|
|
|
42 |
|
|
|
|
43 |
|
|
|
|
44 |
|
|
|
|
45 |
|
|
|
|
47 |
|
|
|
|
48 |
|
(2) Financial Statement Schedules.
All schedules have been omitted because they are not required.
(3) Exhibits.
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
3.1(1) |
|
|
Amended and Restated Articles of Incorporation of the Company. |
|
3.2(4) |
|
|
Bylaws of the Company, as amended. |
|
3.3(10) |
|
|
Certificate of Determination of Series A Junior
Participating Preferred Stock. |
|
3.4(9) |
|
|
Certificate of Determination and Preferences of Series A
Convertible Preferred Stock. |
|
3.5(10) |
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company. |
|
3.6(10) |
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock. |
|
3.7(15) |
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company. |
|
3.8(15) |
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock. |
|
3.9 |
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company. |
|
4.1 |
|
|
Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,
3.7 and 3.8. |
|
4.2(1) |
|
|
Specimen common stock certificate. |
|
10.1(1)+ |
|
|
Form of Indemnity Agreement between the Registrant and each of
its directors and officers. |
|
10.2(18)+ |
|
|
Equity Incentive Plan. |
|
10.3(1)+ |
|
|
Form of the Companys Incentive Stock Option Agreement
under the Equity Incentive Plan. |
|
10.4(1)+ |
|
|
Form of the Companys Non-statutory Stock Option Agreement
under the Equity Incentive Plan. |
|
10.5(1)+ |
|
|
Non-Employee Directors Stock Option Plan. |
|
10.6(1)+ |
|
|
Form of the Companys Non-statutory Stock Option Agreement
under the Non-Employee Directors Stock Option Plan. |
|
10.7(14)+ |
|
|
Employee Stock Purchase Plan, as amended. |
|
10.8(1)+ |
|
|
Form of the Companys Employee Stock Purchase Plan Offering
Document. |
|
10.10(2)* |
|
|
Product Development and Commercialization Agreement between the
Company and SmithKline Beecham PLC. |
69
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
10.12(3) |
|
|
Lease Agreement for the property located in Phase V of the
Britannia Point Eden Business Park in Hayward, California, dated
January 28, 1998, between the Company and Britannia Point
Eden, LLC. |
|
10.13(5) |
|
|
Rights Agreement, dated as of August 31, 1998, between the
Company and Bank Boston, N.A. |
|
10.13a(10) |
|
|
Amendment to Rights Agreement, dated as of October 22,
2001, by and between the Company and Fleet National Bank. |
|
10.13b(10) |
|
|
Amendment to Rights Agreement, dated as of December 6,
2001, by and between the Company and EquiServe Trust Company. |
|
10.16(7)* |
|
|
Amendment to GlaxoSmithKline agreement executed in December 2000. |
|
10.17(11) |
|
|
Securities Purchase Agreement, dated as of February 10,
2003, by and among the Company and the purchasers named therein. |
|
10.18(11) |
|
|
Warrant Repricing Agreement, dated as of February 10, 2003,
by and between the Company and the persons listed on
Exhibit A thereto. |
|
10.19(12) |
|
|
Securities Purchase Agreement, dated as of November 7,
2003, by and among the Company and the purchasers named therein. |
|
10.20(13) |
|
|
Securities Purchase Agreement, dated as of November 14,
2003, by and among the Company and the purchasers named therein. |
|
10.21(16)# |
|
|
Restructuring Agreement, dated as of September 18, 2004, by
and among the Company, Novo Nordisk and Novo Nordisk Delivery
Technologies, Inc. |
|
10.22(17) |
|
|
Securities Purchase Agreement, dated as of December 17,
2004, by and among the Company and the purchasers named therein. |
|
10.23(19)+ |
|
|
Form of Change of Control Agreement to be entered into between
the Company and certain of the Companys senior officers. |
|
10.24(19)+ |
|
|
Executive Officer Severance Benefit Plan. |
|
10.25+ |
|
|
Form of the Companys Restricted Share Bonus Agreement
under the Equity Incentive Plan |
|
10.26# |
|
|
Amended and Restated License Agreement, dated as of
January 26, 2005, by and between the Company and Novo
Nordisk A/S |
|
23.1 |
|
|
Consent of Independent Registered Public Accounting Firm. |
|
24.1 |
|
|
Power of Attorney. Reference is made to the signature page. |
|
31.1 |
|
|
Section 302 Certification of the Chief Executive Officer. |
|
31.2 |
|
|
Section 302 Certification of the Chief Financial Officer. |
|
32.1 |
|
|
Section 906 Certification of the Chief Executive Officer
and the Chief Financial Officer. |
|
|
|
|
* |
The Company has sought confidential treatment for portions of
the referenced exhibit. |
|
|
|
|
+ |
Represents a management contract or compensatory plan or
arrangement. |
|
|
# |
The Commission has granted the Companys request for
confidential treatment with respect to portions of this exhibit. |
|
|
|
|
(1) |
Incorporated by reference to the Companys
Form S-1
(No. 333-4236), as
amended. |
|
|
(2) |
Incorporated by reference to the Companys
Form 8-K filed on
November 7, 1997. |
|
|
(3) |
Incorporated by reference to the Companys
Form 10-K filed on
March 24, 1998, as amended. |
|
|
(4) |
Incorporated by reference to the Companys
Form 10-Q filed on
August 14, 1998. |
|
|
(5) |
Incorporated by reference to the
Companys 8-K
filed on September 2, 1998. |
|
|
(7) |
Incorporated by reference to the Companys
Form 10-K filed
for the year ended December 31, 2000. |
|
|
(9) |
Incorporated by reference to the Companys
Form S-3
(No. 333-76584). |
|
|
(10) |
Incorporated by reference to the Companys
Form 10-K filed
for the year ended December 31, 2001. |
|
(11) |
Incorporated by reference to the Companys
Form 10-Q filed on
May 13, 2003. |
70
|
|
(12) |
Incorporated by reference to the Companys
Form 8-K filed on
November 12, 2003. |
|
(13) |
Incorporated by reference to the Companys
Form 8-K filed on
November 20, 2003. |
|
(14) |
Incorporated by reference to the Companys definitive proxy
statement filed on April 2, 2004 |
|
(15) |
Incorporated by reference to the Companys
Form 10-Q filed on
August 13, 2004. |
|
(16) |
Incorporated by reference to the Companys
Form 10-Q filed on
November 15, 2004 |
|
(17) |
Incorporated by reference to the Companys
Form 8-K filed on
December 23, 2004. |
|
(18) |
Incorporated by reference to the Companys definitive proxy
statement filed on April 7, 2005. |
|
(19) |
Incorporated by reference to the Companys
Form 8-K filed on
October 13, 2005. |
(b) Index to Exhibits.
See Exhibits listed under Item 15(a)(3).
(c) Financial Statement Schedules.
All schedules have been omitted because they are not required.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Hayward, State of
California, on the 30th day of March 2006.
|
|
|
V. Bryan Lawlis |
|
President and Chief Executive Officer |
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints, jointly and
severally, V. Bryan Lawlis and Thomas C. Chesterman, and each
one of them,
attorneys-in-fact for
the undersigned, each with power of substitution, for the
undersigned in any and all capacities, to sign any and all
amendments to this Report on
Form 10-K, and to
file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact,
or their substitutes, may do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this
Power of Attorney as of the date indicated opposite his name.
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ V. Bryan Lawlis
V. Bryan Lawlis |
|
President, Chief Executive Officer, and Director (Principal
Executive Officer) |
|
March 30, 2006 |
|
/s/ Thomas C. Chesterman
Thomas C. Chesterman |
|
Sr. VP and Chief Financial Officer (Principal Financial and
Accounting Officer) |
|
March 30, 2006 |
|
/s/ Virgil D. Thompson
Virgil D. Thompson |
|
Chairman of the Board and Director |
|
March 30, 2006 |
|
/s/ Frank H. Barker
Frank H. Barker |
|
Director |
|
March 30, 2006 |
|
/s/ Igor Gonda
Igor Gonda |
|
Director |
|
March 30, 2006 |
|
/s/ Stephen O. Jaeger
Stephen O. Jaeger |
|
Director |
|
March 30, 2006 |
|
/s/ John M. Nehra
John M. Nehra |
|
Director |
|
March 30, 2006 |
|
/s/ Wayne L. Roe
Wayne L. Roe |
|
Director |
|
March 30, 2006 |
|
/s/ Richard P. Thompson
Richard P. Thompson |
|
Director |
|
March 30, 2006 |
72
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
3.1(1) |
|
|
Amended and Restated Articles of Incorporation of the Company. |
|
3.2(4) |
|
|
Bylaws of the Company, as amended. |
|
3.3(10) |
|
|
Certificate of Determination of Series A Junior
Participating Preferred Stock. |
|
3.4(9) |
|
|
Certificate of Determination and Preferences of Series A
Convertible Preferred Stock. |
|
3.5(10) |
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company. |
|
3.6(10) |
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock. |
|
3.7(15) |
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company. |
|
3.8(15) |
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock. |
|
3.9 |
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company. |
|
4.1 |
|
|
Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,
3.7 and 3.8. |
|
4.2(1) |
|
|
Specimen common stock certificate. |
|
10.1(1)+ |
|
|
Form of Indemnity Agreement between the Registrant and each of
its directors and officers. |
|
10.2(18)+ |
|
|
Equity Incentive Plan. |
|
10.3(1)+ |
|
|
Form of the Companys Incentive Stock Option Agreement
under the Equity Incentive Plan. |
|
10.4(1)+ |
|
|
Form of the Companys Non-statutory Stock Option Agreement
under the Equity Incentive Plan. |
|
10.5(1)+ |
|
|
Non-Employee Directors Stock Option Plan. |
|
10.6(1)+ |
|
|
Form of the Companys Non-statutory Stock Option Agreement
under the Non-Employee Directors Stock Option Plan. |
|
10.7(14)+ |
|
|
Employee Stock Purchase Plan, as amended. |
|
10.8(1)+ |
|
|
Form of the Companys Employee Stock Purchase Plan Offering
Document. |
|
10.10(2)* |
|
|
Product Development and Commercialization Agreement between the
Company and SmithKline Beecham PLC. |
|
10.12(3) |
|
|
Lease Agreement for the property located in Phase V of the
Britannia Point Eden Business Park in Hayward, California, dated
January 28, 1998, between the Company and Britannia Point
Eden, LLC. |
|
10.13(5) |
|
|
Rights Agreement, dated as of August 31, 1998, between the
Company and Bank Boston, N.A. |
|
10.13a(10) |
|
|
Amendment to Rights Agreement, dated as of October 22,
2001, by and between the Company and Fleet National Bank. |
|
10.13b(10) |
|
|
Amendment to Rights Agreement, dated as of December 6,
2001, by and between the Company and EquiServe Trust Company. |
|
10.16(7)* |
|
|
Amendment to GlaxoSmithKline agreement executed in December 2000. |
|
10.17(11) |
|
|
Securities Purchase Agreement, dated as of February 10,
2003, by and among the Company and the purchasers named therein. |
|
10.18(11) |
|
|
Warrant Repricing Agreement, dated as of February 10, 2003,
by and between the Company and the persons listed on
Exhibit A thereto |
|
10.19(12) |
|
|
Securities Purchase Agreement, dated as of November 7,
2003, by and among the Company and the purchasers named therein. |
|
10.20(13) |
|
|
Securities Purchase Agreement, dated as of November 14,
2003, by and among the Company and the purchasers named therein. |
|
10.21(16)# |
|
|
Restructuring Agreement, dated as of September 18, 2004, by
and among the Company, Novo Nordisk and Novo Nordisk Delivery
Technologies, Inc. |
|
10.22(17) |
|
|
Securities Purchase Agreement, dated as of December 17,
2004, by and among the Company and the purchasers named therein. |
73
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
10.23(19)+ |
|
|
Form of Change of Control Agreement to be entered into between
the Company and certain of the Companys senior officers. |
|
10.24(19)+ |
|
|
Executive Officer Severance Benefit Plan. |
|
10.25+ |
|
|
Form of the Companys Restricted Share Bonus Agreement
under the Equity Incentive Plan |
|
10.26# |
|
|
Amended and Restated License Agreement, dated as of
January 26, 2005, by and between the Company and Novo
Nordisk A/S |
|
23.1 |
|
|
Consent of Independent Registered Public Accounting Firm. |
|
24.1 |
|
|
Power of Attorney. Reference is made to the signature page. |
|
31.1 |
|
|
Section 302 Certification of the Chief Executive Officer. |
|
31.2 |
|
|
Section 302 Certification of the Chief Financial Officer. |
|
32.1 |
|
|
Section 906 Certification of the Chief Executive Officer
and the Chief Financial Officer. |
|
|
|
|
* |
The Company has sought confidential treatment for portions of
the referenced exhibit. |
|
|
|
|
+ |
Represents a management contract or compensatory plan or
arrangement. |
|
|
# |
The Commission has granted the Companys request for
confidential treatment with respect to portions of this exhibit. |
|
|
|
|
(1) |
Incorporated by reference to the Companys
Form S-1
(No. 333-4236), as
amended. |
|
|
(2) |
Incorporated by reference to the Companys
Form 8-K filed on
November 7, 1997. |
|
|
(3) |
Incorporated by reference to the Companys
Form 10-K filed on
March 24, 1998, as amended. |
|
|
(4) |
Incorporated by reference to the Companys
Form 10-Q filed on
August 14, 1998. |
|
|
(5) |
Incorporated by reference to the
Companys 8-K
filed on September 2, 1998. |
|
|
(7) |
Incorporated by reference to the Companys
Form 10-K filed
for the year ended December 31, 2000. |
|
|
(9) |
Incorporated by reference to the Companys
Form S-3
(No. 333-76584). |
|
|
(10) |
Incorporated by reference to the Companys
Form 10-K filed
for the year ended December 31, 2001. |
|
(11) |
Incorporated by reference to the Companys
Form 10-Q filed on
May 13, 2003. |
|
(12) |
Incorporated by reference to the Companys
Form 8-K filed on
November 12, 2003. |
|
(13) |
Incorporated by reference to the Companys
Form 8-K filed on
November 20, 2003. |
|
(14) |
Incorporated by reference to the Companys definitive proxy
statement filed on April 2, 2004 |
|
(15) |
Incorporated by reference to the Companys
Form 10-Q filed on
August 13, 2004. |
|
(16) |
Incorporated by reference to the Companys
Form 10-Q filed on
November 15, 2004 |
|
(17) |
Incorporated by reference to the Companys
Form 8-K filed on
December 23, 2004. |
|
(18) |
Incorporated by reference to the Companys definitive proxy
statement filed on April 7, 2005. |
|
(19) |
Incorporated by reference to the Companys
Form 8-K filed on
October 13, 2005. |
74