e10vk
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, 2010
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or
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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
from to ,
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Commission File Number:
000-28402
Aradigm Corporation
(Exact Name of Registrant as
Specified in Its Charter)
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California
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94-3133088
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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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 if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
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 þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ
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(Do not check if a smaller reporting company)
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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 þ
The aggregate market value of the 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, 2010 was: $15,131,761.
The number of shares of the registrants common stock
outstanding as of February 28, 2011 was: 172,304,235.
DOCUMENTS
INCORPORATED BY REFERENCE
Parts of the Registrants Proxy Statement for the 2011
Annual Meeting of Shareholders are incorporated by reference
into Part III of this Annual Report on
Form 10-K.
Except as expressly incorporated by reference, the
Registrants Proxy Statement for the 2011 Annual Meeting of
Shareholders shall not be deemed to be a part of this Annual
Report on
Form 10-K.
Cautionary
Note Regarding Forward-Looking Statements
This Annual Report on
Form 10-K
contains forward-looking statements that are based on the
current beliefs of management, as well as current assumptions
made by, and information currently available to, management. All
statements contained in this Annual Report on
Form 10-K,
other than statements that are purely historical, are
forward-looking statements. Words such as
anticipate, expect, intend,
plan, believe, may,
will, could, continue,
seek, estimate, or the negative thereof
and similar expressions also identify forward-looking
statements. These forward-looking statements are subject to
risks and uncertainties that could cause our future actual
results, performance or achievements to 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 risks and uncertainties discussed in this
section, as well as in the section entitled Risk
Factors, and elsewhere in this Annual Report on
Form 10-K
and our other filings with the United States Securities and
Exchange Commission (the SEC). Forward-looking
statements contained in this Annual Report on
Form 10-K
include, but are not limited to, statements regarding:
(i) our belief that our cash, cash equivalents and
short-term investments as of December 31, 2010, as well as
anticipated recurring royalty payments from Zogenix will be
sufficient to fund our operations through at least the second
quarter of 2011; (ii) our business strategies, including
our intent to pursue selected opportunities for delivery via
inhalation by seeking collaborations and government grants that
will fund development and commercialization; (iii) our
strategy to commercialize our respiratory product candidates
with our own focused sales and marketing force addressing
pulmonary specialty doctors in the United States or in the
European Union and our intent to use our pulmonary delivery
methods and formulations of drugs and biologics to improve their
safety, efficacy and convenience of administration to patients,
(iv) our expectations regarding clinical trials, including
the expected timing and completion of the ORBIT-1 trial;
(v) our expectation that we will incur additional operating
losses; (vi) our expectation that we will continue to
receive royalty revenue from Zogenix and (vii) our focus on
establishing funded partnering agreements and sale or
out-licensing of non-strategic assets as the means to generate
the capital resources needed to fund the further development of
the bronchiectasis and cystic fibrosis indications for our
liposomal ciprofloxacin program.
These forward-looking statements and our business are subject
to significant risks such as the risks and uncertainties
discussed in the section entitled Risk Factors,
including, but not limited to: (i) our ability to enter
into partnering agreements and (ii) our need and ability to
raise additional capital, whether non-dilutive or otherwise,.
Even if product candidates appear promising at various stages of
development, they may not reach the market or may not be
commercially successful for a number of reasons. Such reasons
include, but are not limited to, the possibilities that the
potential products may be found to be unsafe in animal or human
trials, ineffective during clinical trials, may fail to receive
necessary regulatory approvals, may be difficult to manufacture
on a large scale, are uneconomical to market, may be precluded
from commercialization by proprietary rights of third parties or
may not gain acceptance from health care professionals and
patients.
You are cautioned not to place undue reliance on the
forward-looking statements contained herein, which speak only as
of the date of the filing of this Annual Report on
Form 10-K.
We undertake no obligation to update these forward-looking
statements in light of events or circumstances occurring after
the date of the filing of this Annual Report on
Form 10-K
or to reflect the occurrence of unanticipated events.
PART I
Overview
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of drugs delivered by
inhalation for the treatment of severe respiratory diseases by
pulmonologists. Over the last decade, we invested a large amount
of capital to develop drug delivery technologies, particularly
the development of a significant amount of expertise in
pulmonary drug delivery. We also invested considerable effort
into the generation of a large volume of laboratory and clinical
data demonstrating the performance of our
AERx®
pulmonary drug delivery platform and other proprietary
technologies, including our liposomal ciprofloxacin formulations
for inhalation. We have not been profitable since inception and
expect to incur additional operating
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losses over at least the foreseeable future as we continue
product development efforts, preclinical testing, clinical trial
activities, and possible sales, marketing and contract
manufacturing efforts. To date, we have not had any significant
product sales and do not anticipate receiving revenues from the
sale of any of our products in the near term. As of
December 31, 2010, we had an accumulated deficit of
$353.8 million. Historically, we have funded our operations
primarily through public offerings and private placements of our
capital stock, license fees and milestone payments from
collaborators, proceeds from our January 2005 restructuring
transaction with Novo Nordisk, borrowings from Novo Nordisk, the
sale of Intraject-related assets to Zogenix, the milestone
payment received from Zogenix during the three months ended
March 31, 2010, and interest earned on cash equivalents and
short-term investments.
Over the last five years, our business has focused on
opportunities in the development of drugs for the treatment of
severe respiratory diseases that could be developed by us and
commercialized in the United States, or another significant
territory, such as the European Union (EU). It is
our longer term strategy to commercialize our respiratory
product candidates with our own focused sales and marketing
force addressing pulmonary specialty doctors in the United
States or in the EU, where we believe that a proprietary sales
force will enhance the return to our shareholders. Where our
products can benefit a broader population of patients in the
United States or in other countries, we may enter into
co-development, co-promotion or other marketing arrangements
with collaborators, thereby reducing costs and increasing
revenues through license fees, milestone payments and royalties.
In selecting our proprietary development programs, we primarily
seek drugs approved by the United States Food and Drug
Administration (FDA) that can be reformulated for
both existing and new indications in respiratory disease. Our
intent is to use our pulmonary delivery methods and formulations
to improve their safety, efficacy and convenience of
administration to patients. We believe that this strategy will
allow us to reduce cost, development time and risk of failure,
when compared to the discovery and development of new chemical
entities. Our lead development candidates are proprietary
liposomal formulations of the antibiotic ciprofloxacin that are
delivered by inhalation for the management of infections
associated with the severe respiratory diseases cystic fibrosis
and bronchiectasis. We received orphan drug designations for
both of these indications for ARD-3100 in the U.S. and for
cystic fibrosis in the EU. We may seek orphan drug designation
for other eligible product candidates we develop, including
ARD-3150. We have reported the results of one successful Phase
2a trial and one successful Phase 2b trial in non-cystic
fibrosis bronchiectasis and one successful Phase 2a trial in
cystic fibrosis with these product candidates. The same
formulation could also potentially be used for the prevention
and treatment of bioterrorism agents, such as inhaled anthrax,
tularemia and plague.
Pulmonary delivery by inhalation is already a widely used and
well accepted method of administration of a variety of drugs for
the treatment of respiratory diseases. Compared to other routes
of administration, inhalation provides local delivery of the
drug to the respiratory tract which offers a number of potential
advantages, including rapid onset of action, less drug required
to achieve the desired therapeutic effect, and reduced side
effects because the rest of the body has lower exposure to the
drug. We believe that there still are significant unmet medical
needs in the respiratory disease market, both to replace
existing therapies that over prolonged use in patients
demonstrate reduced efficacy or increased side effects, as well
as to provide novel treatments to patient populations and for
disease conditions that are inadequately treated.
In addition to its use in the treatment of respiratory diseases,
there is also an increasing awareness of the value of the
inhalation route of delivery to administer drugs via the lung
for the systemic treatment of disease elsewhere in the body. For
many drugs, the large and highly absorptive area of the lung
enables bioavailability and fast absorption as a result of
pulmonary delivery than could otherwise only be obtained by
injection. We believe that the features of our AERx delivery
system make it more attractive for many systemic drug
applications than alternative methods. We believe particular
opportunities exist for the use of our pulmonary delivery
technology for the delivery of biologics, including proteins,
antibodies and peptides that today must be delivered by
injection, as well as small molecule drugs, where rapid
absorption is desirable. We intend to pursue selected
opportunities for systemic delivery via inhalation by seeking
collaborations and government grants that will fund development
and commercialization.
We believe that our proprietary formulation and delivery
technologies and our experience in the development and
management of pulmonary clinical programs uniquely position us
to benefit from opportunities in the
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respiratory disease market as well as other pharmaceutical
markets that would benefit from the efficient, non-invasive
inhalation delivery of drugs.
Our
Strategy
We have transitioned our business model to a specialty
pharmaceutical company focused on the development and
commercialization of a portfolio of drugs delivered by
inhalation for the treatment and prevention of severe
respiratory diseases. We have chosen to focus on respiratory
diseases based on the expertise of our management team and the
history of our company. We have significant experience in the
treatment of respiratory diseases and specifically in the
development of inhalation products that are uniquely suited for
their treatment. We have a portfolio of proprietary technologies
that may potentially address significant unmet medical needs for
unique or significantly improved products in the global
respiratory market. There are five key elements of our strategy:
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Develop a proprietary portfolio of products for the treatment
of respiratory diseases. We believe our expertise
in the development of pulmonary pharmaceutical products should
enable us to advance and commercialize respiratory products for
a variety of indications. We select for development those
product candidates that can benefit from our experience in
pulmonary delivery and that we believe are likely to provide a
superior therapeutic profile or other valuable benefits to
patients when compared to existing products.
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Accelerate the regulatory approval process. We
believe that our management teams expertise in
pharmaceutical inhalation products, new indications and
reformulations of existing drugs will enable us to pursue the
most appropriate regulatory pathway for our product candidates.
Because our current product candidates incorporate FDA-approved
drugs, we believe that the most expedient review and approval
pathway for these product candidates in the United States will
be under Section 505(b)(2) of the Food, Drug and Cosmetic
Act, or the FDCA. Section 505(b)(2) permits the FDA to rely
on scientific literature or on the FDAs prior findings of
safety
and/or
effectiveness for approved drug products. By choosing to develop
new applications or reformulations of FDA-approved drugs, we
believe that we can substantially reduce or potentially
eliminate the significant time, expenditure and risks associated
with preclinical testing of new chemical entities and biologics,
as well as utilize knowledge of these approved drugs to reduce
the risk, time and cost of the clinical trials needed to obtain
drug approval. In addressing niche market opportunities, we have
already been granted or intend to pursue orphan drug designation
for our products when appropriate. Orphan drug designation may
be granted to drugs and biologics that treat rare
life-threatening diseases that affect fewer than
200,000 persons in the United States. Such designation
provides a company with the possibility of market exclusivity
for seven years as well as regulatory assistance, reduced filing
fees and possible tax credits. Similar legislation exists in the
EU with a market exclusivity of 10 years.
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Develop our own sales and marketing capacity for products in
niche markets. It is our longer term strategy to
develop our own targeted sales and marketing force for those of
our products prescribed primarily by the approximately 11,000
pulmonologists, or their subspecialty associates, in the United
States. We may also decide alternatively to explore the use of
our sales force to serve pulmonary specialty physicians in
another significant pharmaceutical market, such as the EU. We
expect to begin establishing a sales force as we approach
commercialization of the first of such products. We believe that
by developing a small sales group dedicated to interacting with
disease-specific physicians in the respiratory field, we can
create greater value from our products for our shareholders. For
markets where maximizing sales of the product would depend on
marketing to primary healthcare providers that are only
addressable with a large sales force, we plan to enter into
co-marketing arrangements. We also intend to establish
collaborative relationships to commercialize our products in
cases where we cannot meet these goals with a small sales force
or when we need collaborators with relevant expertise and
capabilities, such as the ability to address international
markets. Through such collaborations, we may also utilize our
collaborators resources and expertise to conduct large
late-stage clinical development.
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Exploit the broad applicability of our delivery technology
through product development collaborations. We
continue to believe that companies can benefit by collaborating
with us when our proprietary delivery technologies create new
pharmaceutical and biologics products. We intend to continue to
exploit the broad
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applicability of our delivery technologies for systemic
applications of our technologies in collaborations with
companies and organizations that will fund development and
commercialization. We intend to continue to out-license
technologies and product opportunities that we have already
developed to a certain stage and that are outside of our core
strategic focus. Collaborations and out-licensing may generate
additional revenues while we progress towards the development
and potential launch of our own proprietary products.
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Outsource manufacturing activities. We intend
to outsource the late stage clinical and commercial scale
manufacturing of our products to conserve our capital for
product development. We believe that the required late stage
clinical and commercial manufacturing capacity can be obtained
from contract manufacturers. With this approach, we seek
manufacturers whose expertise should allow us to reduce risk and
the costs normally incurred if we were to build, operate and
maintain large-scale production facilities ourselves.
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Proprietary
Programs Under Development
Liposomal
Ciprofloxacin
Ciprofloxacin has been approved by the FDA as an anti-infective
agent and is widely used for the acute treatment of a variety of
bacterial infections, including exacerbations associated with
pulmonary (respiratory) infections. Today, ciprofloxacin is
approved to be delivered by oral or intravenous administration.
However, these forms of ciprofloxacin are not often used
chronically to prevent the pulmonary exacerbations because of
their side-effects in the rest of the body and concerns about
emergence of systemic microbial resistance to this antibiotic.
Inhalation delivery of antibiotics directly to the respiratory
tract typically results in much higher antibiotic concentrations
in the infected organ, even with relatively small doses, than
the concentrations of the antibiotic that could be achieved with
safe, approved doses delivered via injections or by oral
administration. Furthermore, the inhalation approach may also
significantly reduce the concentration of the antibiotic in the
rest of the body which is beneficial to reduce systemic
side-effects and the risk of antibiotic resistance. However,
ciprofloxacin, like many other antibiotics, is absorbed from the
respiratory tract rapidly, and therefore it would likely need to
be inhaled frequently to achieve adequate anti-infectious
effect. The high concentrations could also potentially cause
irritation in the patients respiratory tract as has been
observed in some trials with other inhaled antibiotics. We
therefore employ liposomes, which are nanoparticles made from
materials similar to the lipids in the human lungs and dispersed
in water, that encapsulate ciprofloxacin during storage and
release it gradually upon contact with the fluid covering the
respiratory tract (airways and lungs) . In an animal experiment,
unencapsulated ciprofloxacin delivered to the lungs of mice
appeared to be rapidly absorbed into the bloodstream, with no
drug detectable four hours after administration. In contrast,
the liposomal formulation of ciprofloxacin produced high
sustained levels of ciprofloxacin in the lungs and was still
detectable at 12 hours post dosing. We have shown similarly
in human clinical trials that inhaled liposomal ciprofloxacin
achieves very high concentrations in the sputum from the
respiratory tract of patients and results in much lower blood
levels of ciprofloxacin than those seen with therapeutic,
approved doses of oral or injected ciprofloxacin. Furthermore,
the slow release of ciprofloxacin allows once daily dosing,
which is more convenient for patients than the twice or three
times daily dosing of the two currently approved inhaled
antibiotics for the management of respiratory infections in
cystic fibrosis. We believe that delivering
ciprofloxacin a potent antibiotic
directly to the respiratory tract by inhalation in the form of
our slow release formulation may improve its safety and efficacy
in the chronic management of pulmonary infections and prevent
traumatic and costly pulmonary exacerbations. We also believe
that for certain respiratory disease indications, it may be
possible that a liposomal formulation enables better interaction
of the drug with the disease target, leading to improved
effectiveness over other therapies. We presently have under
development three disease indications for this formulation that
share much of the laboratory and production development efforts,
as well as a common safety data base.
ARD-3100
Liposomal Ciprofloxacin for the Management of Infections in
Cystic Fibrosis (CF) Patients
One of our programs uses our proprietary liposomal formulation
of ciprofloxacin for the management of respiratory infections
caused by a microorganism, Pseudomonas aeruginosa, common
in patients with cystic fibrosis, or CF. CF is a genetic disease
that causes thick, sticky mucus to form in the lungs, pancreas
and other organs. In the lungs, the mucus tends to block the
airways, causing lung damage and making these patients highly
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susceptible to lung infections. According to the Cystic Fibrosis
Foundation, CF affects roughly 30,000 children and adults in the
United States and roughly 70,000 children and adults worldwide.
Recent reports suggest that there may be over 100,000 largely
undiagnosed CF patients in India. According to the American Lung
Association, the direct medical care costs for an individual
with CF in the U.S. are currently estimated to be in excess
of $40,000 per year.
The inhalation route affords direct administration of the drug
to the infected parts of the lung, maximizing the dose to the
affected sites and minimizing the wasteful exposure to the rest
of the body where it could cause side effects. Therefore,
treatment of CF-related lung infections by direct administration
of antibiotics to the lung may improve both the safety and
efficacy of treatment compared to systemic administration by
other routes, as well as improving patient convenience as
compared to injections. Oral and injectable forms of
ciprofloxacin are approved for the treatment of Pseudomonas
aeruginosa, a serious lung infection to which CF patients
are vulnerable. Currently, there are two inhaled antibiotics
approved for the chronic management of this infection; one of
them is given twice a day and the other one three times a day.
Both of these antibiotics are administered by nebulization and
they are used intermittently one month on the
therapy, one month off therapy. We believe that local lung
delivery via inhalation of ciprofloxacin in our sustained
release liposomal formulation could provide convenient,
effective and safe chronic management of the debilitating and
often life-threatening lung infections that afflict patients
with CF. We think that once a day dosing of inhaled liposomal
ciprofloxacin could also be a welcome reduction in the burden of
therapy for this patient population. Furthermore, some patients
may benefit from rotating two or more inhaled antibiotics so
that they maintain some form of inhaled antibiotic therapy all
the time. As ciprofloxacin is an antibiotic of a different
class, with a different mechanism of action to the two currently
approved inhaled antibiotics, its use could therefore maximize
the control of respiratory infections in CF patients and avoid
the side effects associated with the use of the other
antibiotics. We have received orphan drug designation from the
FDA for this product for the management of CF.
We believe we have the preclinical development, clinical and
regulatory expertise to advance this product through
development. We intend to retain marketing or co-marketing
rights for the inhaled liposomal ciprofloxacin formulations in
at least one of the major markets, such as United States or the
European Union. The benefits of retaining such rights will need
to be weighed against the cost to us of funding additional
development and establishing the commercial infrastructure.
Development
We initiated preclinical studies for liposomal ciprofloxacin in
2006 and we also continued to work on new innovative
formulations for this product with the view to maximize the
safety, efficacy and convenience to patients. In October 2007,
we completed a Phase 1 clinical trial in 20 healthy volunteers
in Australia. This was a safety, tolerability and
pharmacokinetic study that included single dose escalation
followed by dosing for one week. Administration of the liposomal
formulation by inhalation was well tolerated and no serious
adverse reactions were reported. The pharmacokinetic profile
obtained by measurement of blood levels of ciprofloxacin
following the inhalation of the liposomal formulation was
consistent with the profile from sustained release of
ciprofloxacin from liposomes, supporting once daily dosing; the
blood levels of ciprofloxacin were much lower than those that
would be observed following administration of therapeutic doses
of ciprofloxacin by injection or via the gastrointestinal tract.
We believe that this is a desirable pharmacokinetic profile
likely to result in a reduction of the incidence and severity of
systemic side effects of ciprofloxacin and to be less likely to
lead to systemic emergence of resistant micro-organisms.
Further, we believe that once a day dosing of this product could
provide a significant reduction in the burden of therapy for CF
patients and their healthcare providers.
In June 2008, we completed a multi-center
14-day
treatment Phase 2a trial in Australia and New Zealand in 21 CF
patients to investigate safety, efficacy and pharmacokinetics of
once daily inhaled liposomal ciprofloxacin. The primary efficacy
endpoint in this Phase 2a study was the change from baseline in
the sputum Pseudomonas aeruginosa colony forming units
(CFU), an objective measure of the reduction in pulmonary
bacterial load. Data analysis in 21 patients who completed
the study demonstrated that the CFUs decreased by a mean 1.43
log over the
14-day
treatment period (p<0.0001). Evaluation one week after
study treatment was discontinued showed that the Pseudomonas
bacterial density in the lung was still reduced from the
baseline without additional antibiotic use. Pulmonary function
testing as measured by the forced expiratory volume in one
second (FEV1) showed a
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significant mean increase of 6.86% from baseline after
14 days of treatment (p=0.04). The study drug was well
tolerated, and there were no serious adverse events reported
during the trial.
In order to expedite anticipated time to market and increase
market acceptance, we have elected to deliver our formulation
via nebulizer, as most CF patients already own a nebulizer and
are familiar with this method of drug delivery.
ARD-3100
and ARD-3150 Liposomal Ciprofloxacin for the
Management of Infections in Non-Cystic Fibrosis Bronchiectasis
(BE) Patients
Bronchiectasis is a chronic condition characterized by abnormal
dilatation of the bronchi and bronchioles associated with
chronic infection. The patients lung function is often
irreversibly reduced compared to that found in healthy
individuals. Bronchiectasis is frequently observed in patients
with CF. However, it is a condition that affects over
110,000 people without CF in the United States and many
more in other countries, and results from a cycle of
inflammation, recurrent infection, and bronchial wall damage.
There is currently no drug specifically approved for the
treatment of non-CF bronchiectasis in the U.S. We were granted
orphan drug designation in the U.S. for
ARD-3100 for
the management of this condition. We believe we have the
preclinical development, clinical and regulatory expertise to
advance this product through development. We intend to retain
marketing or co-marketing rights for the inhaled liposomal
ciprofloxacin formulations in the United States or another major
market, such as the European Union. The benefits of retaining
such rights will need to be weighed against the cost to us of
funding additional development and establishing the commercial
infrastructure.
Development
We have been testing two formulations of inhaled liposomal
ciprofloxacin (ARD-3100 and ARD-3150) that differ in the
proportion of rapidly available and slow release ciprofloxacin.
ARD-3150 (also called Dual Release Ciprofloxacin for
Inhalation DRCFI) uses the slow release liposomal
formulation (ARD-3100, also called Ciprofloxacin for
Inhalation CFI) mixed with a small amount of
ciprofloxacin dissolved in an aqueous medium.
Pre-clinical and clinical activities described above for
ARD-3100 also support the ARD-3150 program.
In December 2008, we completed an open-label, four week
treatment study of efficacy, safety and tolerability of once
daily inhaled liposomal ciprofloxacin formulation ARD-3100 in
patients with non-CF bronchiectasis. The study was conducted at
eight leading centers in the United Kingdom and enrolled a total
of 36 patients. The patients were randomized into two equal
size groups, one receiving 3 mL of inhaled liposomal
ciprofloxacin and the other receiving 6 mL of inhaled liposomal
ciprofloxacin,
once-a-day
for the four-week treatment period. The primary efficacy
endpoint was the change from baseline in the sputum
Pseudomonas aeruginosa CFU, the standard objective
measure of the reduction in pulmonary bacterial load. The 3 mL
and 6 mL doses of inhaled liposomal ciprofloxacin in the
evaluable patient population demonstrated similar significant
mean decreases against baseline in the Pseudomonas aeruginosa
CFUs over the
28-day
treatment period of 3.5 log (p<0.001) and 4.0 log
(p<0.001) units, respectively.
With regard to safety, there were no statistically significant
changes in lung function for the evaluable patient population at
the end of treatment as measured by the normalized forced
expiratory volume in one second (FEV1% predicted). Inhaled
liposomal ciprofloxacin was well tolerated: no bronchodilator
use was mandated or needed before administration of the study
drug. In the 3 mL group, respiratory drug-related adverse
reactions were only mild. Three serious adverse events were
observed in each dose group, with only one of the six classified
as possibly drug-related in the 6 mL group. This particular
patient suffered from a viral infection (shingles) early in the
treatment period that might have been a confounding factor
leading ultimately to a respiratory exacerbation requiring
hospitalization.
In November 2009, the first patient was dosed in the ORBIT-2
(Once-daily Respiratory Bronchiectasis Inhalation Treatment)
trial, a 168 day, multicenter, international Phase 2b
clinical trial of inhaled ciprofloxacin with the ARD-3150
formulation in 42 adult patients with non-cystic fibrosis
bronchiectasis. The randomized, double-blind, placebo-controlled
trial was conducted in Australia and New Zealand. Following a
14 day screening period, the patients were treated
once-a-day
for 28 days with either the active drug, or placebo,
followed by a 28 day off-
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treatment period. This on-off sequence was repeated three times.
The primary endpoint was defined as the mean change in
Pseudomonas aeruginosa density in sputum (colony forming
units CFU per gram) from baseline to day
28 of the active treatment group versus placebo. Safety and
tolerability assessments of the treatment versus placebo group
were performed and secondary efficacy endpoints assessed
included long term microbiological responses, time to an
exacerbation, severity of exacerbations, length of time to
resolve exacerbations and changes in lung function and in
quality of life measurements. ORBIT-2 explored whether the novel
formulation ARD-3150, which has a different drug release profile
than ARD-3100, may have additional therapeutic benefits.
In October 2010, we announced positive top line data from the
ORBIT-2 study. Statistical significance was achieved in the
primary endpoint the mean change in Pseudomonas
aeruginosa density in sputum from baseline to day 28. In the
full analysis population (full analysis set includes all
patients who were randomized, received at least one dose and
provided samples for at least two time points), there was a
significant mean reduction of 4.2
log10
units in the ARD-3150 group, reflecting an almost
sixteen-thousand fold decrease in bacterial load, versus a very
small mean decrease of 0.1
log10
units in the placebo group (p=0.004). Secondary endpoint
analysis showed that 17 subjects in the placebo group required
supplemental antibiotics for respiratory-related infections
versus 8 subjects in the ARD-3150 group (p=0.05). As announced
in January 2011, the Kaplan-Meier analysis showed that the
median time to first pulmonary exacerbation in the per protocol
evaluation increased from 58 days in the placebo group to
134 days in the active treatment group and was
statistically significant (p<0.05, log rank test). ARD-3150
was well tolerated and there were no significant decreases in
lung function, as measured by FEV1 (forced expiratory volume in
one second), at 28 days in either group. Overall, the
incidence and severity of adverse events were similar in both
the placebo and treatment groups; however, ARD-3150 had a
superior pulmonary safety profile reflected in the number and
severity of pulmonary adverse events.
In February 2010, the first patient was dosed in the
U.S. as part of the ORBIT-1 trial. This Phase 2b trial, an
international, double-blind, placebo-controlled study being
conducted under a U.S. FDA IND, randomized
101 patients and completed enrollment in March 2011. The
ORBIT-1 study design calls for four weeks of once-daily inhaled
doses of the active drug or once-daily inhaled placebo. Two
doses of the active drug are included in the study
100 or 150 mg ciprofloxacin delivered by inhalation as 2 or
3 mL of liposomal dispersion, respectively. The primary efficacy
endpoint is a standard measure of antibacterial
activity the change from baseline in sputum
Pseudomonas aeruginosa colony forming units (CFUs).
Secondary endpoints include quality of life measurements and
improvement of outcomes with respect to exacerbations. Lung
function changes are being monitored for safety.
The results from each of these trials will produce an extensive
data base of information from which we hope to select the
optimum product and the most appropriate endpoints to test in
Phase 3. In order to expedite anticipated time to market and
increase market acceptance, we have elected to deliver our
formulations via an approved, widely-accepted nebulizer system
for each of these Phase 2b trials and we intend to continue
using this approach and obtain the initial marketing approval
also with a currently FDA-approved nebulizer system.
The CF and BE programs incorporate formulation and manufacturing
processes and the early preclinical safety data developed for
our inhalation anthrax program discussed below. We believe our
inhaled liposomal ciprofloxacin could also be explored for the
treatment of other serious respiratory infections, such as those
occurring in severe COPD and asthma patients.
We intend to finalize development plans and budgets for the CF
and BE programs in conjunction with discussions with the FDA. We
are seeking partnerships for these programs in order to reduce
the overall cost to us of development and to bring additional
expertise for the global development and commercialization of
inhaled liposomal ciprofloxacin for multiple indications.
ARD-1100
Liposomal Ciprofloxacin for the Treatment of Inhalation Anthrax
and other biodefense purposes
The third of our liposomal ciprofloxacin programs is for the
prevention and treatment of inhaled infections, such as
inhalation anthrax, tularemia and pneumonic plague. With
inhalation anthrax, once symptoms appear, fatality rates are
high even with the initiation of antibiotic and supportive
therapy. Further, a portion of the anthrax spores, once inhaled,
may remain dormant in the lung for several months and then
germinate. Anthrax has been identified by the Centers for
Disease Control as a likely potential agent of bioterrorism. In
the fall of 2001, when
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anthrax-contaminated mail was deliberately sent through the
United States Postal Service to government officials and members
of the media, five people died and many more became sick. These
attacks highlighted the concern that inhalation anthrax and
other types of inhaled bacterial (e.g. tularemia and plague)
bioterror agents represents a real and current threat.
Ciprofloxacin has been approved by the FDA for use orally and
via injection for the treatment of inhalation anthrax
(post-exposure) since 2000. Our ARD-1100 research and
development program received funding from the Defence Research
and Development Canada, or DRDC, a division of the Canadian
Department of National Defence. We believe that our product
candidate may be able to deliver a long-acting formulation of
ciprofloxacin directly into the lung and could potentially have
fewer side effects and be more effective to prevent and treat
inhalation anthrax and other inhaled bacterial bioterrorism
agents than currently available therapies.
Development
We began our research into liposomal ciprofloxacin for the
treatment of inhalation anthrax under a technology demonstration
program funded by the DRDC as part of their interest in
developing products to counter bioterrorism. The DRDC had
already demonstrated the feasibility of inhaled liposomal
ciprofloxacin for post-exposure prophylaxis of Francisella
tularensis, a potential bioterrorism agent similar to
anthrax. Mice were exposed to a lethal dose of Francisella
tularensis and then 24 hours later were exposed via
inhalation to a single dose of free ciprofloxacin, liposomal
ciprofloxacin or saline. All the mice in the control group and
the free ciprofloxacin group were dead within 11 days
post-infection; in contrast, all the mice in the liposomal
ciprofloxacin group were alive 14 days post-infection. The
same results were obtained when the mice received the single
inhaled treatment as late as 48 or 72 hours post-infection.
The DRDC has provided funding for our development efforts to
date and additional development of this program is dependent on
negotiating for and obtaining additional funding from DRDC or
other collaborators or sources of funding. We plan to use our
preclinical and clinical safety data from our BE and CF programs
to supplement the data needed to have this product candidate
considered for approval for use in treating inhalation anthrax
and possibly tularemia and plague.
If we can obtain sufficient additional funding, we would
anticipate developing this drug for approval under FDA
regulations relating to the approval of new drugs or biologics
for potentially fatal diseases where human studies cannot be
conducted ethically or practically. Unlike most drugs, which
require large, well controlled Phase 3 clinical trials in
patients with the disease or condition being targeted, these
regulations allow for a drug to be evaluated and approved by the
FDA on the basis of demonstrated safety in humans combined with
studies in animal models to show effectiveness.
Smoking
Cessation Therapy
ARD-1600
(Nicotine) Tobacco Smoking Cessation Therapy
According to the National Center for Health Statistics
(NCHS), 21% of the U.S. population age 18
and above currently smoke cigarettes. The World Health
Organizations (WHO) recent report states that
tobacco smoking is the single most preventable cause of death in
the world today. Already tobacco kills more than five million
people per year more than tuberculosis, HIV/AIDS and
malaria combined. WHO warns that by 2030, the death toll could
exceed eight million a year. Unless urgent action is taken,
tobacco could kill one billion people during this century.
According to the National Institute on Drug Abuse, more than
$75 billion of total U.S. healthcare costs each year
is attributable directly to smoking. However, this cost is well
below the total cost to society because it does not include burn
care from smoking-related fires, perinatal care for low
birth-weight infants of mothers who smoke, and medical care
costs associated with disease caused by secondhand smoke. In
addition to healthcare costs, the costs of lost productivity due
to smoking effects are estimated at $82 billion per year,
bringing a conservative estimate of the economic burden of
smoking to more than $150 billion per year.
NCHS indicates that nicotine dependence is the most common form
of chemical dependence in this country. Quitting tobacco use is
difficult and often requires multiple attempts, as users often
relapse because of withdrawal symptoms. Our goal is to develop
an inhaled nicotine product that would address effectively the
acute craving for cigarettes and, through gradual reduction of
the peak nicotine levels, wean-off the patients from cigarette
smoking and from the nicotine addiction.
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Development
The initial laboratory work on this program was partly funded
under grants from the National Institutes of Health.
We have encouraging data from our first human clinical trial
delivering aqueous solutions of nicotine using the palm-size
AERx Essence system. Our randomized, open-label, single-site
Phase 1 trial evaluated arterial plasma pharmacokinetics and
subjective acute cigarette craving when one of three nicotine
doses was administered to 18 adult male smokers. Blood levels of
nicotine rose much more rapidly following a single-breath
inhalation compared to published data on other approved nicotine
delivery systems. Cravings for cigarettes were measured on a
scale from 0-10 before and after dosing for up to four hours.
Prior to dosing, mean craving scores were 5.5, 5.5 and 5.0,
respectively, for the three doses. At five minutes following
inhalation of the nicotine solution through the AERx Essence
device, craving scores were reduced to 1.3, 1.7 and 1.3,
respectively, and did not return to pre-dose baseline during the
four hours of monitoring. Nearly all subjects reported an acute
reduction in craving or an absence of craving immediately
following dosing. No serious adverse reactions were reported in
the study.
We believe these results provide the foundation for further
research with the AERx Essence device as a means toward smoking
cessation. We are seeking collaborations with government and
non-government organizations to further develop this product.
Other
Potential Applications
We have demonstrated in human clinical trials to date effective
deposition and, where required, systemic absorption of a wide
variety of drugs, including small molecules, peptides and
proteins, using our AERx delivery system. In particular, we and
our former collaboration partner Novo Nordisk generated a
substantial amount of preclinical and clinical data on the
delivery of insulin using the AERx inhaler for the treatment of
Type I and Type II diabetes. In October 2008, Novo Nordisk
transferred to us, at no charge, a portfolio of inhaled insulin
related patents pursuant to a license agreement between us and
Novo Nordisk that was terminated in May 2008. The portfolio
includes both U.S. and foreign patents. In addition to the
patent portfolio, Novo Nordisk transferred to us a significant
preclinical safety database that was developed during our
collaboration with Novo Nordisk, the rights to a miniaturized
second-generation AERx electronic insulin inhaler and data from
Novo Nordisks inhaled insulin clinical program, which
included nine Phase 3 trials in Type 1 and Type 2 diabetes
patients. We continue to maintain the intellectual property
portfolio related to inhaled insulin and seek to license or sell
this asset.
We are regularly examining our previously conducted preclinical
and clinical programs to identify product candidates that may be
suitable for further development consistent with our current
business strategy. We previously demonstrated the feasibility of
delivering a variety of small molecules, peptides,
oligonucleotides, proteins and gene therapies via our
proprietary AERx delivery system but we have not been able to
continue their development due to a variety of reasons, most
notably the lack of funding provided from collaborators. We seek
to identify partners who may wish to license or buy these
assets, in order to raise non-dilutive capital from these
non-core assets.
Zogenix
DosePro Technology
In August 2006, we sold all of our assets related to the
Intraject needle-free injector technology platform and products,
including 12 United States patents along with foreign
counterparts, to Zogenix, Inc., a private company. Zogenix is
responsible for further development and commercialization
efforts of Intraject (now rebranded under the name DosePro*). In
conjunction with the sale, we received a $4 million initial
payment from Zogenix, with an additional milestone payment of
$4 million and royalty payments payable upon any
commercialization of products in the U.S. and other
countries, including the European Union, developed and sold
using the DosePro technology.
In March 2008, Zogenix entered into a license agreement to grant
exclusive rights in the European Union to Desitin
Pharmaceuticals, GmbH to develop and commercialize SUMAVEL*
DosePro in the European Union.
In July 2009, Zogenix was granted approval by the FDA of the
SUMAVEL DosePro (sumatriptan injection) needle-free delivery
system for the treatment of acute migraine and cluster headache.
In August 2009, Zogenix and Astellas Pharma US, Inc. entered
into an exclusive co-promotion agreement in the U.S. for
the SUMAVEL DosePro
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needle-free delivery system. Under the announced terms of the
agreement, Zogenix and Astellas will collaborate on the
promotion and marketing of SUMAVEL DosePro with Zogenix focusing
their sales activities primarily on the neurology market while
Astellas will focus mostly on primary care physicians. Zogenix
will have responsibility for manufacturing and distribution of
the product.
On January 13, 2010, Zogenix and Astellas announced the
U.S. commercial launch of SUMAVEL DosePro. In February
2010, we received from Zogenix the $4 million milestone
payable upon the initial commercialization of SUMAVEL DosePro
and we are entitled to quarterly royalty payments of 3% of net
sales on all SUMAVEL DosePro sales.
In December 2010, Zogenix and Desitin were granted approval of
the Marketing Authorization Application (MAA) for
SUMAVEL DosePro (sumatriptan injection) needle-free delivery
system by the Danish Medicines Agency of Denmark. Denmark is the
first country in Europe to grant marketing authorization for
SUMAVEL DosePro. Five weeks later, the Federal Institute for
Drugs and Medical Devices of Germany (BrArM) and the Medicines
and Healthcare products Regulatory Agency of the United Kingdom
(MHRA ) granted approval of the MAA for SUMAVEL DosePro
(sumatriptan injection) needle-free delivery system for the
acute treatment of migraine attacks, with or without aura, and
the acute treatment of cluster headache. Germany and the United
Kingdom are two of the largest pharmaceutical markets in Europe.
We are entitled to 3% royalty on net sales of SUMAVEL DosePro in
all territories.
Pulmonary
Drug Delivery Background
Pulmonary delivery describes the delivery of drugs by inhalation
and is a common method of treatment of many respiratory
diseases, including asthma, chronic bronchitis, cystic fibrosis
and bronchiectasis. The current global market for inhalation
products includes delivery through metered-dose inhalers, dry
powder inhalers and nebulizers. The advantage of inhalation
delivery for the diagnosis, prevention and treatment of lung
disease is that the active agent is delivered in high
concentration directly to the desired targets in the respiratory
tract while keeping the bodys exposure to the rest of the
drug, and resulting side effects, at a minimum. Over the last
two decades, there has also been increased interest in the use
of the inhalation route for systemic delivery of drugs
throughout the body, either for the purpose of rapid onset of
action or to enable noninvasive delivery of drugs that are not
orally bioavailable.
The AERx
Delivery Technology
The AERx delivery technology provides an efficient and
reproducible means of targeting drugs to the diseased parts of
the lung, or to the lung for systemic absorption, through a
combination of fine mist generation technology and breath
control mechanisms. Similar to nebulizers, the AERx delivery
technology is capable of generating aerosols from simple liquid
drug formulations, avoiding the need to develop complex dry
powder or other formulations. However, in contrast to
nebulizers, AERx is a hand-held unit that can deliver the
required dosage typically in one or two breaths in a matter of
seconds due to its enhanced efficiency compared to nebulization
treatments, which commonly last about 15 minutes. We believe the
ability to make small micron-size droplets from a hand-held
device that incorporates breath control will be the preferred
method of delivery for many medications.
We have demonstrated in the laboratory and in many human
clinical trials that our AERx delivery system enables pulmonary
delivery of a wide range of pharmaceuticals in liquid
formulations for local or systemic effects. Our proprietary
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, engineering and
pharmaceutical sciences.
The various forms of our AERx technology have been extensively
tested in the laboratory and in over 50 human clinical trials
with 19 different small molecules, peptides and proteins. We
also conducted two human clinical trials (with treprostinil and
with nicotine) with the latest version of our inhalation
technology, the AERx
Essence®
system. This system retains the key features of breath control
and aerosol quality of the previous generations of the AERx
technology, but the patient is provided with a much smaller,
palm-sized device. The device is easy to use and maintain and it
does not require any batteries or external electrical power.
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While the development of AERx product candidates is currently
dormant, we believe that we could restart the development effort
if sufficient funding or a collaboration is secured. We seek to
identify partners who may wish to license or buy this asset in
order to raise non-dilutive capital.
Formulation
Technologies
We have a number of formulation technologies for drugs delivered
by inhalation. We have proprietary knowledge and trade secrets
relating to the formulation of drugs to achieve products with
adequate stability and safety, and for the manufacture and
testing of inhaled drug formulations. We have been exploring the
use of liposomal formulations of drugs that may be used for the
prevention and treatment of respiratory diseases. Liposomes are
lipid-based nanoparticles dispersed in water that encapsulate
the drug during storage, and release the drug slowly upon
contact with fluid covering the airways and the lung. We have
experience in the development of liposomal formulations
specifically for those drugs that currently need to be dosed
several times a day, or when the slow release of the drug is
likely to improve the efficacy and safety profile. We believe a
liposomal formulation will provide extended duration of
protection and treatment against lung infection, greater
convenience for the patient and reduced systemic levels of the
drug. The formulation may also enable better interaction of the
drug with the disease target, potentially leading to greater
efficacy. We have applied this technology to ciprofloxacin.
Intellectual
Property and Other Proprietary Rights
Our success will depend, to a significant extent, on our ability
to obtain, expand and protect our intellectual property estate,
enforce patents, maintain trade secret protection and operate
without infringing the proprietary rights of other parties. As
of February 28, 2011, we had 97 issued United States
patents, with 36 additional United States patent applications
pending. In addition, we had 60 issued foreign patents and
additional 29 foreign patent applications pending. The bulk of
our patents and patent applications contain claims directed
toward our proprietary delivery technologies, 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 have purchased three United
States patents containing claims that are relevant to our
inhalation technologies. The bulk of our patents, including
fundamental patents directed toward our proprietary AERx
delivery technology, expire between 2013 and 2023. For certain
of our formulation technologies we have in-licensed some
technology and will seek to supplement such intellectual
property rights with complementary proprietary processes,
methods and formulation technologies, including through patent
applications and trade secret protection. 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.
In December 2004, as part of our research and development
efforts funded by the DRDC for the development of liposomal
ciprofloxacin for the treatment of biological terrorism-related
inhalation anthrax, we obtained worldwide exclusive rights to a
patented liposomal formulation technology for the pulmonary
delivery of ciprofloxacin from Tekmira Pharmaceuticals
Corporation, formerly known as Inex Pharmaceuticals Corporation,
and may have the ability to expand the exclusive license to
other fields. We do not use Tekmiras liposomal formulation
technology and developed our own proprietary technology for our
liposomal ciprofloxacin program.
We seek to protect our proprietary position by protecting
inventions that we determine are or may be important to our
business. We do this, when we are able, through the filing of
patent applications with claims directed toward the devices,
methods and technologies we develop. Our ability to compete
effectively will depend to a significant extent on our ability
and the ability of our collaborators to obtain and enforce
patents and maintain trade secret protection over our
proprietary technologies. The coverage claimed in a patent
application typically is significantly reduced before a patent
is issued, either in the United States or abroad. Consequently,
any of our pending or future patent applications may not result
in the issuance of patents or, to the extent patents have been
issued or will be issued, these patents may be subjected to
further proceedings limiting their scope and may in any event
not contain claims broad enough to provide meaningful
protection. Patents that are issued to us or our collaborators
may not provide significant proprietary protection or
competitive advantage, and may be circumvented or invalidated.
We also rely on our trade secrets and the know-how of our
officers, employees, consultants and other service providers.
Our policy is to require our officers, employees, consultants
and advisors to execute proprietary
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information and invention 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 for the invention if we wish to
pursue such protection. These agreements may not 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 or proprietary information to other
projects, and any such disputes may not be resolved in our
favor. Even if resolved in our favor, such disputes could result
in substantial expense and diversion of management attention.
In addition to protecting our own intellectual property rights,
we must be able to develop products without infringing the
proprietary rights of other parties. Because the markets in
which we operate involve established competitors with
significant patent portfolios, including patents relating to
compositions of matter, methods of use, methods of delivery and
products in those markets, it may be difficult for us to develop
products without infringing the proprietary rights of others.
We would incur substantial costs if we are required to defend
ourselves in suits, regardless of their merit. These legal
actions could seek damages and seek to enjoin development,
testing, manufacturing and marketing of the allegedly infringing
product. In addition to potential liability for significant
damages, we could be required to obtain a license to continue to
manufacture or market the allegedly infringing product and any
license required under any such patent may not be available to
us on acceptable terms, if at all.
We may determine that litigation is necessary to enforce our
proprietary rights against others. Such litigation could result
in substantial expense and diversion of management attention,
regardless of its outcome and any litigation may not be resolved
in our favor.
Competition
We are in a highly competitive industry. We are in competition
with pharmaceutical and biotechnology companies, hospitals,
research organizations, individual scientists and nonprofit
organizations engaged in the development of drugs and other
therapies for the respiratory disease indications we are
targeting. Our competitors may succeed, and many have already
succeeded, in developing competing products, obtaining FDA
approval for products or gaining patient and physician
acceptance of products before us for the same markets and
indications that we are targeting. Many of these companies, and
large pharmaceutical companies in particular, have greater
research and development, regulatory, manufacturing, marketing,
financial and managerial resources and experience than we have
and many of these companies may have products and product
candidates that are in a more advanced stage of development than
our product candidates. If we are not first to
market for a particular indication, it may be more
difficult for us or our collaborators to enter markets unless we
can demonstrate our products are clearly superior to existing
therapies.
Examples of competitive therapies include:
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ARD-3100 and ARD-3150. There is no product
approved in the United States specifically for the treatment of
bronchiectasis. Currently marketed inhaled antibiotics for the
management of infections associated with cystic fibrosis are
TOBI* marketed by Novartis and Cayston* marketed by Gilead
Sciences. Inhaled products under development to treat
respiratory infections in CF and non-CF BE include dry powder
tobramycin under development by Novartis, dry powder
ciprofloxacin by Bayer, liposomal amikacin by Transave,
levofloxacin by Mpex Pharmaceuticals and liposomal tobramycin by
Axentis. Bayer was granted orphan drug designation in the
U.S. and in the European Union for their inhaled
ciprofloxacin product in development for the treatment of
infections associated with cystic fibrosis.
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Several of these products have substantial current sales and
long histories of effective and safe use. In addition, we
believe there are a number of additional drug candidates in
various stages of development that, if approved,
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could compete with any future products we may develop. Moreover,
one or more of our competitors that have developed or are
developing pulmonary drug delivery technologies, such as
Alkermes, MAP, Mannkind or Alexza Pharmaceuticals, or other
competitors with alternative drug delivery methods, may
negatively impact our potential competitive position.
We believe that our respiratory expertise and pulmonary delivery
and formulation technologies provide us with an important
competitive advantage for our potential products. We intend to
compete by developing products that are safer, more efficacious,
more convenient, less costly, earlier to market or cheaper to
develop than existing products, or any combination of the
foregoing.
Government
Regulation
United
States
The research, development, testing, manufacturing, labeling,
advertising, promotion, distribution, marketing and export,
among other things, of any products we develop are subject to
extensive regulation by governmental authorities in the United
States and other countries. The FDA regulates drugs in the
United States under the FDCA and implementing regulations
thereunder.
If we fail to comply with the FDCA or FDA regulations, we and
our products could be subject to regulatory actions. These may
include delay in approval or refusal by the FDA to approve
pending applications, injunctions ordering us to stop sale of
any products we develop, seizure of our products, warning
letters, imposition of civil penalties or other monetary
payments, criminal prosecution, and recall of our products. Any
such events would harm our reputation and our results of
operations.
Before any of our drugs may be marketed in the United States, it
must be approved by the FDA. None of our current product
candidates has received such approval. We believe that our
products currently in development will be regulated by the FDA
as drugs.
The steps required before a drug may be approved for marketing
in the United States generally include:
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preclinical laboratory and animal tests, and formulation studies;
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the submission to the FDA of an Investigational New Drug
application, or IND, for human clinical testing that must become
effective before human clinical trials may begin;
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adequate and well controlled human clinical trials to establish
the safety and efficacy of the product candidate for each
indication for which approval is sought;
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the submission to the FDA of a New Drug Application, or NDA, and
FDAs acceptance of the NDA for filing;
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satisfactory completion of an FDA inspection of the
manufacturing facilities at which the product is to be produced
to assess compliance with the FDAs Good Manufacturing
Practices, or GMP; and
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FDA review and approval of the NDA.
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Preclinical
Testing
The testing and approval process requires substantial time,
effort, and financial resources, and the receipt and timing of
approval, if any, is highly uncertain. Preclinical tests include
laboratory evaluations of product chemistry, toxicity, and
formulation, as well as animal studies. The results of the
preclinical studies, together with manufacturing information and
analytical data, are submitted to the FDA as part of the IND.
The IND automatically becomes effective 30 days after
receipt by the FDA, unless the FDA raises concerns or questions
about the conduct of the proposed clinical trials as outlined in
the IND prior to that time. In such a case, the IND sponsor and
the FDA must resolve any outstanding FDA concerns or questions
before clinical trials can proceed. Submission of an IND may not
result in FDA authorization to commence clinical trials. Once an
IND is in effect, the protocol for each clinical trial to be
conducted under the IND must be submitted to the FDA, which may
or may not allow the trial to proceed.
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In July 2009, we received clearance from the FDA for our IND for
inhaled liposomal ciprofloxacin for the treatment of non-cystic
fibrosis bronchiectasis. In May 2010, we received clearance from
the FDA for our IND for inhaled liposomal ciprofloxacin for the
treatment of cystic fibrosis. However, an additional three month
toxicity study in animals with ARD-3100 and ARD-3150 has been
requested by the FDA to support longer term human clinical
trials. This study is underway, but there is no guarantee that
the results of this study will satisfy the FDA and other
regulatory authorities that we can conduct longer term human
clinical trials, or that additional animal safety studies will
not be required to support approval for marketing these products.
Clinical
Trials
Clinical trials involve the administration of the
investigational drug to human subjects under the supervision of
qualified investigators and healthcare personnel. Clinical
trials are conducted under protocols detailing, for example, the
parameters to be used in monitoring patient safety and the
safety and effectiveness criteria, or end points, to be
evaluated. Clinical trials are typically conducted in three
defined phases, but the phases may overlap or be combined. Each
trial must be reviewed and approved by an independent
institutional review board overseeing the institution conducting
the trial before it can begin.
These phases generally include the following:
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Phase 1. Phase 1 clinical trials usually
involve the initial introduction of the drug into human
subjects, frequently healthy volunteers. In Phase 1, the drug is
usually evaluated for safety, including adverse effects, dosage
tolerance, absorption, distribution, metabolism, excretion and
pharmacodynamics.
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Phase 2. Phase 2 usually involves studies in a
limited patient population with the disease or condition for
which the drug is being developed to (1) preliminarily
evaluate the efficacy of the drug for specific, targeted
indications; (2) determine dosage tolerance and appropriate
dosage; and (3) identify possible adverse effects and
safety risks.
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Phase 3. If a drug is found to be potentially
effective and to have an acceptable safety profile in
preclinical (animal), Phase 1 and Phase 2 human studies, the
clinical trial program will be expanded, usually to further
evaluate clinical efficacy and safety by administering the drug
in its final form to an expanded patient population at
geographically dispersed clinical trial sites. Phase 3 studies
usually include several hundred to several thousand patients.
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In November 2009, the first patient was dosed in the ORBIT-2
(Once-daily Respiratory Bronchiectasis Inhalation Treatment)
trial, a 168 day, multicenter, international Phase 2b
clinical trial of inhaled ciprofloxacin (ARD-3150) in 42 adult
patients with non-cystic fibrosis bronchiectasis.
In February 2010, the first patient was dosed in the
U.S. as part of the ORBIT-1 trial. This Phase 2b trial, an
international, double-blind, placebo-controlled study being
conducted under a U.S. FDA IND, randomized
101 patients and completed enrollment in March 2011. The
ORBIT-1 study design calls for four weeks of once-daily inhaled
doses of the active drug or once-daily inhaled placebo. Two
doses of the active drug are included in the study
100 or 150 mg ciprofloxacin delivered by inhalation as 2 or
3 mL of liposomal dispersion, respectively. The primary efficacy
endpoint is a standard measure of antibacterial
activity the change from baseline in sputum
Pseudomonas aeruginosa colony forming units (CFUs).
Secondary endpoints include quality of life measurements and
improvement of outcomes with respect to exacerbations. Lung
function changes are being monitored for safety.
In October 2010, we announced positive top line data from the
ORBIT-2 study. Statistical significance was achieved in the
primary endpoint the mean change in Pseudomonas
aeruginosa density in sputum from baseline to day 28. In the
full analysis population (full analysis set includes all
patients who were randomized, received at least one dose and
provided samples for at least two time points), there was a
significant mean reduction of 4.2
log10
units in the ARD-3150 group, reflecting an almost
sixteen-thousand fold decrease in bacterial load, versus a very
small mean decrease of 0.1
log10
units in the placebo group (p=0.004). Secondary endpoint
analysis showed that 17 subjects in the placebo group required
supplemental antibiotics for respiratory-related infections
versus 8 subjects in the ARD-3150 group (p=0.05). As announced
in January 2011, the Kaplan-Meier analysis showed that the
median time to first pulmonary exacerbation in the per protocol
evaluation increased from 58 days in the placebo
16
group to 134 days in the active treatment group and was
statistically significant (p<0.05, log rank test). ARD-3150
was well tolerated and there were no significant decreases in
lung function, as measured by FEV1 (forced expiratory volume in
one second), at 28 days in either group. Overall, the
incidence and severity of adverse events were similar in both
the placebo and treatment groups; however, ARD-3150 had a
superior pulmonary safety profile reflected in the number and
severity of pulmonary adverse events.
Phase 1, Phase 2, or Phase 3 clinical trials may not be
completed successfully within any specified period of time, if
at all. Further, we or the FDA may suspend clinical trials at
any time on various grounds, including a finding that the
patients are being exposed to an unacceptable health risk.
Assuming successful completion of the required clinical testing,
the results of preclinical studies and clinical trials, together
with detailed information on the manufacture and composition of
the product, are submitted to the FDA in the form of an NDA
requesting approval to market the product for one or more
indications. Before approving an application, the FDA usually
will inspect the facility or facilities at which the product is
manufactured, and will not approve the product unless continuing
GMP compliance is satisfactory. If the FDA determines the NDA is
not acceptable, the FDA may outline the deficiencies in the NDA
and often will request additional information or additional
clinical trials. Notwithstanding the submission of any requested
additional testing or information, the FDA ultimately may decide
that the application does not satisfy the regulatory criteria
for approval.
If regulatory approval of a product is granted, such approval
will usually entail limitations on the indicated uses for which
the product may be marketed. Once approved, the FDA may withdraw
the product approval if compliance with pre- and post-marketing
regulatory requirements and conditions of approvals are not
maintained, if GMP compliance is not maintained or if problems
occur after the product reaches the marketplace. In addition,
the FDA may require post-marketing studies, referred to as Phase
4 studies, to monitor the effect of approved products and may
limit further marketing of the product based on the results of
these post-marketing studies.
After approval, certain changes to the approved product, such as
adding new indications, certain manufacturing changes, or
additional labeling claims are subject to further FDA review and
approval. Post-approval marketing of products can lead to new
findings about the safety or efficacy of the products. This
information can lead to a product sponsor making, or the FDA
requiring, changes in the labeling of the product or even the
withdrawal of the product from the market.
Section 505(b)(2)
Applications
Some of our product candidates may be eligible for submission of
applications for approval under the FDAs
Section 505(b)(2) approval process, which requires less
information than the NDAs described above.
Section 505(b)(2) applications may be submitted for drug
products that represent a modification (e.g., a new
indication or new dosage form) of an eligible approved drug and
for which investigations other than bioavailability or
bioequivalence studies are essential to the drugs
approval. Section 505(b)(2) applications may rely on the
FDAs previous findings for the safety and effectiveness of
the listed drug, scientific literature, and information obtained
by the 505(b)(2) applicant needed to support the modification of
the listed drug. For this reason, preparing
Section 505(b)(2) applications is generally less costly and
time-consuming than preparing an NDA based entirely on new data
and information from a full set of clinical trials. The law
governing Section 505(b)(2) or FDAs current policies
may change in such a way as to adversely affect our applications
for approval that seek to utilize the Section 505(b)(2)
approach. Such changes could result in additional costs
associated with additional studies or clinical trials and delays.
The FDCA provides that reviews
and/or
approvals of applications submitted under Section 505(b)(2)
may be delayed in various circumstances. For example, the holder
of the NDA for the listed drug may be entitled to a period of
market exclusivity, during which the FDA will not approve, and
may not even review a Section 505(b)(2) application from
other sponsors. If the listed drug is claimed by a patent that
the NDA holder has listed with the FDA, the
Section 505(b)(2) applicant must submit a patent
certification. If the 505(b)(2) applicant certifies that the
patent is invalid, unenforceable, or not infringed by the
product that is the subject of the Section 505(b)(2), and
the 505(b)(2) applicant is sued within 45 days of its
notice to the entity that holds the approval for the listed drug
and the patent holder, the FDA will not approve the
Section 505(b)(2) application until the earlier of a court
decision favorable to the Section 505(b)(2) applicant or
the expiration of 30 months. The regulations governing
marketing
17
exclusivity and patent protection are complex, and it is often
unclear how they will be applied in particular circumstances.
In addition, both before and after approval is sought, we are
required to comply with a number of FDA requirements. For
example, we are required to report certain adverse reactions and
production problems, if any, to the FDA, and to comply with
certain limitations and other requirements concerning
advertising and promotion for our products. Also, quality
control and manufacturing procedures must continue to conform to
continuing GMP after approval, and the FDA periodically inspects
manufacturing facilities to assess compliance with continuing
GMP. In addition, discovery of problems, such as safety
problems, may result in changes in labeling or restrictions on a
product manufacturer or NDA holder, including removal of the
product from the market.
Orphan
Drug Designation
The FDA may grant orphan drug designation to drugs intended to
treat a rare disease or condition which generally is
a disease or condition that affects fewer than 200,000
individuals in the United States. A sponsor may request orphan
drug designation of a previously unapproved drug, or of a new
indication for an already marketed drug. Orphan drug designation
must be requested before an NDA is submitted. If the FDA grants
orphan drug designation, which it may not, the identity of the
therapeutic agent and its potential orphan status are publicly
disclosed by the FDA. Orphan drug designation does not convey an
advantage in, or shorten the duration of, the review and
approval process. If a drug which has orphan drug designation
subsequently receives the first FDA approval for the indication
for which it has such designation, the drug is entitled to
orphan drug exclusivity, meaning that the FDA may not approve
any other applications to market the same drug for the same
indication for a period of seven years, unless the subsequent
application is able to demonstrate clinical superiority in
efficacy or safety. Orphan drug designation does not prevent
competitors from developing or marketing different drugs for
that indication, or the same drug for other indications.
We have obtained orphan drug designation from the FDA for an
inhaled liposomal ciprofloxacin formulation (ARD-3100) for the
management of cystic fibrosis and non-cystic fibrosis
bronchiectasis. We may seek orphan drug designation for other
eligible product candidates we develop, including ARD-3150.
However, our liposomal ciprofloxacin may not receive orphan drug
marketing exclusivity. Also, it is possible that our competitors
could obtain approval, and attendant orphan drug designation or
exclusivity, for products that would preclude us from marketing
our liposomal ciprofloxacin for this indication for some time.
Foreign regulatory authorities may also provide for orphan drug
designations in countries outside the United States. For
example, under European guidelines, Orphan Medicinal Product
Designation provides 10 years of potential market
exclusivity if the product candidate is the first product
candidate for the indication approved for marketing in the
European Union. Orphan drug designation also allows the
candidates sponsor to seek assistance from the European
Medicines Agency in optimizing the candidates clinical
development through participation in designing the clinical
protocol and preparing the marketing application. Additionally,
a drug candidate designated by the Commission as an Orphan
Medicinal Product may qualify for a reduction in regulatory fees
as well as a European Union-funded research grant.
In August 2009, the European Medicines Agency granted Orphan
Drug Designation to our inhaled liposomal ciprofloxacin drug
product candidate ARD-3100 for the management of lung infections
associated with cystic fibrosis.
International
Regulation
We are also subject to foreign regulatory requirements governing
clinical trials, product manufacturing, marketing and product
sales. Our ability to market and sell our products in countries
outside the United States will depend upon receiving marketing
authorization(s) from appropriate regulatory authorities. We
will only be permitted to commercialize our products in a
foreign country if the appropriate regulatory authority is
satisfied that we have presented adequate evidence of safety,
quality and efficacy. 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
commencement of marketing of the product in those countries.
Approval of a product by the FDA does not assure approval by
foreign regulators. Regulatory requirements, and the approval
process, vary widely from country to country, and the time, cost
and data needed to secure approval may be longer or shorter than
that required for FDA
18
approval. The regulatory approval and oversight process in other
countries includes all of the risks associated with the FDA
process described above.
Scientific
Advisory Board
We have assembled a scientific advisory board comprised of
scientific and product development advisors who provide
expertise, on a consulting basis from time to time, in the areas
of respiratory diseases, allergy and immunology, pharmaceutical
development and drug delivery, including pulmonary 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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Name
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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
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Peter S. Creticos, M.D.
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The Johns Hopkins University School of Medicine
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Allergy/Immunology/Asthma
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Stephen J. Farr, Ph.D.
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Zogenix, Inc.
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Pulmonary Delivery/Pharmaceutics
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Michael Konstan, M.D.
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Rainbow Babies and Childrens Hospital
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Pulmonary Diseases/Cystic Fibrosis
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Babatunde Otulana, M.D.
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Aerovance, Inc.
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Pulmonary Diseases/Cystic Fibrosis/Regulatory
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Adam Wanner, M.D.
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University of Miami
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Chronic Obstructive Pulmonary Diseases (COPD)
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Martin Wasserman, Ph.D.
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Roche, AtheroGenics (retired)
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Asthma
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In addition to our scientific advisory board, for certain
indications and programs we assemble groups of experts to assist
us on issues specific to such indications and programs.
Employees
As of December 31, 2010, we had twelve employees. Seven
employees are involved in research and development and product
development and five employees are involved in finance and
administration. Five employees have advanced scientific degrees.
Our employees are not represented by any collective bargaining
agreement.
We also utilize an international network of consultants and
contractors, such as clinical research organizations (CROs),
clinical manufacturing organizations (CMOs) and various
specialists in areas, such as regulatory affairs and business
and corporate development.
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
or SEC. Information contained on our website is not part of this
Annual Report on
Form 10-K
or of our other filings with the SEC. The public may read and
copy any material we file with the SEC at the SECs Public
Reference Room at 100 F 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.
19
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 and our
principal financial and accounting officer. This code of ethics
is posted on our website. If we amend or waive a provision of
our Code of Business Conduct and Ethics, we intend to post such
amendment or waiver on our website, as required by applicable
rules.
Executive
Officers and Directors
Our directors and executive officers and their ages as of
February 28, 2011 are as follows:
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Name
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Age
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Position
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Igor Gonda, Ph.D.
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63
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President, Chief Executive Officer and Director
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Nancy E. Pecota
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51
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Vice President, Finance and Chief Financial Officer
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Frank H. Barker(1)(2)(3)
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80
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Director
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Tamar D. Howson(2)
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62
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Director
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John M. Siebert, Ph.D.(1)(2)(3)
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70
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Director
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Virgil D. Thompson(1)(2)(3)
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71
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Chairman of the Board and Director
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(1) |
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Member of the Audit Committee. |
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(2) |
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Member of the Compensation Committee. |
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(3) |
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Member of the Nominating and Corporate Governance Committee. |
Igor Gonda, Ph.D. has served as our President and
Chief Executive Officer since August 2006 and as a director
since September 2001. From December 2001 to August 2006,
Dr. Gonda was the Chief Executive Officer and Managing
Director of Acrux Limited, a publicly traded specialty
pharmaceutical company located in Melbourne, Australia. From
July 2001 to December 2001, Dr. Gonda was our Chief
Scientific Officer and, from October 1995 to July 2001, was our
Vice President, Research and Development. From February 1992 to
September 1995, Dr. Gonda was a Senior Scientist and Group
Leader at Genentech, Inc. His key responsibilities at Genentech
were the development of the inhalation delivery of rhDNase
(Pulmozyme) for the treatment of cystic fibrosis and
non-parenteral methods of delivery of biologics. Prior to that,
Dr. Gonda held academic positions at the University of
Aston in Birmingham, United Kingdom, and the University of
Sydney, Australia. Dr. Gonda holds a B.Sc. in Chemistry and
a Ph.D. in Physical Chemistry from Leeds University, United
Kingdom. Dr. Gonda was the Chairman of our Scientific
Advisory Board until August 2006.
Nancy E. Pecota has served as our Vice President, Finance
and Chief Financial Officer since September 2008. From October
2005 to July 2008, Ms. Pecota was the Chief Financial
Officer for NuGEN Technologies, Inc., a privately held life
sciences tools company. From August 2003 to September 2005,
Ms. Pecota was a consultant for early to mid-stage
biopharmaceutical companies assisting them in developing
fundable business models and assessing and improving internal
financial preparation and reporting processes. From March 2001
to April 2003, she was Vice President, Finance and
Administration at Signature BioScience, Inc., a privately held
biopharmaceutical company. Prior to that, she was Director,
Finance and Accounting for ACLARA BioSciences, Inc., a publicly
traded biotechnology company. Ms. Pecota holds a B.S. in
Economics from San Jose State University.
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
retired from Johnson & Johnson, Inc. in January 1996.
Mr. Barker holds a B.A. in Business Administration from
Rollins College, Winter Park, Florida.
Tamar D. Howson has been a director since November 2010.
From 2001 to 2007, she served as Senior Vice President of
Corporate and Business Development and was a member of the
executive committee at Bristol-Myers Squibb Company
(Bristol-Myers). During her tenure at Bristol-Myers,
Ms. Howson was responsible for leading the companys
efforts in external alliances, licensing and acquisitions. From
1991 to 2000, Ms. Howson served as Senior Vice President
and Director of Business Development at SmithKline Beecham plc,
a global pharmaceutical company. She also managed SR One Ltd., a
venture capital fund of SmithKline Beecham, plc. From 1990 to
1991, Ms. Howson held the position of Vice President,
Venture Investments at Johnston Associates, Inc., and from 1987
to 1990, she served as Director of Worldwide Business
Development and Licensing for Squibb Corporation. She
20
previously served as Executive Vice President of Corporate
Development for Lexicon Pharmaceuticals, Inc. and on the boards
of Ariad Pharmaceuticals, Inc., SkyePharma, plc, NPS
Pharmaceuticals, Inc., Targacept, Inc., and the Healthcare
Businesswomens Association. Ms. Howson received her
MBA in finance and international business from Columbia
University. She holds an MS from the City College of New York
and a BS from Technion in Israel. Tamar Howson is currently a
partner with JSB-Partners, LP, a transaction advisory firm
serving the life sciences industry. She is also a consultant to
Pitango Venture Fund, and a member of the advisory board to
Triana Venture Partners, Inc. She serves on the boards of
Soligenix, Inc., OXIGENE, Inc., Idenix Pharmaceuticals, Inc.,
and S*Bio Pte Ltd.
John M. Siebert, Ph.D. has been a
director since November 2006. From May 2003 to October 2008,
Dr. Siebert was the Chairman and Chief Executive Officer of
CyDex, Inc., a privately held specialty pharmaceutical company.
From September 1995 to April 2003, he was President and Chief
Executive Officer of CIMA Labs Inc., a publicly traded drug
delivery company, and from July 1995 to September 1995 he was
President and Chief Operating Officer of CIMA Labs. From 1992 to
1995, Dr. Siebert was Vice President, Technical Affairs at
Dey Laboratories, Inc., a privately held pharmaceutical company.
From 1988 to 1992, he worked at Bayer Corporation. Prior to
that, Dr. Siebert was employed by E.R. Squibb &
Sons, Inc., G.D. Searle & Co. and The
Procter & Gamble Company. Dr Siebert holds a B.S. in
Chemistry from Illinois Benedictine University, an M.S. in
Organic Chemistry from Wichita State University and a Ph.D. in
Organic Chemistry from the University of Missouri.
Dr. Siebert is the Chairman of our audit committee and the
designated audit committee financial expert.
Virgil D. Thompson has been a director since June 1995
and has been Chairman of the Board since January 2005. Since
July 2009, Mr. Thompson has been Chief Executive Officer
and a director of Spinnaker Biosciences, Inc., a privately held
ophthalmic drug delivery company. From November 2002 until June
2007, Mr. Thompson served as President and Chief Executive
Officer of Angstrom Pharmaceuticals, Inc., a privately held
pharmaceutical company. From September 2000 to November 2002,
Mr. Thompson was President, Chief Executive Officer and a
director of Chimeric Therapies, Inc., a privately held
biotechnology company. From May 1999 until September 2000,
Mr. Thompson was the President, Chief Operating Officer and
a director of Savient Pharmaceuticals, a publicly traded
specialty pharmaceutical company. From January 1996 to April
1999, Mr. Thompson was the President and Chief Executive
Officer and a director of Cytel Corporation, a publicly traded
biopharmaceutical company that was subsequently acquired by IDM
Pharma, Inc. From 1994 to 1996, Mr. Thompson was President
and Chief Executive Officer of Cibus Pharmaceuticals, Inc., a
privately held drug delivery device company. From 1991 to 1993,
Mr. Thompson was President of Syntex Laboratories, Inc., a
U.S. subsidiary of Syntex Corporation, a publicly traded
pharmaceutical company. Mr. Thompson holds a B.S. in
Pharmacy from Kansas University and a J.D. from The George
Washington University Law School. Mr. Thompson is a
director and chairman of the board of Questcor Pharmaceuticals,
Inc., a publicly traded pharmaceutical company, and a director
of Savient Pharmaceuticals and Soligenix, Inc.
Except for historical information contained herein, the
discussion in this Annual 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 expressed
in, or implied by, any such forward-looking statements.
Potential risks and uncertainties include, without limitation,
those mentioned in this report and in particular the factors
described below.
Risks
Related to Our Business
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 products require extensive
research, development and pre-clinical and clinical testing. Our
potential products also may involve lengthy regulatory reviews
before they can be sold. Because none of our product candidates
has yet received
21
approval by the FDA, we cannot assure you that our research and
development efforts will be successful, any of our potential
products will be proven safe and effective or regulatory
clearance or approval to sell any of our potential products will
be obtained. We cannot assure you that any of our potential
products can be manufactured in commercial quantities or at an
acceptable cost or marketed successfully. We may abandon the
development of some or all of our product candidates at any time
and without prior notice. We must incur substantial up-front
expenses to develop and commercialize products and failure to
achieve commercial feasibility, demonstrate safety, achieve
clinical efficacy, obtain regulatory approval or successfully
manufacture and market products will negatively impact our
business.
We
will need to raise additional capital and we may not be able to
raise additional capital on a timely basis, on reasonable terms
or at all.
We will need to commit substantial funds to develop our product
candidates and we may not be able to obtain sufficient funds on
acceptable terms or at all, especially in light of the current
difficult financing environment. Our operations to date have
consumed substantial amounts of cash and have generated no
significant direct product revenues. We expect negative
operating cash flows to continue for at least the foreseeable
future. Our future capital requirements will depend on many
factors, including:
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our progress in the application of our delivery and formulation
technologies, which may require further refinement of these
technologies;
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the number of product development programs we pursue and the
pace of each program;
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our progress with formulation development;
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the scope, rate of progress, results and costs of preclinical
testing and clinical trials;
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the time and costs associated with seeking and maintaining
regulatory approvals;
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our ability to outsource the manufacture of our product
candidates and the costs of doing so;
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the time and costs associated with establishing in-house
resources to market and sell certain of our products;
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our ability to establish collaborative arrangements with others
and the terms of those arrangements;
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the costs of preparing, filing, prosecuting, maintaining and
enforcing patent claims, and
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our need to acquire licenses, or other rights for our product
candidates.
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Since inception, we have financed our operations primarily
through private placements and public offerings of our capital
stock, contract research funding and interest earned on
investments. We believe that our cash, cash equivalents and
short-term investments at December 31, 2010, as well as the
anticipated recurring royalty payments from Zogenix will be
sufficient to fund our operations through at least the second
quarter of 2011. We will need to obtain substantial additional
funds before we would be able to bring any of our product
candidates to market. Our estimates of future capital use are
uncertain, and changing circumstances, including those related
to implementation of, or further changes to, our development
strategy, could cause us to consume capital significantly faster
than currently expected, and our expected sources of funding may
not be sufficient. If adequate funds are not available, we will
be required to delay, reduce the scope of, or eliminate one or
more of our product development programs and reduce
personnel-related costs, or to obtain funds through arrangements
with collaborators or other sources that may require us to
relinquish rights to or sell certain of our technologies or
products that we would not otherwise relinquish or sell. If we
are able to obtain funds through the issuance of debt securities
or borrowing, the terms may significantly restrict our
operations. If we are able to obtain funds through the issuance
of equity securities, our shareholders may suffer significant
dilution and our stock price may drop.
We
have a history of losses, we expect to incur losses for at least
the foreseeable future, and we may never attain or maintain
profitability.
We have never been profitable and have incurred significant
losses in each year since our inception. As of December 31,
2010, we have an accumulated deficit of $353.8 million. We
have not had any significant direct
22
product sales and do not anticipate receiving revenues from the
sale of any of our products for at least the next few years, if
ever. While our shift in development strategy has resulted in
reduced operating expenses and capital expenditures, we expect
to continue to incur substantial losses for the foreseeable
future as we:
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continue drug product development efforts;
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conduct preclinical testing and clinical trials;
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pursue additional applications for our existing delivery
technologies;
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outsource the commercial-scale production of our
products; and
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establish a sales and marketing force to commercialize certain
of our proprietary products if these products obtain regulatory
approval.
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To achieve and sustain profitability, we must, alone or with
others, successfully develop, obtain regulatory approval for,
manufacture, market and sell our products. We expect to incur
substantial expenses in our efforts to develop and commercialize
products and we may never generate sufficient product or
contract research revenues to become profitable or to sustain
profitability.
We are
dependent upon Zogenix and its partners to successfully market
and sell the SUMAVEL DosePro needle-free delivery system in
order to realize value from this asset.
We have no control over decisions made by Zogenix
and/or its
partners and collaborators on the marketing, sale or continued
development of the SUMAVEL DosePro product and any subsequent
products utilizing the DosePro technology. Any delay in, or
failure to receive royalties could adversely affect our
financial position and we may not be able to find another source
of cash to continue our operations.
The
results of later stage clinical trials of our product candidates
may not be as favorable as earlier trials and that could result
in additional costs and delay or prevent commercialization of
our products.
Although we believe the limited and preliminary data we have
regarding our potential products are encouraging, the results of
initial preclinical testing and clinical trials do not
necessarily predict the results that we will get from subsequent
or more extensive preclinical testing and clinical trials.
Clinical trials of our product candidates may not demonstrate
that they are safe and effective to the extent necessary to
obtain collaborative partnerships
and/or
regulatory approvals. Many companies in the biopharmaceutical
industry have suffered significant setbacks in advanced clinical
trials, even after receiving promising results in earlier
trials. If we cannot adequately demonstrate through the clinical
trial process that a therapeutic product we are developing is
safe and effective, regulatory approval of that product would be
delayed or prevented, which would impair our reputation,
increase our costs and prevent us from earning revenues. For
example, while our first Phase 2b clinical trial (ORBIT-2) with
inhaled liposomal ciprofloxacin showed promising initial
efficacy and safety results in patients with non-cystic fibrosis
bronchiectasis and our Phase 2a clinical trial showed promising
results in patients with cystic fibrosis, there is no guarantee
that the second Phase 2b clinical trial (ORBIT-1) or longer term
studies in larger patient populations will confirm these results
or that we will be able to conduct studies that will provide
satisfactory evidence of all efficacy and safety endpoints
required by the regulatory authorities.
If our
clinical trials are delayed because of patient enrollment or
other problems, we would incur additional costs and delay the
potential receipt of revenues.
Before we or any future collaborators can file for regulatory
approval for the commercial sale of our potential products, the
FDA will require extensive preclinical safety testing and
clinical trials to demonstrate their safety and efficacy.
Completing clinical trials in a timely manner depends on, among
other factors, the timely enrollment of patients. Our ability to
recruit patients depends on a number of factors, including the
size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study and the
existence of competing clinical trials. Delays in our current or
future clinical trials because of delays in planned patient
enrollment or other problems may result in increased costs,
program delays, or both, and the loss of potential revenues.
23
We are
subject to extensive regulation, including the requirement of
approval before any of our product candidates can be marketed.
We may not obtain regulatory approval for our product candidates
on a timely basis, or at all.
We and our products are subject to extensive and rigorous
regulation by the federal government, principally the FDA, and
by state and local government agencies. Both before and after
regulatory approval, the development, testing, manufacture,
quality control, labeling, storage, approval, advertising,
promotion, sale, distribution and export of our potential
products are subject to regulation. Pharmaceutical products that
are marketed abroad are also subject to regulation by foreign
governments. Our products cannot be marketed in the United
States without FDA approval. The process for obtaining FDA
approval for drug products is generally lengthy, expensive and
uncertain. To date, we have not sought or received approval from
the FDA or any corresponding foreign authority for any of our
product candidates.
Even though we intend to apply for approval of most of our
products in the United States under Section 505(b)(2) of
the United States Food, Drug and Cosmetic Act, which applies to
reformulations of approved drugs and which may require smaller
and shorter safety and efficacy testing than that for entirely
new drugs, the approval process will still be costly,
time-consuming and uncertain. We, or our collaborators, may not
be able to obtain necessary regulatory approvals on a timely
basis, if at all, for any of our potential products. Even if
granted, regulatory approvals may include significant
limitations on the uses for which products may be marketed.
Failure to comply with applicable regulatory requirements can,
among other things, result in warning letters, imposition of
civil penalties or other monetary payments, delay in approving
or refusal to approve a product candidate, suspension or
withdrawal of regulatory approval, product recall or seizure,
operating restrictions, interruption of clinical trials or
manufacturing, injunctions and criminal prosecution.
Regulatory
authorities may delay or not approve our product candidates even
if the product candidates meet safety and efficacy endpoints in
clinical trials or the approvals may be too limited for us to
earn sufficient revenues.
The FDA and other foreign regulatory agencies can delay approval
of, or refuse to approve, our product candidates for a variety
of reasons, including failure to meet safety and / or
efficacy endpoints in our clinical trials. Our product
candidates may not be approved even if they achieve their
endpoints in clinical trials. Regulatory agencies, including the
FDA, may disagree with our trial design and our interpretations
of data from preclinical studies and clinical trials. Even if a
product candidate is approved, it may be approved for fewer or
more limited indications than requested or the approval may be
subject to the performance of significant post-marketing studies
that can be long and costly. In addition, regulatory agencies
may not approve the labeling claims that are necessary or
desirable for the successful commercialization of our product
candidates. Any limitation, condition or denial of approval
would have an adverse affect on our business, reputation and
results of operations.
Even
if we are granted initial FDA approval for any of our product
candidates, we may not be able to maintain such approval, which
would reduce our revenues.
Even if we are granted initial regulatory approval for a product
candidate, the FDA and similar foreign regulatory agencies can
limit or withdraw product approvals for a variety of reasons,
including failure to comply with regulatory requirements,
changes in regulatory requirements, problems with manufacturing
facilities or processes or the occurrence of unforeseen
problems, such as the discovery of previously undiscovered side
effects. If we are able to obtain any product approvals, they
may be limited or withdrawn or we may be unable to remain in
compliance with regulatory requirements. Both before and after
approval we, our future collaborators and our products are
subject to a number of additional requirements. For example,
certain changes to the approved product, such as adding new
indications, certain manufacturing changes and additional
labeling claims are subject to additional FDA review and
approval. Advertising and other promotional material must comply
with FDA requirements and established requirements applicable to
drug samples. We, our future collaborators and our manufacturers
will be subject to continuing review and periodic inspections by
the FDA and other authorities, where applicable, and must comply
with ongoing requirements, including the FDAs Good
Manufacturing Practices, or GMP, requirements. Once the FDA
approves a product, a manufacturer must provide certain updated
safety and efficacy information, submit copies of promotional
materials to the FDA and make certain other required
24
reports. Product approvals may be withdrawn if regulatory
requirements are not complied with or if problems concerning
safety or efficacy of the product occur following approval. Any
limitation or withdrawal of approval of any of our products
could delay or prevent sales of our products, which would
adversely affect our revenues. Further continuing regulatory
requirements may involve expensive ongoing monitoring and
testing requirements.
Because
our proprietary liposomal ciprofloxacin programs rely on the
FDAs and European Medicines Agencys grant of orphan
drug designation for potential market exclusivity, the product
may not be able to obtain market exclusivity and could be barred
from the market in the US for up to seven years or European
Union for up to ten years.
The FDA has granted orphan drug designation for our proprietary
liposomal ciprofloxacin drug product candidate ARD-3100 for the
management of cystic fibrosis and bronchiectasis. Orphan drug
designation is intended to encourage research and development of
new therapies for diseases that affect fewer than
200,000 patients in the United States. The designation
provides the opportunity to obtain market exclusivity for seven
years from the date of the FDAs approval of a new drug
application, or NDA. However, the market exclusivity is granted
only to the first chemical entity to be approved by the FDA for
a given indication. Therefore, if another similar inhaled
ciprofloxacin product were to be approved by the FDA for a
cystic fibrosis or bronchiectasis indication before our product,
then we may be blocked from launching our product in the United
States for seven years, unless we are able to demonstrate to the
FDA clinical superiority of our product on the basis of safety
or efficacy. For example, Bayer HealthCare is developing an
inhaled powder formulation of ciprofloxacin for the treatment of
respiratory infections in cystic fibrosis and bronchiectasis.
Bayer has obtained orphan drug status for their inhaled powder
formulation of ciprofloxacin in the United States and European
Union for the treatment of cystic fibrosis.
In August 2009, the European Medicines Agency granted orphan
drug designation to our inhaled liposomal ciprofloxacin drug
product candidate ARD-3100 for the treatment of lung infections
associated with cystic fibrosis. Under European guidelines,
Orphan Medicinal Product Designation provides 10 years of
potential market exclusivity if the product candidate is the
first product candidate for the indication approved for
marketing in the European Union. We may seek to develop
additional products that incorporate drugs that have received
orphan drug designations for specific indications. In each case,
if our product is not the first to be approved by the FDA or
European Medicines Agency for a given indication, we may not be
able to access the target market in the United States
and/or the
European Union, which would adversely affect our ability to earn
revenues.
If we wish to develop and commercialize ARD-3150 for cystic
fibrosis or bronchiectasis, we may need to apply for orphan drug
designation for this formulation of inhaled liposomal
ciprofloxacin as well. There is no guarantee that such
designation will be obtained either from the FDA or from the
European Medicines Agency and even if we obtain them the risks
outlined above will apply.
We
have limited manufacturing capacity and will have to depend on
contract manufacturers and collaborators; if they do not perform
as expected, our revenues and customer relations will
suffer.
We have limited capacity to manufacture our requirements for the
development and commercialization of our product candidates. We
intend to use contract manufacturers to produce our products. We
may not be able to enter into or maintain satisfactory contract
manufacturing arrangements. For example, our agreement with
Sigma-Tau Group to manufacture liposomal ciprofloxacin may be
terminated for unforeseen reasons, or we may not be able to
reach mutually satisfactory agreements with Sigma-Tau Group to
manufacture these at a commercial scale. There may be a
significant delay before we find an alternative contract
manufacturer or we may not find an alternative contract
manufacturer at all.
Further, we, our contract manufacturers and our future
collaborators are required to comply with the FDAs GMP
requirements that relate to product testing, quality assurance,
manufacturing and maintaining records and documentation. We and
our contract manufacturers or our future collaborators may not
be able to comply with the applicable GMP and other FDA
regulatory requirements for manufacturing, which could result in
an enforcement or other action, prevent commercialization of our
product candidates and impair our reputation and results of
operations.
25
Our
dependence on future collaborators and other contracting parties
may delay or terminate certain of our programs, and any such
delay or termination would harm our business prospects and stock
price.
Our commercialization strategy for certain of our product
candidates depends on our ability to enter into agreements with
collaborators to obtain assistance and funding for the
development and potential commercialization of our product
candidates. Collaborations may involve greater uncertainty for
us, as we have less control over certain aspects of our
collaborative programs than we do over our proprietary
development and commercialization programs. We may determine
that continuing a collaboration under the terms provided is not
in our best interest, and we may terminate the collaboration.
Our collaborators could delay or terminate their agreements, and
our products subject to collaborative arrangements may never be
successfully commercialized.
Further, our future collaborators may pursue alternative
technologies or develop alternative products either on their own
or in collaboration with others, including our competitors, and
the priorities or focus of our collaborators may shift such that
our programs receive less attention or resources than we would
like, or they may be terminated altogether. Any such actions by
our collaborators may adversely affect our business prospects
and ability to earn revenues. In addition, we could have
disputes with our existing or future collaborators, such as the
interpretation of terms in our agreements. Any such
disagreements could lead to delays in the development or
commercialization of any potential products or could result in
time-consuming and expensive litigation or arbitration, which
may not be resolved in our favor.
Even with respect to certain other programs that we intend to
commercialize ourselves, we may enter into agreements with
collaborators to share in the burden of conducting clinical
trials, manufacturing and marketing our product candidates or
products. In addition, our ability to apply our proprietary
technologies to develop proprietary drugs will depend on our
ability to establish and maintain licensing arrangements or
other collaborative arrangements with the holders of proprietary
rights to such drugs. We may not be able to establish such
arrangements on favorable terms or at all, and our existing or
future collaborative arrangements may not be successful.
In
order to market our proprietary products, we are likely to
establish our own sales, marketing and distribution
capabilities. We have no experience in these areas, and if we
have problems establishing these capabilities, the
commercialization of our products would be
impaired.
We intend to establish our own sales, marketing and distribution
capabilities to market products to concentrated, easily
addressable prescriber markets. We have no experience in these
areas, and developing these capabilities will require
significant expenditures on personnel and infrastructure. While
we intend to market products that are aimed at a small patient
population, we may not be able to create an effective sales
force around even a niche market. In addition, some of our
product candidates will require a large sales force to call on,
educate and support physicians and patients. While we intend to
enter into collaborations with one or more pharmaceutical
companies to sell, market and distribute such products, we may
not be able to enter into any such arrangement on acceptable
terms, if at all. Any collaborations we do enter into may not be
effective in generating meaningful product royalties or other
revenues for us.
If any
products that we or our future collaborators may develop do not
attain adequate market acceptance by healthcare professionals
and patients, our business prospects and results of operations
will suffer.
Even if we or our future collaborators successfully develop one
or more products, such products may not be commercially
acceptable to healthcare professionals and patients, who will
have to choose our products over alternative products for the
same disease indications, and many of these alternative products
will be more established than ours. For our products to be
commercially viable we will need to demonstrate to healthcare
professionals and patients that our products afford benefits to
the patient that are cost-effective as compared to the benefits
of alternative therapies. Our ability to demonstrate this
depends on a variety of factors, including:
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the demonstration of efficacy and safety in clinical trials;
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the existence, prevalence and severity of any side effects;
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the potential or perceived advantages or disadvantages compared
to alternative treatments;
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the timing of market entry relative to competitive treatments;
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the relative cost, convenience, product dependability and ease
of administration;
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the strength of marketing and distribution support;
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the sufficiency of coverage and reimbursement of our product
candidates by governmental and other third-party payors; and
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the product labeling or product insert required by the FDA or
regulatory authorities in other countries.
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Our product revenues will be adversely affected if, due to these
or other factors, the products we or our future collaborators
are able to commercialize do not gain significant market
acceptance.
We
depend upon our proprietary technologies, and we may not be able
to protect our potential competitive proprietary
advantage.
Our business and competitive position is dependent upon our and
our future collaborators ability to protect our
proprietary technologies related to various aspects of pulmonary
drug delivery and drug formulation. While our intellectual
property rights may not provide a significant commercial
advantage for us, our patents and know-how are intended to
provide protection for important aspects of our technology,
including methods for aerosol generation, devices used to
generate aerosols, breath control, compliance monitoring,
certain pharmaceutical formulations, design of dosage forms and
their manufacturing and testing methods. In addition, we are
maintaining as non-patented trade secrets some of the key
elements of our manufacturing technologies, for example, those
associated with the production of liposomal ciprofloxacin.
Our ability to compete effectively will also depend to a
significant extent on our and our future collaborators
ability to obtain and enforce patents and maintain trade secret
protection over our proprietary technologies. The coverage
claimed in a patent application typically is significantly
reduced before a patent is issued, either in the United States
or abroad. Consequently, any of our pending or future patent
applications may not result in the issuance of patents and any
patents issued may be subjected to further proceedings limiting
their scope and may in any event not contain claims broad enough
to provide meaningful protection. Any patents that are issued to
us or our future collaborators may not provide significant
proprietary protection or competitive advantage, and may be
circumvented or invalidated. In addition, unpatented proprietary
rights, including trade secrets and know-how, can be difficult
to protect and may lose their value if they are independently
developed by a third party or if their secrecy is lost. Further,
because development and commercialization of pharmaceutical
products can be subject to substantial delays, patents may
expire and provide only a short period of protection, if any,
following commercialization of products.
We may
infringe on the intellectual property rights of others, and any
litigation could force us to stop developing or selling
potential products and could be costly, divert management
attention and harm our business.
We must be able to develop products without infringing the
proprietary rights of other parties. Because the markets in
which we operate involve established competitors with
significant patent portfolios, including patents relating to
compositions of matter, methods of use and methods of drug
delivery, it could be difficult for us to use our technologies
or develop products without infringing the proprietary rights of
others. We may not be able to design around the patented
technologies or inventions of others and we may not be able to
obtain licenses to use patented technologies on acceptable
terms, or at all. If we cannot operate without infringing on the
proprietary rights of others, we will not earn product revenues.
If we are required to defend ourselves in a lawsuit, we could
incur substantial costs and the lawsuit could divert
managements attention, regardless of the lawsuits
merit or outcome. These legal actions could seek damages and
seek to enjoin testing, manufacturing and marketing of the
accused product or process. In addition to potential liability
for significant damages, we could be required to obtain a
license to continue to manufacture or market the accused product
or process and any license required under any such patent may
not be made available to us on acceptable terms, if at all.
27
Periodically, we review publicly available information regarding
the development efforts of others in order to determine whether
these efforts may violate our proprietary rights. We may
determine that litigation is necessary to enforce our
proprietary rights against others. Such litigation could result
in substantial expense, regardless of its outcome, and may not
be resolved in our favor.
Furthermore, patents already issued to us or our pending patent
applications may become subject to dispute, and any disputes
could be resolved against us. For example, Eli Lilly and Company
brought an action against us seeking to have one or more
employees of Eli Lilly named as co-inventors on one of our
patents. This case was determined in our favor in 2004, but we
may face other similar claims in the future and we may lose or
settle cases at significant loss to us. In addition, because
patent applications in the United States are currently
maintained in secrecy for a period of time prior to issuance,
patent applications in certain other countries generally are not
published until more than 18 months after they are first
filed, and publication of discoveries in scientific or patent
literature often lags behind actual discoveries, we cannot be
certain that we were the first creator of inventions covered by
our pending patent applications or that we were the first to
file patent applications on such inventions.
We are
in a highly competitive market, and our competitors have
developed or may develop alternative therapies for our target
indications, which would limit the revenue potential of any
product we may develop.
We are in competition with pharmaceutical, biotechnology and
drug delivery companies, hospitals, research organizations,
individual scientists and nonprofit organizations engaged in the
development of drugs and therapies for the disease indications
we are targeting. Our competitors may succeed before we can, and
many already have succeeded, in developing competing
technologies for the same disease indications, obtaining FDA
approval for products or gaining acceptance for the same markets
that we are targeting. If we are not first to
market, it may be more difficult for us to enter markets
as second or subsequent competitors and become commercially
successful. We are aware of a number of companies that are
developing or have developed therapies to address indications we
are targeting, including major pharmaceutical companies such as
Bayer, Genentech (now a part of Roche), Gilead Sciences,
GlaxoSmith Kline, Johnson & Johnson, Novartis and
Pfizer. Certain of these companies are addressing these target
markets with pulmonary products that are similar to ours. These
companies and many other potential competitors have greater
research and development, manufacturing, marketing, sales,
distribution, financial and managerial resources and experience
than we have and many of these companies may have products and
product candidates that are on the market or in a more advanced
stage of development than our product candidates. Our ability to
earn product revenues and our market share would be
substantially harmed if any existing or potential competitors
brought a product to market before we or our future
collaborators were able to, or if a competitor introduced at any
time a product superior to or more cost-effective than ours.
If we
do not continue to attract and retain key employees, our product
development efforts will be delayed and impaired.
We depend on a small number of key management and technical
personnel. Our success also depends on our ability to attract
and retain additional highly qualified management, clinical,
regulatory and development personnel. There is a shortage of
skilled personnel in our industry, we face competition in our
recruiting activities, and we may not be able to attract or
retain qualified personnel. Losing any of our key employees,
particularly our President and Chief Executive Officer,
Dr. Igor Gonda, could impair our product development
efforts and otherwise harm our business. Any of our employees
may terminate their employment with us at will.
If we
market our products in other countries, we will be subject to
different laws and regulations and we may not be able to adapt
to those laws and regulations, which could increase our costs
while reducing our revenues.
If we market any approved products in foreign countries, we will
be subject to different laws, and regulations, particularly with
respect to intellectual property rights and regulatory approval.
To maintain a proprietary market position in foreign countries,
we may seek to protect some of our proprietary inventions
through foreign counterpart patent applications. Statutory
differences in patentable subject matter may limit the
protection we can obtain on some of our inventions outside of
the United States. The diversity of patent laws may make our
expenses associated
28
with the development and maintenance of intellectual property in
foreign jurisdictions more expensive than we anticipate. We
probably will not obtain the same patent protection in every
market in which we may otherwise be able to potentially generate
revenues. In addition, in order to market our products in
foreign jurisdictions, we and our future collaborators must
obtain required regulatory approvals from foreign regulatory
agencies and comply with extensive regulations regarding safety
and quality. We may not be able to obtain regulatory approvals
in such jurisdictions and we may have to incur significant costs
in obtaining or maintaining any foreign regulatory approvals. If
approvals to market our products are delayed, if we fail to
receive these approvals, or if we lose previously received
approvals, our business would be impaired as we could not earn
revenues from sales in those countries.
We may
be exposed to product liability claims, which would hurt our
reputation, market position and operating results.
We face an inherent risk of product liability as a result of the
clinical testing of our product candidates in humans and will
face an even greater risk upon commercialization of any
products. These claims may be made directly by consumers or by
pharmaceutical companies or others selling such products. We may
be held liable if any product we develop causes injury or is
found otherwise unsuitable during product testing, manufacturing
or sale. Regardless of merit or eventual outcome, liability
claims would likely result in negative publicity, decreased
demand for any products that we may develop, injury to our
reputation and suspension or withdrawal of clinical trials. Any
such claim will be very costly to defend and also may result in
substantial monetary awards to clinical trial participants or
customers, loss of revenues and the inability to commercialize
products that we develop. Although we currently have product
liability insurance, we may not be able to maintain such
insurance or obtain additional insurance on acceptable terms, in
amounts sufficient to protect our business, or at all. A
successful claim brought against us in excess of our insurance
coverage would have a material adverse effect on our results of
operations.
If we
cannot arrange for adequate third-party reimbursement for our
products, our revenues will suffer.
In both domestic and foreign markets, sales of our potential
products will depend in substantial part on the availability of
adequate reimbursement from third-party payors such as
government health administration authorities, private health
insurers and other organizations. Third-party payors often
challenge the price and cost-effectiveness of medical products
and services. Significant uncertainty exists as to the adequate
reimbursement status of newly approved health care products. Any
products we are able to successfully develop may not be
reimbursable by third-party payors. In addition, our products
may not be considered cost-effective and adequate third-party
reimbursement may not be available to enable us to maintain
price levels sufficient to realize a profit. Legislation and
regulations affecting the pricing of pharmaceuticals may change
before our products are approved for marketing and any such
changes could further limit reimbursement. If any products we
develop do not receive adequate reimbursement, our revenues will
be severely limited.
Our
use of hazardous materials could subject us to liabilities,
fines and sanctions.
Our laboratory and clinical testing sometimes involves the use
of hazardous and toxic materials. We are subject to federal,
state and local laws and regulations governing how we use,
manufacture, handle, store and dispose of these materials.
Although we believe that our safety procedures for handling and
disposing of such materials comply in all material respects with
all federal, state and local regulations and standards, there is
always the risk of accidental contamination or injury from these
materials. In the event of an accident, we could be held liable
for any damages that result and such liability could exceed our
financial resources. Compliance with environmental and other
laws may be expensive and current or future regulations may
impair our development or commercialization efforts.
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If we
are unable to effectively implement or maintain a system of
internal control over financial reporting, we may not be able to
accurately or timely report our financial results and our stock
price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us
to evaluate the effectiveness of our internal control over
financial reporting as of the end of each fiscal year, and to
include a management report assessing the effectiveness of our
internal control over financial reporting in our Annual Report
on
Form 10-K
for that fiscal year. Our ability to comply with the annual
internal control report requirements will depend on the
effectiveness of our financial reporting and data systems and
controls across our company. We expect these systems and
controls to involve significant expenditures and to become
increasingly complex as our business grows. To effectively
manage this complexity, we will need to continue to improve our
operational, financial and management controls and our reporting
systems and procedures. Any failure to implement required new or
improved controls, or difficulties encountered in the
implementation or operation of these controls, could harm our
operating results and cause us to fail to meet our financial
reporting obligations, which could adversely affect our business
and reduce our stock price.
Risks
Related to Our Common Stock
Our
stock price is likely to remain volatile.
The market prices for securities of many companies in the drug
delivery and pharmaceutical industries, including ours, have
historically been highly volatile, and the market from time to
time has experienced significant price and volume fluctuations
unrelated to the operating performance of particular companies.
The market prices for our common stock may continue to be highly
volatile in the future. The market prices for our common stock
may be influenced by many factors, including:
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investor perception of us;
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our available cash;
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market conditions relating to our segment of the industry or the
securities markets in general;
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investor perception of the value of the royalty stream from
Zogenix;
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sales of our stock by certain large institutional shareholders;
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research analyst recommendations and our ability to meet or
exceed quarterly performance expectations of analysts or
investors;
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failure to establish new collaborative relationships;
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fluctuations in our operating results;
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announcements of technological innovations or new commercial
products by us or our competitors;
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publicity regarding actual or potential developments relating to
products under development by us or our competitors;
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developments or disputes concerning patents or proprietary
rights;
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delays in the development or approval of our product candidates;
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regulatory developments in both the United States and foreign
countries;
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concern of the public or the medical community as to the safety
or efficacy of our products, or products deemed to have similar
safety risk factors or other similar characteristics to our
products;
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future sales or expected sales of substantial amounts of common
stock by shareholders;
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our ability to raise capital; and
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economic and other external factors.
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In the past, class action securities litigation has often been
instituted against companies promptly following volatility in
the market price of their securities. Any such litigation
instigated against us would, regardless of its merit, result in
substantial costs and a diversion of managements attention
and resources.
Our
common stock is quoted on the OTC Bulletin Board, which may
provide less liquidity for our shareholders than the national
exchanges.
On November 10, 2006, our common stock was delisted from
the Nasdaq Capital Market due to non-compliance with
Nasdaqs continued listing standards. Our common stock is
currently quoted on the OTC Bulletin Board. As compared to
being listed on a national exchange, being quoted on the OTC
Bulletin Board may result in reduced liquidity for our
shareholders, may cause investors not to trade in our stock and
may result in a lower stock price. In addition, investors may
find it more difficult to obtain accurate quotations of the
share price of our common stock. Trading of our common stock
through the OTC Bulletin Board is frequently thin and
highly volatile, and there is no assurance that a sufficient
market will develop in our common stock, in which case it could
be difficult for our shareholders to sell their stock.
Our
common stock may be considered penny stock and may
be difficult to sell.
The SEC has adopted regulations which generally define
penny stock to include an equity security that has a
market price of less than $5.00 per share, subject to specific
exemptions. The market price of our common stock is currently
less than $5.00 per share and therefore may be designated as a
penny stock according to SEC rules. This designation
requires any broker or dealer selling these securities to
disclose some information concerning the transaction, obtain a
written agreement from the purchaser and determine that the
purchaser is reasonably suitable to purchase the securities.
These rules may restrict the ability of brokers or dealers to
sell the common stock and may affect the ability of investors to
sell their shares. These regulations may likely have the effect
of limiting the trading activity of our common stock and
reducing the liquidity of an investment in our common stock.
We
have implemented certain anti-takeover provisions, which may
make an acquisition less likely or might result in costly
litigation or proxy battles.
Certain provisions of our articles of incorporation and the
California Corporations Code could discourage a party from
acquiring, or make it more difficult for a party to acquire,
control of our company without approval of our Board of
Directors. These provisions could also limit the price that
certain investors might be willing to pay in the future for
shares of our common stock. Certain provisions allow our Board
of Directors to authorize the issuance, without shareholder
approval, of preferred stock with rights superior to those of
the common stock. We are also subject to the provisions of
Section 1203 of the California Corporations Code, which
requires us to provide a fairness opinion to our shareholders in
connection with their consideration of any proposed
interested party reorganization transaction.
We have adopted a shareholder rights plan, commonly known as a
poison pill. We have also adopted an executive
officer severance plan and entered into change of control
agreements with our executive officers, both of which may
provide for the payment of benefits to our officers and other
key employees in connection with an acquisition. The provisions
of our articles of incorporation, our poison pill, our severance
plan and our change of control agreements, and provisions of the
California Corporations Code may discourage, delay or prevent
another party from acquiring us or reduce the price that a buyer
is willing to pay for our common stock.
One of our shareholders may choose to pursue a lawsuit or engage
in a proxy battle with management to limit our use of one or
more of these anti-takeover protections. Any such lawsuit or
proxy battle would, regardless of its merit or outcome, result
in substantial costs and a diversion of managements
attention and resources.
We
have never paid dividends on our capital stock, and we do not
anticipate paying cash dividends for at least the foreseeable
future.
We have never declared or paid cash dividends on our capital
stock. We do not anticipate paying any cash dividends on our
common stock for at least the foreseeable future. We currently
intend to retain all available funds and future earnings, if
any, to fund the development and growth of our business.
Therefore, our shareholders will not
31
receive any funds absent a sale of their shares. We cannot
assure shareholders of a positive return on their investment if
they sell their shares, nor can we assure that shareholders will
not lose the entire amount of their investment.
A
small number of shareholders own a large percentage of our
common stock and can influence the outcome of matters submitted
to our shareholders for approval.
A small number of our shareholders own a large percentage of our
common stock and can, therefore, influence the outcome of
matters submitted to our shareholders for approval. Based on
information known to us as of February 28, 2011, our three
largest investors, collectively, control in excess of a majority
of our outstanding common stock. As a result, these shareholders
have the ability to influence the outcome of matters submitted
to our shareholders for approval, including certain proposed
amendments to our amended and restated articles of incorporation
(for example, amendments to increase the number of our
authorized shares) and any proposed merger, consolidation or
sale of all or substantially all of our assets. These
shareholders may support proposals and actions with which you
may disagree. The concentration of ownership could delay or
prevent a change in control of our company or otherwise
discourage a potential acquirer from attempting to obtain
control of our company, which in turn could reduce the price of
our common stock.
Our
independent public accounting firm, in its audit opinion issued
in connection with the accompanying financial statements, has
expressed substantial doubt about our ability to continue as a
going concern given our recurring losses from
operations.
The accompanying financial statements included in this Annual
Report on
Form 10-K
have been prepared assuming that we will continue as a going
concern. As discussed in Note 1 to the financial
statements, we have suffered recurring losses from operations
that raises substantial doubt about our ability to continue as a
going concern. Managements plans in regard to these
matters are also described in Note 1. The accompanying
financial statements were prepared on the basis of a going
concern, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course
of business, and accordingly do not contain any adjustments
which may result due to the outcome of this uncertainty.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
As of December 31, 2010, we leased one building with an
aggregate of 72,000 square feet of office and laboratory
facilities at 3929 Point Eden Way, Hayward, California. This
building serves as our Corporate office and our research and
development facility with a lease expiration of July 2016. In
2007, we entered into a long-term sublease with Mendel
Biotechnology, Inc. (Mendel). The sublease with
Mendel is for 48,000 square feet and expires concurrently
with our lease. In April 2009, we entered into an amendment to
our sublease agreement with Mendel to sublease to Mendel an
additional 1,550 square feet. Mendel is permitted to
terminate the sublease early on September 1, 2012 for a
termination fee of $225,000. The sublease with Mendel
substantially reduced our net outstanding lease commitment (see
Note 8 to the audited financial statements included in this
Annual Report on
Form 10-K).
Our current building is expected to meet our facility
requirements for the foreseeable future.
|
|
Item 3.
|
Legal
Proceedings
|
None.
32
|
|
Item 4.
|
(Removed
and Reserved)
|
PART II
|
|
Item 5.
|
Market
for the Registrants Common Stock, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Market
Information
Since December 21, 2006, our common stock has been quoted
on the OTC Bulletin Board, an electronic quotation service
for securities traded
over-the-counter,
under the symbol ARDM. Between June 20, 1996
and May 1, 2006 our common stock was listed on the Nasdaq
Global Market (formerly the Nasdaq National Market). Between
May 2, 2006 and November 9, 2006, our common stock was
listed on the Nasdaq Capital Market (formerly the Nasdaq Small
Cap Market). As of November 9, 2006, we were delisted from
the Nasdaq Capital Market. Between November 10, 2006 and
December 20, 2006, our common stock was quoted on the Pink
Sheets.
The following table sets forth the high and low closing sale
prices of our common stock for the periods indicated as reported
on the OTC Bulletin Board.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
2009
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.29
|
|
|
$
|
0.07
|
|
Second Quarter
|
|
|
0.34
|
|
|
|
0.10
|
|
Third Quarter
|
|
|
0.28
|
|
|
|
0.17
|
|
Fourth Quarter
|
|
|
0.20
|
|
|
|
0.14
|
|
2010
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.18
|
|
|
$
|
0.13
|
|
Second Quarter
|
|
|
0.15
|
|
|
|
0.11
|
|
Third Quarter
|
|
|
0.20
|
|
|
|
0.11
|
|
Fourth Quarter
|
|
|
0.29
|
|
|
|
0.13
|
|
As of February 28, 2011, there were 164 holders of record
of our common stock. A greater number of holders of common stock
are street name or beneficial holders, whose shares
are held of record by banks, brokers and other financial
institutions.
Dividend
Policy
We have never declared or paid any cash dividends on our capital
stock and we do not currently intend to pay any cash dividends
on our capital stock for at least the foreseeable future. We
expect to retain future earnings, if any, to fund the
development and growth of our business. Any future determination
to pay dividends on our capital stock will be, subject to
applicable law, at the discretion of our Board of Directors and
will depend upon, among other factors, our results of
operations, financial condition, capital requirements and
contractual restrictions in loan agreements or other agreements.
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and the
audited financial statements and notes thereto included
elsewhere in this Annual Report on
Form 10-K.
We have derived the selected financial data for the years ended
and as of December 31, 2010 and 2009 from our audited
financial statements and notes thereto included elsewhere in
this Annual Report on
Form 10-K.
The selected financial data for the years ended and as of
December 31, 2008, 2007 and 2006 has been derived from
financial statements not included in this Annual Report on
Form 10-K.
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands, except per share data)
|
|
Statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
4,383
|
|
|
$
|
4,883
|
|
|
$
|
251
|
|
|
$
|
961
|
|
|
$
|
4,814
|
|
Total operating expenses
|
|
|
14,743
|
|
|
|
18,310
|
|
|
|
23,257
|
|
|
|
27,353
|
|
|
|
38,918
|
|
Loss from operations
|
|
|
(10,360
|
)
|
|
|
(13,427
|
)
|
|
|
(23,006
|
)
|
|
|
(26,392
|
)
|
|
|
(34,104
|
)
|
Gain on sale of patent and royalty interest to related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
Net interest income (expense)
|
|
|
(298
|
)
|
|
|
(356
|
)
|
|
|
373
|
|
|
|
2,180
|
|
|
|
1,054
|
|
Other income (expense), including extinguishment of debt
|
|
|
5,279
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
11
|
|
|
|
23
|
|
Net loss
|
|
|
(5,379
|
)
|
|
|
(13,772
|
)
|
|
|
(22,608
|
)
|
|
|
(24,201
|
)
|
|
|
(13,027
|
)
|
Basic and diluted net loss per share
|
|
|
(0.04
|
)
|
|
|
(0.15
|
)
|
|
|
(0.42
|
)
|
|
|
(0.48
|
)
|
|
|
(0.89
|
)
|
Shares used in computing basic and diluted net loss per share
|
|
|
128,660
|
|
|
|
92,348
|
|
|
|
54,162
|
|
|
|
50,721
|
|
|
|
14,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
5,546
|
|
|
$
|
9,131
|
|
|
$
|
19,140
|
|
|
$
|
40,510
|
|
|
$
|
27,514
|
|
Working capital
|
|
|
3,780
|
|
|
|
7,411
|
|
|
|
17,313
|
|
|
|
36,594
|
|
|
|
25,405
|
|
Total assets
|
|
|
7,628
|
|
|
|
11,965
|
|
|
|
25,519
|
|
|
|
45,813
|
|
|
|
32,226
|
|
Note payable and accrued interest to former related party
|
|
|
|
|
|
|
8,896
|
|
|
|
8,472
|
|
|
|
8,071
|
|
|
|
7,686
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,669
|
|
Accumulated deficit
|
|
|
(353,825
|
)
|
|
|
(348,446
|
)
|
|
|
(334,674
|
)
|
|
|
(312,066
|
)
|
|
|
(287,865
|
)
|
Total shareholders equity (deficit)
|
|
|
4,599
|
|
|
|
(173
|
)
|
|
|
8,756
|
|
|
|
30,299
|
|
|
|
(3,947
|
)
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Cautionary
Note Regarding Forward-Looking Statements
The discussion below contains forward-looking statements that
are based on the current beliefs of our management, as well as
current assumptions made by, and information currently available
to, our management. All statements contained in the discussion
below, other than statements that are purely historical, are
forward-looking statements. These forward-looking statements are
subject to risks and uncertainties that could cause our future
actual results, performance or achievements to 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 risks and uncertainties discussed in this
section, as well as in the section entitled Risk
Factors, and elsewhere in our other filings with the SEC.
See Cautionary Note Regarding Forward-Looking
Statements elsewhere in this Annual Report on
Form 10-K.
Our business is subject to significant risks including, but
not limited to, our ability to obtain additional financing, our
ability to implement our product development strategy, the
success of product development efforts, obtaining and enforcing
patents important to our business, clearing the lengthy and
expensive regulatory approval process and possible competition
from other products. Even if product candidates appear promising
at various stages of development, they may not reach the market
or may not be commercially successful for a number of reasons.
Such reasons include, but are not limited to, the possibilities
that the potential products may be found to be ineffective
during clinical trials, may fail to receive necessary regulatory
approvals, may be difficult to manufacture
34
on a large scale, are uneconomical to market, may be
precluded from commercialization by proprietary rights of third
parties or may not gain acceptance from health care
professionals and patients. Further, even if our product
candidates appear promising at various stages of development,
our share price may decrease such that we are unable to raise
additional capital without dilution that may be unacceptable to
our shareholders.
Investors are cautioned not to place undue reliance on the
forward-looking statements contained herein. We undertake no
obligation to update these forward-looking statements in light
of events or circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
Overview
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of drugs delivered by
inhalation for the treatment of severe respiratory diseases by
pulmonologists. Over the last decade, we invested a large amount
of capital to develop drug delivery technologies, particularly
the development of a significant amount of expertise in
pulmonary drug delivery. We also invested considerable effort
into the generation of a large volume of laboratory and clinical
data demonstrating the performance of our AERx pulmonary drug
delivery platform and other proprietary technologies, including
our liposomal ciprofloxacin formulation for inhalation. We have
not been profitable since inception and expect to incur
additional operating losses over at least the foreseeable future
as we continue product development efforts, clinical trial
activities, and possible sales, marketing and contract
manufacturing efforts. To date, we have not had any significant
product sales and do not anticipate receiving revenues from the
sale of any of our products in the near term. As of
December 31, 2010, we had an accumulated deficit of
$353.8 million. Historically, we have funded our operations
primarily through public offerings and private placements of our
capital stock, license fees and milestone payments from
collaborators, proceeds from the January 2005 restructuring
transaction with Novo Nordisk, borrowings from Novo Nordisk, the
sale of Intraject-related assets to Zogenix, the milestone
payment received from Zogenix during the three months ended
March 31, 2010 and interest earned on cash equivalents and
short term-investments.
Over the last five years, our business has focused on
opportunities in the development of drugs for the treatment of
severe respiratory diseases that could be developed by us and
commercialized in the United States, or another significant
territory, such as the European Union (EU). It is
our longer term strategy to commercialize our respiratory
product candidates with our own focused marketing and sales
force addressing pulmonary specialty doctors in the United
States, or in the EU, where we believe that a proprietary sales
force will enhance the return to our shareholders. Where our
products can benefit a broader population of patients in the
United States or in other countries, we may enter into
co-development, co-promotion or other marketing arrangements
with collaborators, thereby reducing costs and increasing
revenues through license fees, milestone payments and royalties.
In selecting our proprietary development programs, we primarily
seek drugs approved by the United States Food and Drug
Administration (FDA) that can be reformulated for
both existing and new indications in respiratory disease. Our
intent is to use our pulmonary delivery methods and formulations
to improve their safety, efficacy and convenience of
administration to patients. We believe that this strategy will
allow us to reduce cost, development time and risk of failure,
when compared to the discovery and development of new chemical
entities. Our lead development candidates are proprietary
liposomal formulations, ARD-3100 and ARD-3150, of the antibiotic
ciprofloxacin that is delivered by inhalation for the management
of infections associated with the severe respiratory diseases
cystic fibrosis (CF) and non-cystic fibrosis
bronchiectasis (BE). We received orphan drug
designations for ARD-3100 for both of these indications in the
U.S and for cystic fibrosis in the European Union. We have
reported the results of one successful Phase 2b trial with
ARD-3150 in non-cystic fibrosis bronchiectasis and two
successful Phase 2a trials with ARD-3100 in cystic fibrosis and
non-cystic fibrosis bronchiectasis, respectively.
In June 2008, we completed an open label, multi-center
14-day
treatment Phase 2a trial in Australia and New Zealand in 21 CF
patients with once-daily dosing of 6 mL of inhaled liposomal
ciprofloxacin (ARD-3100). The primary efficacy endpoint in this
Phase 2a study was the change from baseline in the sputum
Pseudomonas aeruginosa colony forming units
(CFU), an objective measure of the reduction in
pulmonary bacterial load. Data analysis in 21 patients who
completed the study demonstrated that the CFUs decreased by a
mean 1.43 log against baseline over the
14-day
treatment period (p<0.0001). Evaluation one week after
study treatment was discontinued showed that the Pseudomonas
bacterial density in the lung was still reduced from the
baseline without additional antibiotic use. Pulmonary function
testing as measured by the forced expiratory volume in one
second (FEV1)
35
showed a significant mean increase of 6.86% from baseline after
14 days of treatment (p=0.04). The study drug was well
tolerated and there were no serious adverse events reported
during the trial.
In December 2008, we completed an open-label, four week
treatment study with once-daily inhaled liposomal ciprofloxacin
(ARD-3100) in patients with non-CF bronchiectasis. The study was
conducted at eight leading centers in the United Kingdom and
enrolled a total of 36 patients. The patients were
randomized into two equal size groups, one receiving 3 mL of
inhaled liposomal ciprofloxacin and the other receiving 6 mL of
inhaled liposomal ciprofloxacin,
once-a-day
for the four-week treatment period. The primary efficacy
endpoint was the change from baseline in the sputum
Pseudomonas aeruginosa CFUs, the standard objective
measure of the reduction in pulmonary bacterial load. The 3 mL
and 6 mL doses of inhaled liposomal ciprofloxacin in the
evaluable patient population demonstrated significant mean
decreases against baseline in the CFUs over the
28-day
treatment period of 3.5 log (p<0.001) and 4.0 log
(p<0.001) units, respectively.
In July 2009, we announced that clearance was received for the
U.S. Food and Drug Administration for the inhaled liposomal
ciprofloxacin (ARD-3100) Investigational New Drug (IND)
application for the management of non-cystic fibrosis
bronchiectasis.
In August 2009, the European Medicines Agency granted Orphan
Drug Designation to our inhaled liposomal ciprofloxacin drug
product candidate ARD-3100 for the treatment of lung infections
associated with cystic fibrosis. Under European guidelines,
Orphan Medicinal Product Designation provides 10 years of
potential market exclusivity if the product candidate is the
first product candidate for the indication approved for
marketing in the European Union. Orphan drug designation also
allows the candidates sponsor to seek assistance from the
European Medicines Agency in optimizing the candidates
clinical development through participation in designing the
clinical protocol and preparing the marketing application.
Additionally, a drug candidate designated by the Commission as
an Orphan Medicinal Product may qualify for a reduction in
regulatory fees as well as a European Union-funded research
grant. We had previously been granted orphan drug designations
by the U.S. Food and Drug Administration for inhaled
liposomal ciprofloxacin ARD-3100 for the management of CF and
for non-cystic fibrosis bronchiectasis.
In November 2009, the first patient was dosed in the ORBIT-2
(Once-daily Respiratory Bronchiectasis Inhalation Treatment)
trial, a 168 day, multicenter, international Phase 2b
clinical trial of inhaled ciprofloxacin with the ARD-3150
formulation in 42 adult patients with non-cystic fibrosis
bronchiectasis. The randomized, double-blind, placebo-controlled
trial was conducted in Australia and New Zealand. Following a
14 day screening period, the patients were treated
once-a-day
for 28 days with either the active drug, or placebo,
followed by a 28 day off-treatment period. This on-off
sequence was repeated three times. The primary endpoint was
defined as the mean change in Pseudomonas aeruginosa
density in sputum (colony forming units CFU -
per gram) from baseline to day 28 of the active treatment group
versus placebo. Safety and tolerability assessments of the
treatment versus placebo group were performed and secondary
efficacy endpoints being assessed included long term
microbiological responses, time to an exacerbation, severity of
exacerbations, length of time to resolve exacerbations and
changes in lung function and in quality of life measurements.
ORBIT-2 explored whether the novel formulation ARD-3150, which
has a different drug release profile than ARD-3100, may have
additional therapeutic benefits.
In October 2010, we announced positive top line data from the
ORBIT-2 study. Statistical significance was achieved in the
primary endpoint the mean change in Pseudomonas
aeruginosa density in sputum from baseline to day 28. In the
full analysis population (full analysis set includes all
patients who were randomized, received at least one dose and
provided samples for at least two time points), there was a
significant mean reduction of 4.2
log10
units in the ARD-3150 group, reflecting an almost
sixteen-thousand fold decrease in bacterial load, versus a very
small mean decrease of 0.1
log10
units in the placebo group (p=0.004). Secondary endpoint
analysis showed that 17 subjects in the placebo group required
supplemental antibiotics for respiratory-related infections
versus 8 subjects in the ARD-3150 group (p=0.05). As announced
in January 2011, the Kaplan-Meier analysis showed that the
median time to first pulmonary exacerbation in the per protocol
evaluation increased from 58 days in the placebo group to
134 days in the active treatment group and was
statistically significant (p<0.05, log rank test). ARD-3150
was well tolerated and there were no significant decreases in
lung function, as measured by FEV1 (forced expiratory volume in
one second), at 28 days in either group. Overall, the
incidence and severity of adverse events were similar
36
in both the placebo and treatment groups; however, ARD-3150 had
a superior pulmonary safety profile reflected in the number and
severity of pulmonary adverse events.
In February 2010, the first patient was dosed in the
U.S. as part of the ORBIT-1 trial. This Phase 2b trial, an
international, double-blind, placebo-controlled study being
conducted under a U.S. FDA IND, randomized
101 patients and completed enrollment in March 2011. The
ORBIT-1 study design calls for four weeks of once-daily inhaled
doses of the active drug or once-daily inhaled placebo. Two
doses of the active drug are included in the study
100 or 150 mg ciprofloxacin delivered by inhalation as 2 or
3 mL of liposomal dispersion, respectively. The primary efficacy
endpoint is a standard measure of antibacterial
activity the change from baseline in sputum
Pseudomonas aeruginosa colony forming units (CFUs).
Secondary endpoints include quality of life measurements and
improvement of outcomes with respect to exacerbations. Lung
function changes are being monitored for safety.
The results from each of these trials will produce an extensive
database of information from which we hope to select the optimum
product and the most appropriate endpoints to test in Phase 3.
In order to expedite anticipated time to market and increase
market acceptance, we have elected to deliver our formulations
via an FDA-approved, widely-accepted nebulizer system for each
of these Phase 2b trials.
In August 2006, we sold all of our assets related to the
Intraject needle-free injector technology platform and products,
including 12 United States patents along with foreign
counterparts, to Zogenix, Inc. Zogenix is responsible for
further development and commercialization efforts of Intraject
(now rebranded under the name DosePro). In conjunction with the
sale, we received a $4 million initial payment from
Zogenix, with an additional milestone payment of $4 million
and royalty payments payable upon any commercialization of
products in the U.S. and other countries, including the
European Union, developed and sold using the DosePro technology.
Zogenix entered into a license agreement to grant exclusive
rights in the European Union to Desitin Pharmaceuticals, GmbH to
develop and commercialize SUMAVEL DosePro in the European Union.
In July 2009, Zogenix was granted approval by the FDA of the
SUMAVEL DosePro (sumatriptan injection) needle-free delivery
system for the treatment of acute migraine and cluster headache.
In August 2009, Zogenix and Astellas Pharma US, Inc. entered
into an exclusive co-promotion agreement in the U.S. for
the SUMAVEL DosePro needle-free delivery system. Under the
announced terms of the agreement, Zogenix and Astellas will
collaborate on the promotion and marketing of SUMAVEL DosePro
with Zogenix focusing their sales activities primarily on the
neurology market while Astellas will focus mostly on primary
care physicians. Zogenix will have responsibility for
manufacturing and distribution of the product. On
January 13, 2010, Zogenix and Astellas announced the
U.S. commercial launch of SUMAVEL DosePro. In February
2010, we received from Zogenix the $4 million milestone
payable upon the initial commercialization of SUMAVEL DosePro
and we are entitled to quarterly royalty payments of 3% of net
sales on all SUMAVEL DosePro sales.
In December 2010, Zogenix and Desitin were granted approval of
the Marketing Authorization Application (MAA) for
SUMAVEL DosePro (sumatriptan injection) needle-free delivery
system by the Danish Medicines Agency of Denmark. Denmark is the
first country in Europe to grant marketing authorization for
SUMAVEL DosePro. Five weeks later, the Federal Institute for
Drugs and Medical Devices of Germany (BrArM) and the Medicines
and Healthcare products Regulatory Agency of the United Kingdom
(MHRA ) granted approval of the MAA for SUMAVEL DosePro
(sumatriptan injection) needle-free delivery system for the
acute treatment of migraine attacks, with or without aura, and
the acute treatment of cluster headache. Germany and the United
Kingdom are two of the largest pharmaceutical markets in Europe.
We are entitled to 3% royalty on net sales of SUMAVEL DosePro in
all territories.
On June 21, 2010, we closed the June 2010 Private
Placement, in which we sold 34,702,512 shares of common
stock and warrants to purchase an aggregate of
7,527,214 shares of common stock to accredited investors
(which included a few existing significant investors) under the
terms of a securities purchase agreement that was entered into
with the investors on June 18, 2010. At the closing of the
June 2010 Private Placement, we received approximately
$4.1 million in aggregate gross proceeds from the sale of
the common stock and the warrants. After deducting for fees and
expenses, the aggregate net proceeds from the sale of the common
stock and the warrants were approximately $3.7 million.
After we held our special meeting of shareholders on
September 14, 2010 and obtained the requisite shareholder
approval on a proposal to amend our amended and restated
articles of
37
incorporation to increase the total number of authorized shares
of our common stock to cover the shares issuable upon exercise
of the warrants, the warrants were exercised and we received
approximately $891,000 in additional aggregate net proceeds from
the exercise of the warrants.
On September 15, 2010, we eliminated all of our outstanding
debt when we closed the issuance to Novo Nordisk A/S of
26,000,000 shares of our common stock under a stock
purchase agreement, dated as of July 30, 2010, by and among
us and Novo Nordisk A/S, in consideration for the termination of
all of our obligations under a then outstanding promissory note
and security agreement dated July 3, 2006 in favor of Novo
Nordisk A/S. As a result of this transaction that exchanged debt
for stock, we recorded a gain based on the value of the stock
issued to Novo Nordisk A/S. The closing occurred after we held
our special meeting of shareholders on September 14, 2010
and obtained the requisite shareholder approval on a proposal to
amend our amended and restated articles of incorporation to
increase the total number of authorized shares of our common
stock to cover the 26,000,000 shares issuable under the
Novo Nordisk stock purchase agreement. An amended and restated
stock purchase agreement, dated as of January 26, 2005,
previously entered into by us, Novo Nordisk A/S and Novo Nordisk
Pharmaceuticals, Inc. in connection with our January 2005
restructuring transaction with Novo Nordisk was also terminated
at the closing. The July 3, 2006 promissory note and
security agreement had evidenced, among other things, a loan
that had been previously made by Novo Nordisk A/S to us in the
principal amount of $7.5 million, which bore interest
accruing at 5% per annum and the principal, along with the
accrued interest, had been payable in three equal payments of
approximately $3.5 million on July 2, 2012,
July 1, 2013 and June 30, 2014.
Critical
Accounting Policies and Estimates
We consider certain accounting policies related to revenue
recognition, impairment of long-lived assets, exit/disposal
activities, research and development, income taxes and
stock-based compensation to be critical accounting policies that
require the use of significant judgments and estimates relating
to matters that are inherently uncertain and may result in
materially different results under different assumptions and
conditions. The preparation of financial statements in
conformity with United States generally accepted accounting
principles requires us to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes to the financial statements. These estimates
include useful lives for property and equipment and related
depreciation calculations, estimated amortization periods for
payments received from product development and license
agreements as they relate to the revenue recognition, and
assumptions for valuing options, warrants and other stock-based
compensation. Our actual results could differ from these
estimates.
Revenue
Recognition
Contract revenues consist of revenues from grants, collaboration
agreements and feasibility studies. We recognize revenue under
the provisions of the Securities and Exchange Commission issued
Staff Accounting Bulletin 104, Topic 13, Revenue
Recognition Revised and Updated (SAB 104)
and Accounting Standards Codification (ASC)
605-25,
Revenue Arrangements-Multiple Element Arrangements
(ASC
605-25).
Revenue for arrangements not having multiple deliverables, as
outlined in
ASC 605-25,
is recognized once costs are incurred and collectability is
reasonably assured.
Collaborative license and development agreements often require
us to provide multiple deliverables, such as a license, research
and development, product steering committee services and other
performance obligations. These agreements are accounted for in
accordance with
ASC 605-25.
Under this standard, delivered items are evaluated to determine
whether such items have value to our collaborators on a
stand-alone basis and whether objective reliable evidence of
fair value of the undelivered items exist.
Deliverables that meet these criteria are considered a separate
unit of accounting. Deliverables that do not meet these criteria
are combined and accounted for as a single unit of accounting.
The appropriate revenue recognition criteria are identified and
applied to each separate unit of accounting. Under the Lung Rx
Agreement, we were obligated to provide multiple deliverables
including the transfer of AERx technology and any future
improvements thereto during the term of the Lung Rx Agreement
and participation on a product steering committee during the
term of the Lung Rx Agreement. Thus, all of the deliverables
under the Lung Rx Agreement were treated as a single unit of
accounting under
ASC 605-25
since the fair value of the undelivered performance obligations
associated
38
with these activities could not be objectively determined and
the activities were not economically independent of each other.
Revenue continued to be deferred under the Lung Rx agreement
until the quarter ended September 30, 2009 when all revenue
was recognized as we no longer had any performance obligations
under the agreement due to our determination that the likelihood
of future collaborations with Lung Rx was remote.
Royalty revenue will be earned under the terms of the asset sale
agreement with Zogenix. We will recognize revenue when the
amounts under this agreement can be determined and when
collectability is probable. We have no performance obligations
under this agreement. We anticipate recognizing revenue from
quarterly royalty payments one quarter in arrears since we
believe that we will not be able to determine quarterly royalty
earnings until we receive our royalty statements and payments
from Zogenix.
Gain
on Debt Extinguishment
During the quarter ended September 30, 2010, we issued
26,000,000 shares of our common stock to Novo Nordisk A/S
in consideration for the termination of all of our obligations
under a promissory note and security agreement dated
July 3, 2006 in favor on Novo Nordisk A/S. We determined
that this transaction should be accounted for in accordance with
ASC 470-60,
Troubled Debt Restructuring. Additionally,
ASC 470-60-35-4 states
that when stock is exchanged for debt, the fair value of the
stock should be used as the value of the consideration.
Accordingly, we valued the stock issued to Novo Nordisk A/S at
the fair market value on September 14, 2010, (the closing
value of the stock on OTC) which was the date on which we
obtained the requisite shareholder approval to amend our amended
and restated articles of incorporation to increase the total
number of authorized shares of our common stock to cover the
26,000,000 shares issued to Novo Nordisk A/S. The gain on
the exchange was reduced by legal fees and direct costs
associated with the transaction.
Impairment
of Long-Lived Assets
In accordance with
ASC 360-10,
Property, Plant & Equipment Overall, we
review 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,
we write down the assets to their estimated fair values and
recognize the loss in the statements of operations.
Accounting
for Costs Associated with Exit or Disposal
Activities
In accordance with ASC 420, Exit or Disposal Cost
Obligations, we recognize a liability for the cost
associated with an exit or disposal activity that is measured
initially at its fair value in the period in which the liability
is incurred, except for a liability for one-time termination
benefits that is incurred over time. According to ASC 420,
costs to terminate an operating lease or other contracts are
(a) costs to terminate the contract before the end of its
term or (b) costs that will continue to be incurred under
the contract for its remaining term without economic benefit to
the entity. In periods subsequent to initial measurement,
changes to the liability are measured using the risk-free
interest rate that was used to measure the liability initially.
We recorded losses under this standard for the Mendel sublease
in 2007 and for the sublease of additional space in 2009 since
the sublease rate was less than the rental rate that we are
paying.
Research
and Development
Research and development expenses consist of costs incurred for
company-sponsored, collaborative and contracted research and
development activities. These costs include direct and
research-related overhead expenses. Research and development
expenses that are reimbursed under collaborative and government
grants approximate the revenue recognized under such agreements.
We expense research and development costs as incurred.
Income
Taxes
We make certain estimates and judgments in determining income
tax expense for financial statement purposes. These estimates
and judgments occur in the calculation of certain tax assets and
liabilities, which arise from
39
differences in the timing of recognition of revenue and expense
for tax and financial statement purposes. As part of the process
of preparing our financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which
we operate. This process involves us estimating our current tax
exposure under the most recent tax laws and assessing temporary
differences resulting from differing treatment of items for tax
and accounting purposes. In addition, we evaluate our tax
positions to ensure that a minimum recognition threshold is met
before we recognize the tax position in the financial
statements. The aforementioned differences result in deferred
tax assets and liabilities, which are included in our balance
sheets.
We assess the likelihood that we will be able to recover our
deferred tax assets. We consider all available evidence, both
positive and negative, including our historical levels of income
and losses, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation
allowance. If we do not consider it more likely than not that we
will recover our deferred tax assets, we will record a valuation
allowance against the deferred tax assets that we estimate will
not ultimately be recoverable. At December 31, 2010 and
2009, we believed that the amount of our deferred income taxes
would not be ultimately recovered. Accordingly, we recorded a
full valuation allowance for deferred tax assets. However,
should there be a change in our ability to recover our deferred
tax assets, we would recognize a benefit to our tax provision in
the period in which we determine that it is more likely than not
that we will recover our deferred tax assets.
Stock-Based
Compensation
We account for stock-based payment arrangements in accordance
with ASC 718, Compensation-Stock Compensation and
ASC 505-50,
Equity-Equity Based Payments to Non-Employees which
requires the recognition of compensation expense, using a
fair-value based method, for all costs related to stock-based
payments including stock options, restricted stock awards and
stock issued under the employee stock purchase plan. These ASC
topics require companies to estimate the fair value of stock
based payment awards on the date of the grant using an option
pricing model.
We recorded $859,000 and $873,000 of stock-based compensation
expense for the years ended December 31, 2010 and 2009,
respectively. Stock-based compensation expense is recorded to
research and development and general and administrative expenses
based on the function of the related employee. This charge had
no impact on our cash flows for the periods presented.
We use the Black-Scholes option pricing model to estimate the
fair value of stock-based awards as of the grant date. The
Black-Scholes model is complex and dependent upon key data input
estimates. The primary data inputs with the greatest degree of
judgment are the estimated lives of the stock options and the
estimated volatility of our stock price. The Black-Scholes model
is highly sensitive to changes in these two inputs. The expected
term of the options represents the period of time that options
granted are expected to be outstanding. We use the simplified
method to estimate the expected term as an input into the
Black-Scholes option pricing model. We determine expected
volatility using the historical method, which is based on the
historical daily trading data of our common stock over the
expected term of the option. For more information about our
accounting for stock-based compensation, see Note 9 to the
audited financial statements included in this Annual Report on
Form 10-K.
Recent
Accounting Pronouncements
See Note 1 to the audited financial statements included in
this Annual Report on
Form 10-K
for information on recent accounting pronouncements.
Results
of Operations
Years
ended December 31, 2010 and 2009
We significantly reduced our net loss by $8.4 million for
the twelve months ended December 31, 2010, as compared to
the twelve months ended December 31, 2009. The reduction of
net loss resulted from milestone royalty revenue from Zogenix,
the non-recurring gain on the extinguishment of the Novo Nordisk
promissory note, the receipt of the Qualifying Therapeutic
Discovery Tax Credit grant monies and lower operating expenses,
which more
40
than offset the decrease in contract revenue, as compared to the
twelve months ended December 31, 2009. In the quarter ended
December 31, 2010, we received from the U.S. Internal
Revenue Service three grants in the amount of $244,479 each for
qualified investments in three qualifying therapeutic discovery
projects. Operating expenses for the twelve months ended
December 31, 2010 were lower as compared to the twelve
months ended December 31, 2009 despite our continued
investment in our liposomal ciprofloxacin program, including the
expenses related to our two Phase 2b clinical trials.
Total revenue was $4.4 million for the twelve months ended
December 31, 2010 as compared to $4.9 million for the
twelve months ended December 31, 2009. For the twelve
months ended December 31, 2010, we recorded
$4.0 million in royalty revenue related to the milestone
payment that was due upon the initial commercialization of
Zogenixs DosePro product, as well as recurring royalty
revenue related to ongoing DosePro product sales. For the twelve
months ended December 31, 2009, we recorded
$4.9 million in previously deferred revenues due to the
termination of the Lung Rx Agreement.
Operating expenses were $14.7 million for the twelve months
ended December 31, 2010, which represented a
$3.6 million decrease as compared to the twelve months
ended December 31, 2009. For the twelve months ended
December 31, 2010, research and development expenses
decreased by $1.2 million, general and administrative
expenses decreased by $0.6 million and restructuring and
impairment expenses decreased by $1.8 million as compared
to the twelve months ended December 31, 2009.
The decrease in research and development expenses was due to
lower AERx-related expenses for headcount, contract
manufacturing and depreciation expenses. AERx-related expenses
decreased due to the termination of the Lung Rx collaboration in
June 2009 and the subsequent suspension of AERx-related
development activity. In addition, we reduced expenditures
related to ongoing research laboratory activities in mid-2009.
These decreases were partially offset by higher direct clinical
expenses related to our liposomal ciprofloxacin Phase 2b ORBIT-1
and ORBIT-2 trials.
The decrease in general and administrative expenses was
primarily due to lower legal fees (due to the dismissal of the
Lung Rx arbitration proceedings and lower patent maintenance
fees) and lower accounting and audit fees for the twelve months
ended December 31, 2010. We also received property tax
refunds of $0.4 million from the County of Alameda recorded
in 2010 due to our successful challenge of a previous audit
assessment.
The decrease in restructuring and asset impairment related to
the 2009 impairment of the AERx production-related fixed assets,
additional lease exit expenses related to the sublease of
additional space to Mendel and the recurring accretion expense
associated with the 2007 facility lease exit obligation which
was recorded in 2009. The impairment of the AERx technology
fixed assets resulted in an expense of $1.6 million in 2009.
Net interest income (expense) for the twelve months ended
December 31, 2010 decreased from the twelve months ended
December 31, 2009 due to lower average invested balances
and less interest expense being recorded in the second half of
2010 due to the extinguishment of the Promissory Note from Novo
Nordisk.
Other income (expense), including extinguishment of debt for the
twelve months ended December 31, 2010, increased
significantly as compared to the twelve months ended
December 31, 2009 primarily due to the issuance of
26,000,000 shares of common stock in consideration for the
termination of all of our obligations to Novo Nordisk under a
promissory note which resulted in a net gain after direct legal
costs of $4.4 million. This transaction resulted in a
favorable exchange of all of our outstanding debt including
accrued interest. We also received $0.7 million in October
2010 for the Qualifying Therapeutic Discovery Tax Credit grant
monies for our liposomal ciprofloxacin programs and recorded
these as other income.
Liquidity
and Capital Resources
As of December 31, 2010, we had cash, cash equivalents and
short-term investments of $5.5 million and total working
capital of $3.8 million. We assess our liquidity primarily
by the amount of our cash and cash equivalents and short term
investments less our current liabilities. We believe that this
amount as well as anticipated recurring royalty payments from
Zogenix will be sufficient to enable us to fund our operations
through at least the second quarter of 2011.
41
On June 21, 2010 we closed the June 2010 Private Placement
in which we sold 34,702,512 shares of our common stock and
warrants to purchase an aggregate of 7,527,214 shares of
our common stock to accredited investors (which included several
existing significant investors) under the terms of a securities
purchase agreement that we entered into with the investors on
June 18, 2010. At the closing of the June 2010 Private
Placement, we received approximately $4.1 million in
aggregate proceeds from the sale of the common stock and
warrants. After deducting for fees and expenses, the aggregate
net proceeds from the sale of the common stock and warrants were
approximately $3.7 million. After we held a special meeting
of shareholders on September 14, 2010 and obtained the
requisite shareholder approval on a proposal to amend our
amended and restated articles of incorporation to increase the
total number of authorized shares of common stock to cover the
shares issuable upon exercise of the warrants, the warrants were
exercised and we received approximately $0.9 million in
additional aggregate net proceeds from the exercise of the
warrants.
Since inception, we have funded our operations primarily through
public offerings and private placements of our capital stock,
license fees and milestone payments from collaborators, proceeds
from the January 2005 restructuring transaction with Novo
Nordisk, borrowings from Novo Nordisk, the sale of
Intraject-related assets, the milestone payment received from
Zogenix in the three months ended March 31, 2010 and
interest earned on investments. We have incurred significant
losses and negative cash flows from operations since our
inception. At December 31, 2010, we had an accumulated
deficit of $353.8 million, working capital of
$3.8 million and shareholders equity of
$4.6 million.
We are currently focusing primarily on establishing funded
partnering agreements and sale or out-licensing of non-strategic
assets as the means to generate the capital resources needed to
fund the further development and commercialization of inhaled
liposomal ciprofloxacin for the cystic fibrosis and
bronchiectasis indications. If we are unable to find financing
on acceptable terms, we may be required to further reduce or
defer our activities or discontinue operations.
Year
ended December 31, 2010
As of December 31, 2010, we had cash, cash equivalents and
short-term investments of $5.5 million, down from
$9.1 million at December 31, 2009. The overall
decrease primarily resulted from the use of cash to fund
operations partially offset by the $4.6 million in proceeds
from the sale of common stock and the exercise of warrants
issued in the June 2010 Private Placement.
Net cash used in operating activities for the twelve months
ended December 31, 2010 was $8.2 million reflecting
our net loss of $5.4 million and the non-cash gain on the
extinguishment of the Novo Nordisk promissory note of
$4.4 million. These uses were partially offset by non-cash
expenses for depreciation and stock-based compensation. Net cash
provided by investing activities for the twelve months ended
December 31, 2010 was $4.9 million and primarily
resulted from the proceeds from the sales of short-term
investments. Net cash provided by financing activities for the
twelve months ended December 31, 2010 was $4.6 million
which was primarily due to the sale of common stock and the
exercise of warrants issued in the June 2010 Private Placement.
Year
ended December 31, 2009
As of December 31, 2009, we had cash, cash equivalents and
short-term investments of $9.1 million, down from
$19.1 million at December 31, 2008. The overall
decrease primarily resulted from the use of cash to fund
operations, partially offset by the $3.9 million in
proceeds from the registered direct offering of our common stock.
Net cash used in operating activities for the twelve months
ended December 31, 2009 was $14.1 million and
primarily resulted from our net loss of $13.8 million and
the decrease of deferred revenue of $4.1 million. These
uses of cash were partially offset by non-cash expenses for the
impairment of AERx assets, depreciation, stock-based
compensation and facility lease exit expenses. Net cash used by
investing activities for the twelve months ended
December 31, 2009 was $2.7 million and primarily
resulted from the net purchase of short-term investments. Net
cash provided by financing activities for the twelve months
ended December 31, 2009 was $4.0 million which was
primarily due to the sale of our common stock in our February
2009 registered direct offering.
42
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 have one inactive, wholly-owned subsidiary domiciled
in the United Kingdom.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
The disclosures in this section are not required since we
qualify as a smaller reporting company.
43
|
|
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, 2010 and 2009, and the
related statements of operations, shareholders equity
(deficit) and cash flows for the years then ended. 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. The Company is not required to
have, nor were we engaged to perform, an audit of the
Companys internal control over financial reporting. Our
audits 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 audited by us present
fairly, in all material respects, the financial position of
Aradigm Corporation at December 31, 2010 and 2009 and the
results of its operations and its cash flows for the years then
ended, in conformity with U.S. generally accepted
accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the
Company has suffered recurring losses from operations that
raises substantial doubt about its ability to continue as a
going concern. Managements plans in regard to these
matters are also described in Note 1. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Odenberg
Ullakko Muranishi & Co LLP
San Francisco, California
March 23, 2011
44
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,295
|
|
|
$
|
3,903
|
|
Short-term investments
|
|
|
251
|
|
|
|
5,228
|
|
Receivables
|
|
|
180
|
|
|
|
155
|
|
Prepaid and other current assets
|
|
|
180
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
5,906
|
|
|
|
9,614
|
|
Property and equipment, net
|
|
|
1,553
|
|
|
|
2,166
|
|
Notes receivable
|
|
|
54
|
|
|
|
52
|
|
Other assets
|
|
|
115
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,628
|
|
|
$
|
11,965
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
257
|
|
|
$
|
572
|
|
Accrued clinical and cost of other studies
|
|
|
993
|
|
|
|
670
|
|
Accrued compensation
|
|
|
327
|
|
|
|
341
|
|
Facility lease exit obligation
|
|
|
99
|
|
|
|
263
|
|
Other accrued liabilities
|
|
|
450
|
|
|
|
357
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,126
|
|
|
|
2,203
|
|
Deferred rent, non-current
|
|
|
99
|
|
|
|
136
|
|
Facility lease exit obligation, non-current
|
|
|
729
|
|
|
|
828
|
|
Other non-current liabilities
|
|
|
75
|
|
|
|
75
|
|
Note payable and accrued interest
|
|
|
|
|
|
|
8,896
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,029
|
|
|
|
12,138
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (See Note 8)
|
|
|
|
|
|
|
|
|
Shareholders equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred stock, 5,000,000 shares authorized, none
outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value; authorized shares: 213,527,214 at
December 31, 2010 and 150,000,000 at December 31,
2009; issued and outstanding shares: 172,304,235 at
December 31, 2010; 102,381,116 at December 31, 2009
|
|
|
358,424
|
|
|
|
348,271
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
2
|
|
Accumulated deficit
|
|
|
(353,825
|
)
|
|
|
(348,446
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
|
4,599
|
|
|
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity (deficit)
|
|
$
|
7,628
|
|
|
$
|
11,965
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
45
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
4,383
|
|
|
$
|
4,883
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
10,210
|
|
|
|
11,406
|
|
General and administrative
|
|
|
4,485
|
|
|
|
5,030
|
|
Restructuring and asset impairment
|
|
|
48
|
|
|
|
1,874
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,743
|
|
|
|
18,310
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(10,360
|
)
|
|
|
(13,427
|
)
|
Interest income
|
|
|
20
|
|
|
|
72
|
|
Interest expense
|
|
|
(318
|
)
|
|
|
(428
|
)
|
Other income (expense), net
|
|
|
844
|
|
|
|
(4
|
)
|
Gain from extinguishment of debt
|
|
|
4,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(5,379
|
)
|
|
|
(13,787
|
)
|
Income tax benefit
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,379
|
)
|
|
$
|
(13,772
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
128,660
|
|
|
|
92,348
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
46
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Shareholders
|
|
|
|
Common Stock
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
Balances at December 31, 2008
|
|
|
55,029,384
|
|
|
$
|
343,426
|
|
|
$
|
4
|
|
|
$
|
(334,674
|
)
|
|
$
|
8,756
|
|
Issuance of common stock in a public offering, net of issuance
costs
|
|
|
44,663,071
|
|
|
|
3,927
|
|
|
|
|
|
|
|
|
|
|
|
3,927
|
|
Issuance of common stock under the employee stock purchase plan
|
|
|
371,036
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
Stock-based compensation
|
|
|
|
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
873
|
|
Issuance of restricted stock awards
|
|
|
2,418,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of restricted stock award due to forfeiture
|
|
|
(100,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,772
|
)
|
|
|
(13,772
|
)
|
Unrealized loss on
available-for-sale
investments
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
102,381,116
|
|
|
|
348,271
|
|
|
|
2
|
|
|
|
(348,446
|
)
|
|
|
(173
|
)
|
Issuance of common stock in a private offering, net of issuance
costs
|
|
|
42,229,726
|
|
|
|
4,553
|
|
|
|
|
|
|
|
|
|
|
|
4,553
|
|
Issuance of common stock to Novo Nordisk, for extinguishment of
debt, net of issuance costs
|
|
|
26,000,000
|
|
|
|
4,680
|
|
|
|
|
|
|
|
|
|
|
|
4,680
|
|
Issuance of common stock under the employee stock purchase plan
|
|
|
498,870
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
Issuance of restricted stock awards
|
|
|
1,824,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of restricted stock award due to forfeiture
|
|
|
(630,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
859
|
|
|
|
|
|
|
|
|
|
|
|
859
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,379
|
)
|
|
|
(5,379
|
)
|
Unrealized loss on
available-for-sale
investments
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2010
|
|
|
172,304,235
|
|
|
$
|
358,424
|
|
|
$
|
|
|
|
$
|
(353,825
|
)
|
|
$
|
4,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
47
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,379
|
)
|
|
$
|
(13,772
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Non-cash asset impairment on property and equipment
|
|
|
|
|
|
|
1,654
|
|
Facility lease exit costs
|
|
|
|
|
|
|
158
|
|
Amortization and accretion of investments
|
|
|
26
|
|
|
|
21
|
|
Depreciation and amortization
|
|
|
606
|
|
|
|
1,067
|
|
Stock-based compensation expense
|
|
|
859
|
|
|
|
873
|
|
Loss on disposal of property and equipment
|
|
|
11
|
|
|
|
4
|
|
Gain on extinguishment of debt
|
|
|
(4,526
|
)
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(25
|
)
|
|
|
238
|
|
Prepaid and other current assets
|
|
|
148
|
|
|
|
61
|
|
Restricted cash
|
|
|
|
|
|
|
225
|
|
Other assets
|
|
|
16
|
|
|
|
14
|
|
Accounts payable
|
|
|
(314
|
)
|
|
|
(167
|
)
|
Accrued compensation
|
|
|
(14
|
)
|
|
|
(710
|
)
|
Accrued liabilities
|
|
|
726
|
|
|
|
720
|
|
Deferred rent
|
|
|
(37
|
)
|
|
|
(63
|
)
|
Deferred revenue
|
|
|
|
|
|
|
(4,122
|
)
|
Facility lease exit obligation
|
|
|
(263
|
)
|
|
|
(325
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(8,166
|
)
|
|
|
(14,124
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(5
|
)
|
|
|
185
|
|
Purchases of
available-for-sale
investments
|
|
|
(521
|
)
|
|
|
(11,438
|
)
|
Proceeds from maturities of
available-for-sale
investments
|
|
|
5,470
|
|
|
|
8,585
|
|
Notes receivable payments
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
4,944
|
|
|
|
(2,686
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from public offering of common stock, net
|
|
|
4,553
|
|
|
|
3,927
|
|
Proceeds from issuance of common stock to Employee Stock
Purchase Plan
|
|
|
61
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,614
|
|
|
|
3,972
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,392
|
|
|
|
(12,838
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
3,903
|
|
|
|
16,741
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
5,295
|
|
|
$
|
3,903
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash received for income taxes
|
|
$
|
(16
|
)
|
|
$
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
Non cash reduction in note payable from issuance of common stock
|
|
$
|
4,680
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
48
ARADIGM
CORPORATION
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Organization
Aradigm Corporation (the Company) is a California
corporation, incorporated in 1991, focused on the development
and commercialization of drugs delivered by inhalation for the
treatment of severe respiratory diseases. The Companys
principal activities to date have included conducting research
and development and developing collaborations. Management does
not anticipate receiving revenues from the sale of any of its
products in the upcoming year, except for the royalty revenue
from Zogenix. The Company operates as a single operating segment.
Liquidity
and Financial Condition
The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. The
Company has incurred significant operating losses and negative
cash flows from operations. At December 31, 2010, the
Company had an accumulated deficit of $353.8 million,
working capital of $3.8 million and shareholders
equity of $4.6 million. Management believes that the cash
resources as of December 31, 2010, along with quarterly
royalty payments from Zogenix, are sufficient to meet its
obligations through at least the second quarter of 2011 since
the Company continues to defer certain discretionary activities.
The Company will require additional capital to fund its drug
development and operating activities and is currently seeking
additional financing, which may include a collaborative
arrangement, an equity offering, a royalty monetization or sale
or licensing of non-core assets, in order to continue such
activities. If the Company is unable to complete such a
transaction or is unable to obtain sufficient financing on
acceptable terms or otherwise, the Company may be required to
further reduce, defer or discontinue its activities or may not
be able to continue as a going concern. The financial statements
do not include any adjustments that might result from the
outcome of this uncertainty.
Use of
Estimates
The preparation of financial statements, in conformity with
United States generally accepted accounting principles, requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. These estimates include useful lives for property and
equipment and related depreciation calculations, estimated
amortization period for payments received from product
development and license agreements as they relate to the revenue
recognition, assumptions for valuing options and warrants, and
income taxes. Actual results could differ from these estimates.
Cash
Equivalents
All highly liquid investments with maturities of three months or
less at the time of purchase are classified as cash equivalents.
Investments
Management determines the appropriate classification of the
Companys marketable securities, which consist solely of
debt securities, at the time of purchase. All marketable
securities are classified as
available-for-sale,
carried at estimated fair value and reported in short-term
investments. Unrealized gains and losses on
available-for-sale
securities are excluded from earnings and losses and are
reported as a separate component in the statement of
shareholders equity (deficit) until realized. Fair values
of investments are based on quoted market prices where
available. Investment 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 reviews all of its
investments for
other-than-temporary
declines in fair value. When the Company determines that the
decline in fair value of an investment below the Companys
accounting basis is
other-than-temporary,
the Company reduces the carrying
49
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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.
Property
and Equipment
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:
|
|
|
Computer equipment and software
|
|
3 to 5 years
|
Furniture and fixtures
|
|
5 to 7 years
|
Lab equipment
|
|
5 to 7 years
|
Machinery and equipment
|
|
5 years
|
Leasehold improvements
|
|
5 to 17 years
|
Impairment
of Long-Lived Assets
In accordance with Statement of Accounting Standards
Codification (ASC)
360-10,
Property Plant and Equipment Overall, 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 (see
Note 11).
Accounting
for Costs Associated with Exit or Disposal
Activities
In accordance with ASC 420, Exit or Disposal Activities
the Company recognizes a liability for the cost associated
with an exit or disposal activity that is measured initially at
its fair value in the period in which the liability is incurred.
The Company accounted for the partial sublease of its
headquarters building as an exit activity and recorded the
sublease loss in its statement of operations (see Note 5).
According to ASC 420, costs to terminate an operating lease
or other contracts are (a) costs to terminate the contract
before the end of its term or (b) costs that will continue
to be incurred under the contract for its remaining term without
economic benefit to the entity. In periods subsequent to initial
measurement, changes to the liability are measured using the
risk-free rate that was used to measure the liability initially.
Revenue
Recognition
Contract revenues consist of revenues from grants, collaboration
agreements and feasibility studies. The Company recognizes
revenue under the provisions of the Securities and Exchange
Commission issued Staff Accounting Bulletin 104, Topic 13,
Revenue Recognition Revised and Updated
(SAB Topic 13) and
ASC 605-25,
Revenue Recognition-Multiple Elements. Revenue for
arrangements not having multiple deliverables, as outlined in
ASC 605-25,
is recognized once costs are incurred and collectability is
reasonably assured.
In accordance with contract terms, milestone payments from
collaborative research agreements are considered reimbursements
for costs incurred under the agreements and, accordingly, are
recognized as revenue either upon completion of the milestone
effort, when payments are contingent upon completion of the
effort, or are based on
50
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
actual efforts expended over the remaining term of the agreement
when payments precede the required efforts. Refundable
development payments are deferred until specific performance
criteria are achieved. Refundable development payments are
generally not refundable once specific performance criteria are
achieved and accepted.
Collaborative license and development agreements that require
the Company to provide multiple deliverables, such as a license,
research and product steering committee services and other
performance obligations, are accounted for in accordance with
ASC 605-25.
Under
ASC 605-25,
delivered items are evaluated to determine whether such items
have value to the Companys collaborators on a stand-alone
basis and whether objective reliable evidence of fair value of
the undelivered items exists. Deliverables that meet these
criteria are considered a separate unit of accounting.
Deliverables that do not meet these criteria are combined and
accounted for as a single unit of accounting. The appropriate
revenue recognition criteria are identified and applied to each
separate unit of accounting.
The Company determined that the Lung Rx collaboration agreement,
since it was comprised of multiple deliverables without
standalone value, should be treated as a single unit of
accounting.
Research
and Development
Research and development expenses consist of costs incurred for
company-sponsored, collaborative and contracted research and
development activities. These costs include direct and
research-related overhead expenses. The Company expenses
research and development costs as incurred.
Stock-Based
Compensation
The Company accounts for share-based payment arrangements in
accordance with ASC 718, Compensation-Stock Compensation
and
ASC 505-50,
Equity-Equity Based Payments to Non-Employees which requires
the recognition of compensation expense, using a fair-value
based method, for all costs related to share-based payments
including stock options and restricted stock awards and stock
issued under the employee stock purchase plan. These standards
require companies to estimate the fair value of share-based
payment awards on the date of the grant using an option-pricing
model. See Note 9 for further discussion of the
Companys stock-based compensation plans.
Other
Income
The Company received notification in October 2010 from the
U.S. Internal Revenue Service (IRS) that it was approved to
receive three grants in the amount of $244,479 each for
qualified investments in three qualifying therapeutic discovery
projects. In July 2010, the Company applied for grants for three
projects under the Qualifying Therapeutic Discovery Project. The
three projects were: 1) ARD-3150 Liposomal Ciprofloxacin
for the Treatment of Non-CF Bronchiectasis, 2) ARD-3100
Liposomal Ciprofloxacin for the Treatment of Non-CF
Bronchiectasis and 3) ARD-3100 Liposomal Ciprofloxacin for
the Treatment of Cystic Fibrosis. After a determination by
U.S. Department of Health and Human Services (HHS) that all
three projects met the definition of a qualifying
therapeutic discovery project, the IRS certified the
qualifying investment and approved the award amount of $244,479
per project, for a total of $733,438 in awards to the Company.
The qualified investments represent 2009 research and
development expenses; there are no future performance
obligations related to these grants.
Income
Taxes
The Company makes certain estimates and judgments in determining
income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of certain tax
assets and liabilities, which arise from differences in the
timing of the recognition of revenue and expense for tax and
financial statement purposes. As part of the process of
preparing the financial statements, the Company is required to
estimate its income taxes in each of the jurisdictions in which
it operates. This process involves the estimation of the current
tax exposure under the most recent tax laws and assessing
temporary differences resulting from differing treatment of
51
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
items for tax and accounting purposes. These differences result
in deferred tax assets and liabilities which are included in the
Companys balance sheets.
The Company assesses the likelihood that they will be able to
recover their deferred tax assets. The Company considers all
available evidence, both positive and negative, including its
historical levels of income and losses, expectations and risks
associated with estimates of future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the
need for a valuation allowance. If the Company does not consider
it more likely than not that they will recover their deferred
tax assets, they will record a valuation allowance against the
deferred tax assets that they estimate will not ultimately be
recoverable. At December 31, 2010 and 2009, the Company
believed that the amount of their deferred income taxes would
not be ultimately recovered. Accordingly, the Company recorded a
full valuation allowance for deferred tax assets. However,
should there be a change in the Companys ability to
recover its deferred tax assets, they would recognize a benefit
to their tax provision in the period in which they determine
that it is more likely than not that they will recover their
deferred tax assets.
Net
Loss Per Common Share
Basic net loss per common share is computed using the
weighted-average number of shares of common stock outstanding
less the weighted-average number of shares subject to
repurchase. Unvested restricted stock awards subject to
repurchase totaled 2,448,000 shares and
2,668,000 shares for the years ended December 31, 2010
and 2009, respectively. Potentially dilutive securities were not
included in the net loss per share calculation for the years
ended December 31, 2010 and 2009 because the inclusion of
such shares would have had an anti-dilutive effect.
Potentially dilutive securities include the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
Outstanding stock options
|
|
|
6,355
|
|
|
|
5,088
|
|
Unvested restricted stock awards
|
|
|
2,448
|
|
|
|
2,668
|
|
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 and corporate notes 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 accompanying balance
sheets.
Comprehensive
Income (Loss)
ASC 220, Comprehensive Income requires that an
entitys change in equity or net assets during a period
from transactions and other events from non-owner sources be
reported. The Company reports unrealized gains or losses on its
available-for-sale
securities as other comprehensive income (loss). Total
comprehensive income (loss) has been disclosed on the statement
of shareholders equity (deficit).
Recently
Issued Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU)
2010-17,
Milestone Method of Revenue Recognition a consensus of the
FASB Emerging Issues Task Force. This standard provides
guidance on defining a milestone and determining when it may be
appropriate to apply the milestone method for revenue
recognition for research and development arrangements. This
standard provides guidance on the criteria that should be met to
recognize revenue upon achievement of the related milestone
event. The ASU is effective for fiscal years (and interim
periods within those fiscal years) beginning on or after
June 15,
52
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
2010. The Company adopted this guidance in the third quarter of
2010. While the Company does not expect the adoption of this
standard to have a material impact on the Companys
financial position and results of operations, this standard may
impact the Company in the event the Company completes future
transactions.
In September 2009, the FASB issued Accounting Standards Update
(ASU)
No. 2009-13
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements (formerly EITF Issue
No. 08-1
Revenue Arrangements with Multiple Deliverables).
This standard modifies the revenue recognition guidance for
arrangements that involve the delivery of multiple elements,
such as product, license fees and research and development
reimbursements, to a customer at different times as part of a
single revenue generating transaction. This standard provides
principles and application guidance to determine whether
multiple deliverables exist, how the individual deliverables
should be separated and how to allocate the revenue in the
arrangement among those separate deliverables. The standard also
significantly expands the disclosure requirements for multiple
deliverable revenue arrangements. While the Company does not
expect the adoption of this standard to have a material impact
on the Companys financial position and results of
operations, this standard may impact the Company in the event
the Company completes future transactions.
|
|
2.
|
Cash and
Cash Equivalents and Short-term Investments
|
A summary of cash and cash equivalents and short-term
investments, classified as
available-for-sale
and carried at fair value is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Fair Value
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,295
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
251
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,903
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
500
|
|
Certificates of deposit
|
|
|
3,183
|
|
|
|
2
|
|
|
|
|
|
|
|
3,185
|
|
U.S. Treasury and agencies
|
|
|
1,543
|
|
|
|
|
|
|
|
|
|
|
|
1,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,226
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
5,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All short-term investments at December 31, 2010 and 2009
mature in less than one year. Unrealized holding gains and
losses on securities classified as
available-for-sale
are recorded in accumulated other comprehensive income. As of
December 31, 2010 and 2009 the difference between the fair
value and amortized cost of
available-for-sale
securities were gains of zero and $2,000, respectively.
|
|
3.
|
Fair
Value Measurements
|
Effective January 1, 2008, the Company adopted
SFAS 157, Fair Value Measurements. (now referred to
as ASC 820) which clarifies the definition of fair
value, prescribes methods for measuring fair value, establishes
a fair value hierarchy based on the inputs used to measure fair
value and expands disclosures about the use of fair value
measurements. The fair value hierarchy has three levels based on
the reliability of the inputs used to determine fair value.
Level 1 values are based on quoted prices in active
markets. Level 2 values are based on significant other
53
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
observable inputs. Level 3 values are based on significant
unobservable inputs. The following table presents the fair value
level for the cash and cash equivalents and short-term
investments which represents the assets that are measured at
fair value on a recurring basis and are categorized using the
fair value hierarchy. The Company does not have any liabilities
that are measured at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
2010
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
5,295
|
|
|
$
|
333
|
|
|
$
|
4,962
|
|
|
$
|
|
|
Short-term investments
|
|
|
251
|
|
|
|
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,546
|
|
|
$
|
333
|
|
|
$
|
5,213
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys cash and cash equivalents at
December 31, 2010 consist of cash, commercial paper,
U.S. Treasury and agency notes and money market funds.
Money market funds are valued using quoted market prices. The
Companys short-term investments at December 31, 2010
consist of U.S. Treasury notes. The Company uses an
independent third party pricing service to value these
securities. The pricing service uses observable inputs such as
new issue money market rates, adjustment spreads, corporate
actions and other factors and applies a series of matrices
pricing model. The Company performs a review of prices reported
by the pricing service to determine if they are reasonable
estimates of fair value. In addition, the Company performs a
review of its securities to determine the proper classification
in accordance with the fair value hierarchy.
|
|
4.
|
Property
and Equipment
|
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Machinery and equipment
|
|
$
|
4,410
|
|
|
$
|
4,510
|
|
Furniture and fixtures
|
|
|
1,138
|
|
|
|
1,138
|
|
Lab equipment
|
|
|
2,150
|
|
|
|
2,488
|
|
Computer equipment and software
|
|
|
2,630
|
|
|
|
2,630
|
|
Leasehold improvements
|
|
|
1,839
|
|
|
|
1,861
|
|
|
|
|
|
|
|
|
|
|
Property and equipment at cost
|
|
|
12,167
|
|
|
|
12,627
|
|
Less accumulated depreciation and amortization
|
|
|
(10,614
|
)
|
|
|
(10,461
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,553
|
|
|
$
|
2,166
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $606,000 and $1,067,000 for the years
ended December 31, 2010 and 2009, respectively.
|
|
5.
|
Sublease
Agreement and Lease Exit Liability:
|
On July 18, 2007, the Company entered into a sublease
agreement with Mendel to lease approximately 48,000 square
feet of the Companys 72,000 square foot headquarters
facility located in Hayward, California. In April 2009, the
Company entered into an amendment to its sublease agreement with
Mendel to sublease to Mendel an additional 1,550 square
feet. The Company recorded an additional sublease loss on the
amendment since the monthly payments the Company expects to
receive are less than the Company will owe the lessor for the
subleased space.
During the year ended December 31, 2007, the Company
recorded a $2.1 million lease exit liability and related
expense for the expected loss on the sublease, in accordance
with ASC 420 Exit or Disposal Cost Obligations,
54
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
because the monthly payments the Company expects to receive
under the sublease are less than the amounts that the Company
will owe the lessor for the sublease space. The fair value of
the lease exit liability was determined using a credit-adjusted
risk-free rate to discount the estimated future net cash flows,
consisting of the minimum lease payments to the lessor for the
sublease space and payments the Company will receive under the
sublease. The sublease loss and ongoing accretion expense
required to record the lease exit liability at its fair value
using the interest method have been recorded as part of
restructuring and asset impairment expense in the statement of
operations. The lease exit liability activity for the years
ended December 31, 2010 and 2009 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance at beginning of year
|
|
$
|
1,091
|
|
|
$
|
1,374
|
|
Loss on sublease amendment to Mendel
|
|
|
|
|
|
|
42
|
|
Accretion expense
|
|
|
48
|
|
|
|
61
|
|
Lease payments
|
|
|
(311
|
)
|
|
|
(386
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
828
|
|
|
$
|
1,091
|
|
|
|
|
|
|
|
|
|
|
The Company classified $99,000 of the $828,000 lease exit
liability in current liabilities and the remaining $729,000 in
non-current liabilities in the accompanying balance sheet at
December 31, 2010. At December 31, 2009, the Company
classified $263,000 of the lease exit liability in current
liabilities and $828,000 in non-current liabilities.
Other liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued expense for services
|
|
$
|
413
|
|
|
$
|
302
|
|
Payroll withholding liabilities
|
|
|
37
|
|
|
|
47
|
|
Other short term obligations
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total other accrued liabilities
|
|
$
|
450
|
|
|
$
|
357
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
75
|
|
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
Total other non-current liabilities
|
|
$
|
75
|
|
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
In July 2010, the Company entered into an agreement with the
landlord to defer a portion of its monthly rent payments each
month over a one year period. The repayment period will be over
12 months beginning in September 2011. Deferred amounts
will accrue interest charges at an interest rate of
10 percent per annum. As of December 31, 2010 the
deferred landlord rent and interest that was included in accrued
expense for services was $235,000.
|
|
7.
|
Notes
Payable and Accrued Interest and Debt Extinguishment
|
On September 15, 2010, the Company closed the issuance to
Novo Nordisk A/S of 26,000,000 shares of common stock under
a stock purchase agreement, dated as of July 30, 2010, by
and among Aradigm and Novo Nordisk A/S (the Novo Nordisk
Stock Purchase Agreement), in consideration for the
termination of all of the Companys obligations under a
promissory note and security agreement dated July 3, 2006
in favor of Novo Nordisk
55
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
A/S. The closing occurred after the Company held a special
meeting of shareholders on September 14, 2010 and obtained
the requisite shareholder approval on a proposal to amend its
amended and restated articles of incorporation to increase the
total number of authorized shares of its common stock to cover
the 26,000,000 shares issuable under the Novo Nordisk Stock
Purchase Agreement. An amended and restated stock purchase
agreement, dated as of January 26, 2005, previously entered
into by the Company, Novo Nordisk A/S and Novo Nordisk
Pharmaceuticals, Inc. in connection with the January 2005
restructuring transaction with Novo Nordisk was also terminated
at the closing. The July 3, 2006 promissory note and
security agreement had evidenced, among other things, a loan
that had been previously made by Novo Nordisk A/S to the Company
in the principal amount of $7.5 million, which bore
interest accruing at 5% per annum and the principal, along with
the accrued interest, had been payable in three equal payments
of approximately $3.5 million on July 2, 2012,
July 1, 2013 and June 30, 2014.
The Company valued the common stock issued at $4.7 million
using the closing price on the day preceding the day of issuance
of the shares following the special meeting of shareholders and
recorded the difference between the value of the common stock
issued and the carrying value of the note and accrued interest
as a Gain from debt extinguishment of
$4.5 million in the condensed statement of operations. The
Gain from debt extinguishment on the consolidated
statement of operations was reduced by direct legal costs
incurred of $91,000. The impact on earnings per share was a net
gain of $0.03 as of December 31, 2010.
|
|
8.
|
Leases,
Commitments and Contingencies
|
The Company has a lease for a building containing office and
laboratory and manufacturing facilities, which expires in 2016.
A portion of this lease obligation was offset by a sublease to
Mendel Biotechnology, Inc. (Mendel). Future minimum
non-cancelable lease payments at December 31, 2010 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Mendel
|
|
|
Net Operating
|
|
|
|
Leases
|
|
|
Sub-Lease
|
|
|
Lease Payments
|
|
|
Year ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
1,639
|
|
|
|
(986
|
)
|
|
|
653
|
|
2012
|
|
|
1,704
|
|
|
|
(896
|
)
|
|
|
808
|
|
2013
|
|
|
1,774
|
|
|
|
|
|
|
|
1,774
|
|
2014
|
|
|
1,844
|
|
|
|
|
|
|
|
1,844
|
|
2015
|
|
|
1,918
|
|
|
|
|
|
|
|
1,918
|
|
2016
|
|
|
1,020
|
|
|
|
|
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
9,899
|
|
|
$
|
(1,882
|
)
|
|
$
|
8,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In July 2007, the Company entered into a sublease agreement with
Mendel to lease approximately 48,000 square feet of its
72,000 square foot headquarters located in Hayward,
California. In April 2009, the Company entered into an amendment
to its sublease agreement with Mendel to sublease an additional
1,550 square feet.
The sublease commenced in July 2007 and expires concurrently
with the master lease in July 2016. Under the sublease and
amendment, Mendel will make monthly base rent payments totaling
$1.7 million (exclusive of the termination fee) through
August 2012 that will offset a portion of the Companys
existing building lease obligation. Mendel has the option for
early termination of the sublease on September 1, 2012 for
a termination fee of $225,000. If the option to terminate the
sublease is not exercised by Mendel, the Company will receive a
total of $4.2 million of additional monthly base rent
payments through the expiration of the sublease in 2016. Mendel
will also pay the Company for its share of all pass through
costs such as taxes, operating expenses and utilities based on
the percentage of the facility space occupied by them.
The Companys monthly rent payments fluctuates under the
master lease. In accordance with U.S. generally accepted
accounting principles, the Company recognizes rent expense on a
straight-line basis. The Company
56
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
records deferred rent for the difference between the amounts
paid and recorded as expense. At December 31, 2010 and
2009, the Company had $99,000 and $136,000 of deferred rent,
respectively.
For the years ended December 31, 2010 and 2009, building
rent expense under operating leases totaled $661,000 and
$609,000 respectively.
Indemnification
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 at December 31, 2010 or 2009.
Legal
Matters
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.
On June 21, 2010, the Company closed the June 2010 Private
Placement, in which the Company sold 34,702,512 shares of
common stock and warrants to purchase an aggregate of
7,527,214 shares of common stock to accredited investors
(which included several existing significant investors) under
the terms of a securities purchase agreement that was entered
into with the investors on June 18, 2010. At the closing of
the June 2010 Private Placement, the Company received
approximately $4.1 million in aggregate gross proceeds from
the sale of the common stock and the warrants. After deducting
for fees and expenses, the aggregate net proceeds from the sale
of the common stock and the warrants were approximately
$3.7 million. After the Company held a special meeting of
shareholders on September 14, 2010 and obtained the
requisite shareholder approval on a proposal to amend the
Companys amended and restated articles of incorporation to
increase the total number of authorized shares of common stock
to cover the shares issuable upon exercise of the warrants, the
warrants were exercised and the Company received approximately
$0.9 million in additional aggregate net proceeds from the
exercise of the warrants. The shares were registered for resale
on
Form S-1
(no. 333-168770).
The registration statement was declared effective by the SEC on
November 9, 2010.
On February 26, 2009, the Company closed a registered
direct offering covering the sale of an aggregate of
44.7 million shares under a shelf registration statement on
Form S-3
(no. 333-148623)
that was previously filed by the Company on December 21,
2007 and declared effective by the SEC on January 25, 2008.
The Company received net proceeds, after offering expenses, of
$3.9 million.
Reserved
Shares
At December 31, 2010 the Company had 6,354,758 shares
reserved for issuance upon exercise of options under all stock
option plans and 1,959,278 shares of common stock reserved
for issuance of new option grants. The Company had
2,570,010 shares available for future issuances under the
ESPP.
57
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Shareholder
Rights Plan
In September 2008, the Company adopted an amended and restated
shareholder rights plan, which replaced the rights plan
originally adopted in August 1998. Pursuant to the rights plan,
as amended and restated, the Company distributes rights to
purchase shares of Series A Junior Participating Preferred
Stock as a dividend at the rate of one right for each share of
common stock outstanding. Until the rights are distributed, the
rights trade with, and are not separable from, the
Companys common stock and are not exercisable. The rights
are designed to guard against partial tender offers and other
abusive and coercive tactics that might be used in an attempt to
gain control of the Company or to deprive the Companys
shareholders of their interest in the Companys long-term
value. The shareholder rights plan seeks to achieve these goals
by encouraging a potential acquirer to negotiate with the
Companys Board of Directors. The rights will expire at the
close of business on September 8, 2018.
Stock
Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive
Plan and 1996 Non-Employee Directors Plan
The 1996 Equity Incentive Plan (the 1996 Plan) and
the 2005 Equity Incentive Plan (the 2005 Plan),
which amended, restated and retitled the 1996 Plan, were adopted
to provide a means by which officers, non-employee directors,
scientific advisory board members and employees of and
consultants to the Company and its affiliates could be given an
opportunity to acquire an equity interest in the Company. All
officers, non-employee directors, scientific advisory board
members and employees of and consultants to the Company are
eligible to participate in the 2005 Plan.
In April 1996, the Companys Board of Directors adopted and
the Companys shareholders approved the 1996 Plan, which
amended and restated an earlier stock option plan. The 1996 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 2,000,000 shares. 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 shares of 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. As of
December 31, 2010, the Company had 279,866 options
outstanding and 35,417 shares were available for future
grants under the 1996 Plan.
In March 2005, the Companys Board of Directors adopted and
in May 2005 the Companys shareholders approved 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. Pursuant to the 2005 Plan, the Company had
2,918,638 shares of common stock authorized for issuance.
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
919,386 shares became available for future grant under the
2005 Plan. In March 2006, the Companys Board of Directors
amended, and in May 2006 the Companys shareholders
approved, the amendment to the 2005 Plan, increasing the shares
of common stock authorized for issuance by 2,000,000. In April
2007, the Companys Board of Directors amended, and in June
2007, the Companys shareholders approved the amendment to
the 2005 Plan, increasing the shares of common stock authorized
for issuance by 1,600,000 shares. In March 2008, the
Companys Board of Directors amended, and in May 2008 the
Company shareholders approved, the amendment to the 2005
Plan, increasing the shares of common stock authorized by
2,700,000. In March 2010, the Companys Board of Directors
amended, and in May 2010 the Company shareholders approved
the amendment to the 2005 Plan, increasing the shares of common
stock authorized by 4,000,000. Shares available for future
grants totaled 1,923,861 as of December 31, 2010 for the
2005 Plan.
58
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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
Companys 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.
Options granted under the 2005 Plan may be immediately
exercisable 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, 2010 and
2009, 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 subject to repurchase 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. The Company granted options to
purchase 1,990,000 shares and 2,078,000 shares during
the years ended December 31, 2010 and 2009, respectively,
under the 2005 Plan, which included option grants to the
Companys non-employee directors in the amount of
450,000 shares and 600,000 shares during 2010 and
2009, respectively. The 2005 Plan had 6,074,892 option shares
outstanding as of December 31, 2010.
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 had no effect on the options already
outstanding. There were 9,736 and 3,407 shares cancelled
due to option expirations for the years ended December 31,
2010 and 2009, respectively. As of December 31, 2010, there
were no outstanding options in this plan and there were no
additional shares available for grant.
59
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
The following is a summary of activity under the 1996 Plan, the
2005 Plan and the Directors Plan as of December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares Available
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
for Grant of
|
|
|
Number of
|
|
|
|
|
|
Exercise
|
|
|
|
Option or Award
|
|
|
Shares
|
|
|
Price per Share
|
|
|
Price
|
|
|
Balance at December 31, 2008
|
|
|
3,987,599
|
|
|
|
4,185,061
|
|
|
$
|
0.39
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
4.14
|
|
Options authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,078,000
|
)
|
|
|
2,078,000
|
|
|
$
|
0.15
|
|
|
|
|
|
|
$
|
0.25
|
|
|
$
|
0.22
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Restricted stock awards granted
|
|
|
(2,418,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
1,174,618
|
|
|
|
(1,174,618
|
)
|
|
$
|
0.17
|
|
|
|
|
|
|
$
|
112.50
|
|
|
$
|
4.34
|
|
Restricted share awards cancelled
|
|
|
100,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan shares cancelled and not reauthorized
|
|
|
(3,407
|
)
|
|
|
|
|
|
$
|
41.25
|
|
|
|
|
|
|
$
|
42.19
|
|
|
$
|
41.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
763,185
|
|
|
|
5,088,443
|
|
|
$
|
0.15
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
2.49
|
|
Shares added
|
|
|
4,000,000
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Options granted
|
|
|
(1,990,000
|
)
|
|
|
1,990,000
|
|
|
$
|
0.12
|
|
|
|
|
|
|
$
|
0.18
|
|
|
$
|
0.17
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards granted
|
|
|
(2,157,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
723,685
|
|
|
|
(723,685
|
)
|
|
$
|
0.25
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
6.43
|
|
Restricted share awards cancelled
|
|
|
630,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan shares cancelled and not reauthorized
|
|
|
(9,736
|
)
|
|
|
|
|
|
$
|
107.81
|
|
|
|
|
|
|
$
|
120.63
|
|
|
$
|
113.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
1,959,278
|
|
|
|
6,354,758
|
|
|
$
|
0.12
|
|
|
|
|
|
|
$
|
64.69
|
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding and exercisable as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Exercise Price Range
|
|
Shares
|
|
|
Life (In Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$0.12 $0.15
|
|
|
456,000
|
|
|
|
9.42
|
|
|
$
|
0.13
|
|
|
|
151,500
|
|
|
$
|
0.12
|
|
$0.16 $0.23
|
|
|
2,194,000
|
|
|
|
9.31
|
|
|
|
0.18
|
|
|
|
826,250
|
|
|
|
0.17
|
|
$0.24 $0.39
|
|
|
1,083,031
|
|
|
|
7.98
|
|
|
|
0.28
|
|
|
|
514,059
|
|
|
|
0.28
|
|
$0.40 $0.87
|
|
|
90,000
|
|
|
|
7.42
|
|
|
|
0.81
|
|
|
|
83,437
|
|
|
|
0.83
|
|
$0.88 $1.41
|
|
|
497,861
|
|
|
|
6.27
|
|
|
|
1.31
|
|
|
|
462,919
|
|
|
|
1.30
|
|
$1.42 $1.87
|
|
|
1,672,000
|
|
|
|
6.03
|
|
|
|
1.72
|
|
|
|
1,521,812
|
|
|
|
1.74
|
|
$1.88 $4.75
|
|
|
93,300
|
|
|
|
4.29
|
|
|
|
3.99
|
|
|
|
93,300
|
|
|
|
3.99
|
|
$4.76 $9.45
|
|
|
137,700
|
|
|
|
3.59
|
|
|
|
6.06
|
|
|
|
137,700
|
|
|
|
6.06
|
|
$9.46 $34.00
|
|
|
130,026
|
|
|
|
1.37
|
|
|
|
21.17
|
|
|
|
130,026
|
|
|
|
21.17
|
|
$34.01 $64.69
|
|
|
840
|
|
|
|
0.10
|
|
|
|
63.93
|
|
|
|
840
|
|
|
|
63.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,354,758
|
|
|
|
7.60
|
|
|
$
|
1.32
|
|
|
|
3,921,843
|
|
|
$
|
1.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value is the sum of the amounts by which the
quoted market price of the Companys stock exceeded the
exercise price of the stock options at December 31, 2010
and 2009 for those stock options for which
60
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
the quoted market price was in excess of the exercise price
(in-the-money
options). As of December 31, 2010 and 2009, the
aggregate intrinsic value of options outstanding was $26,000 and
zero, respectively. As of December 31, 2010, options to
purchase 3,921,843 shares of common stock were exercisable
and had an aggregate intrinsic value of $14,000. No stock
options were exercised in 2010 or 2009.
A summary of the activity of the Companys unvested
restricted stock and performance bonus stock award activities
for the years ending December 31, 2010 and 2009 is
presented below. The ending balances represent the maximum
number of shares that could be earned or vested under the 2005
Plan:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Grant Date Fair Value
|
|
|
Balance at December 31, 2008
|
|
|
703,535
|
|
|
$
|
1.60
|
|
Restricted stock awards granted
|
|
|
2,418,250
|
|
|
|
0.16
|
|
Restricted share awards vested
|
|
|
(353,154
|
)
|
|
|
0.90
|
|
Restricted share awards cancelled
|
|
|
(100,625
|
)
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
2,668,006
|
|
|
|
0.41
|
|
Restricted stock awards granted
|
|
|
1,824,523
|
|
|
|
0.16
|
|
Restricted share awards vested
|
|
|
(1,414,256
|
)
|
|
|
0.19
|
|
Restricted share awards cancelled
|
|
|
(630,000
|
)
|
|
|
0.13
|
|
Balance at December 31, 2010
|
|
|
2,448,273
|
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
For restricted stock awards, the Company recognizes compensation
expense over the vesting period for the fair value of the stock
award on the measurement date. The Companys 2010
restricted stock awards granted included 100,000 shares
with vesting provisions based solely on the achievement of
performance-based milestones. The Companys 2009 restricted
stock awards granted included 600,000 shares with vesting
provisions based solely on the achievement of performance-based
milestones. One of the restricted performance-based milestone
awards from 2009 for 200,000 shares was achieved in 2010
and the rest were cancelled as the performance-based criteria
were not met. The Company records expense for these awards if
achievement of the award is probable. Expense is recorded over
the estimated service period until the performance-based
milestone is achieved.
The total fair value of restricted stock awards that did vest
during the years ended December 31, 2010 and 2009 was
$169,000 and $66,000, respectively. The Company retained
purchase rights to 2,448,000 and 2,668,000 shares of
unvested restricted stock awards issued pursuant to stock
purchase agreements at no cost per share as of December 31,
2010 and 2009, respectively. Total employee stock-based
compensation expense for restricted stock awards was $405,000
and $346,000 for the years ended December 31, 2010 and
2009, respectively.
During the year ended December 31, 2010, the Company issued
333,333 shares of restricted stock units with no exercise
price to non-employee members of its Board of Directors. The
units will vest on the earlier of either a change in control of
the Company or upon the grantees termination of service as
a Board member, In 2010, the non-employee members of the Board
of Directors elected to forego all or a portion of their cash
compensation in lieu of the aforementioned restricted stock unit
grants and restricted stock awards.
Employee
Stock Purchase Plan
Employees generally are eligible to participate in the Employee
Stock Purchase Plan (ESPP) 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
shareholder. Shares may be purchased under the ESPP 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 15% of earnings
or $25,000.
61
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
As of December 31, 2010, a total of 1,979,990 shares
had been issued under the ESPP. In April 2008, the
Companys Board of Directors amended, and in May 2008 the
Companys shareholder approved, the amendment to the ESPP
increasing the shares of common stock authorized by 1,000,000.
In April 2009, the Companys Board of Directors amended,
and in May 2009 the Companys shareholders approved, the
amendment to the ESPP increasing the number of shares of common
stock authorized by 2,500,000. As of December 31, 2010,
there was a balance of 2,570,010 available authorized shares.
Compensation expense was $63,000 and $55,000 for the years ended
December 31, 2010 and 2009, respectively. The fair value of
employee stock purchase rights under the ESPP is determined
using the Black-Scholes option pricing model and the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Volatility factor
|
|
|
136.0
|
%
|
|
|
115.4
|
%
|
Risk-free interest rate
|
|
|
1.0
|
%
|
|
|
0.9
|
%
|
Expected life (years)
|
|
|
2.00
|
|
|
|
2.00
|
|
Weighted-average fair value of purchase rights granted during
the period
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
Stock-Based
Compensation Expense
The Company adopted the fair value recognition provisions of
SFAS No. 123(R), Share-based Payment, (now
referred to as ASC 718) effective January 1,
2006. Stock-based compensation expense is based on the fair
value of that portion of stock options and restricted stock
awards that are ultimately expected to vest during the period.
Stock-based compensation expense recognized in the statement of
operations during 2010 and 2009 included compensation expense
for stock-based awards granted prior to, but not yet vested, as
of December 31, 2005, based on the grant date fair value
estimated in accordance with the pro forma provisions of SFAS
123, and share-based payment awards granted subsequent to
December 31, 2005 based on the grant date fair value
estimated in accordance with SFAS 123(R). For stock options
granted after January 1, 2006, the fair value of each award
is amortized using the straight-line single-option method. For
share awards granted prior to 2006, the fair value of each award
was amortized using the accelerated multiple-option valuation
method prescribed by SFAS 123(R). Stock-based compensation
expense is based on awards ultimately expected to vest,
therefore, it has been reduced for estimated forfeitures. The
Companys estimated forfeiture rate is based on historical
experience.
The following table shows stock-based compensation expense
included in the statement of operations for the years ended
December 31, 2010 and 2009, respectively (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
218
|
|
|
$
|
305
|
|
General and administrative
|
|
|
641
|
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense
|
|
$
|
859
|
|
|
$
|
873
|
|
|
|
|
|
|
|
|
|
|
Impact on basic and diluted net loss per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
There was no capitalized stock-based compensation cost as of
December 31, 2010. Since the Company has cumulative net
losses through December 31, 2010, there was no tax benefit
associated with stock-based compensation expense.
The total amount of unrecognized compensation cost related to
non-vested stock options and stock purchases net of forfeitures,
was $361,000 as of December 31, 2010. This amount will be
recognized over a weighted average
62
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
period of 1.50 years. As of December 31, 2010,
$299,000 of total unrecognized compensation costs, net of
forfeitures, related to non-vested awards is expected to be
recognized over a weighted average period of 0.92 years.
Valuation
Assumptions
The fair value of options was estimated at the date of grant
using the Black-Scholes option pricing model. Expected
volatility is based on the historical volatility of the
Companys common stock for similar terms. The expected term
was estimated using a lattice model prior to 2010, and the
simplified method was used in 2010 as allowed in
SAB No. 110, since the Companys recent exercise
and forfeiture history was not representative of the expected
term of options granted during the year. The expected term
represents the estimated period of time that stock options are
expected to be outstanding, which is less than the contractual
term which is generally ten years. The risk-free interest rate
is based on the U.S. Treasury yield. The expected dividend
yield is zero, as the Company does not anticipate paying
dividends in the near future. The weighted average assumptions
for employee and non-employee options are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2010
|
|
2009
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Volatility factor
|
|
|
98.7
|
%
|
|
|
91.6
|
%
|
Risk-free interest rate
|
|
|
1.7
|
%
|
|
|
1.3
|
%
|
Expected term (years)
|
|
|
5.5
|
|
|
|
3.7
|
|
Weighted-average fair value of options granted during the periods
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
Stock-Based
Compensation for Non-Employees
The Company accounts for options issued to non-employees under
ASC 505-50,
Equity Equity Based Payments to Non-Employees,
using the Black-Scholes option-pricing model. The value of
such non-employee options are periodically re-measured over
their vesting terms.
|
|
10.
|
Collaborations
and Royalty Agreements
|
Lung
Rx
On August 30, 2007, the Company signed an Exclusive
License, Development and Commercialization Agreement (the
Lung Rx Agreement) with Lung Rx, Inc., (Lung
Rx), a wholly-owned subsidiary of United Therapeutics
Corporation, pursuant to which the Company granted Lung Rx, upon
the payment of specified amounts, an exclusive license to
develop and commercialize inhaled treprostinil using the
Companys AERx Essence technology for the treatment of
pulmonary arterial hypertension and other potential therapeutic
indications. The Company determined that the Lung Rx
collaboration agreement, since it was comprised of multiple
deliverables without standalone value, should be treated as a
single unit of accounting. The Company has received a total of
$4.9 million in milestone, development and other payments
under this agreement. Up until the quarter ended
September 30, 2009, the Company had not recognized any
revenue under the Lung Rx Agreement due to the existence of
certain undelivered performance obligations.
On June 1, 2009, the Company received a written notice from
United Therapeutics Corporation seeking to terminate the Lung Rx
Agreement on July 1, 2009. During the three months ended
September 30, 2009, the Company engaged Lung Rx in
discussions about continuing or restructuring its collaboration
with Lung Rx. These discussions were not successful and the
Company concluded that the likelihood of further collaboration
with Lung Rx was remote. Therefore, during the three months
ended September 30, 2009, the Company recognized
$4.9 million of revenue relating to the Lung Rx Agreement
that had been previously deferred. In accordance
63
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
with the Companys revenue recognition policy, all amounts
were recognized as revenue in the quarter ended
September 30, 2009 since the Company no longer had any
performance obligations under the Lung Rx Agreement.
Zogenix
In August 2006, the Company sold all of its assets related to
the Intraject needle-free injector technology platform and
products, including 12 United States patents along with foreign
counterparts, to Zogenix, Inc. Zogenix is responsible for
further development and commercialization efforts of Intraject
(now rebranded under the name DosePro). Under the terms of the
asset sale agreement, the Company received a $4.0 million
initial payment from Zogenix and was entitled to a
$4.0 million milestone payment upon initial
U.S. commercialization, as well as royalty payments upon
commercialization of DosePro products. In December 2007, Zogenix
submitted a New Drug Application (NDA) with the
U.S. Food and Drug Administration (FDA) for the
migraine drug sumatriptan using the needle-free injector DosePro
(SUMAVEL DosePro). In March 2008, Zogenix entered
into a license agreement to grant exclusive rights in the
European Union to Desitin Pharmaceuticals, GmbH to develop and
commercialize SUMAVEL DosePro in the European Union. On
July 16, 2009, Zogenix announced that it had received
approval from the FDA for its NDA for SUMAVEL DosePro
needle-free delivery system. On August 3, 2009, Zogenix and
Astellas Pharma US, Inc. announced that they had entered into an
exclusive co-promotion agreement in the U.S. for the
SUMAVEL DosePro needle-free delivery system. Under the announced
terms of the agreement, the companies will collaborate on the
promotion and marketing of SUMAVEL DosePro with Zogenix focusing
their sales activities primarily on the neurology market while
Astellas will focus mostly on primary care physicians. Zogenix
will have responsibility for manufacturing and distribution of
the product.
The Company received from Zogenix a milestone payment of
$4.0 million in the three months ended March 31, 2010
and received recurring royalty payments totaling
$0.4 million during the last half of the year ending
December 31, 2010.
In accordance with U.S. GAAP, the Company reviews for
impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. For
the quarter ended September 30, 2009, the Company concluded
that the termination of the Lung Rx Agreement and the subsequent
suspension of development activities warranted reviewing AERx
technology assets for impairment. The Company determined that
the production equipment used to manufacture the AERx product
constituted an asset group that should be reviewed for
impairment. These assets are presently idle and primarily
consist of customized AERx production equipment that does not
have an active resale market due to the specialized nature of
the assets. The Company determined that the net book value of
these assets exceeded the expected future cash flows.
Accordingly, the Company recorded an impairment charge of
$1.6 million to write down the assets to their estimated
fair value. The Company recorded this charge as a component of
restructuring and asset impairment on its statement of
operations. In addition, the Company recorded $0.3 million
in restructuring and asset impairment expense related to lease
exit activities.
|
|
12.
|
Employee
Benefit Plans
|
The Company provides a 401(k) Plan for all full-time employees.
Employees can contribute on a pretax basis up to the 2010
statutory limit of $16,500 (plus an additional $5,500 for
employees that are 50 years and older). The Company matches
employees contributions on 50% of the first 6% of an
employees contribution. The Companys employer
matching contribution expense was $35,000 and $62,000 in 2010
and 2009, respectively.
64
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
In 2010 and 2009, the Company recorded an income tax benefit of
zero and $15,000, respectively. The income tax benefits were a
result of the refundable research and development credit that
was enacted in 2008. 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 as well as net operating loss and tax
credit carryforwards.
Significant components of the Companys deferred tax assets
and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net operating loss carryforwards
|
|
$
|
9,114
|
|
|
$
|
7,962
|
|
Research and development credits
|
|
|
6,461
|
|
|
|
6,389
|
|
Federal orphan drug credits
|
|
|
3,801
|
|
|
|
3,360
|
|
Debt extinguishment
|
|
|
(1,149
|
)
|
|
|
|
|
Other
|
|
|
1,922
|
|
|
|
1,818
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
20,149
|
|
|
|
19,529
|
|
Valuation allowance
|
|
|
(20,149
|
)
|
|
|
(19,529
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company considers all available evidence, both positive and
negative, including historical levels of taxable income,
expectations and risks associated with estimates of future
taxable income, and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance. At
December 31, 2010 and 2009, based on the Companys
analysis of all available evidence, both positive and negative,
it was considered more likely than not that the Companys
deferred tax assets would not be realized, and as a result, the
Company recorded a valuation allowance for its deferred tax
assets. The valuation allowance increased by $0.6 million
during the year ended December 31, 2010 and increased by
$7.6 million during the year ended December 31, 2009.
In accordance with ASC 718 Compensation-Stock
Compensation, the Company has excluded from deferred tax
assets those tax benefits attributable to employee stock option
exercises.
The difference between the income tax benefit and the amount
computed by applying the federal statutory income tax rate to
loss before income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Income tax benefit at federal statutory rate
|
|
$
|
(1,882
|
)
|
|
$
|
(4,825
|
)
|
Expired net operating losses
|
|
|
65
|
|
|
|
11
|
|
State taxes (net of federal)
|
|
|
(116
|
)
|
|
|
(847
|
)
|
Credits
|
|
|
(2,621
|
)
|
|
|
(2,408
|
)
|
Other
|
|
|
85
|
|
|
|
425
|
|
Reduction in deferred tax assets due to Section 382
limitations
|
|
|
3,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
620
|
|
|
|
7,629
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the Company had federal net
operating loss carryforwards of approximately
$22.5 million, federal research and development tax credit
carryforwards of approximately $0.1 million and federal
orphan drug credit carryforwards of approximately
$3.8 million, which expire in the years 2011 through 2030.
The
65
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
Company also had California net operating loss carryforwards of
approximately $21.5 million, which expire in the years 2011
through 2030, and California research and development tax credit
carryforwards of approximately $9.8 million, which do not
expire. None of the federal and state net operating loss
carryforwards represent stock option deductions arising from
activity under the Companys stock option plan.
The Companys federal and state net operating loss
(NOLs) and tax credit carryforwards are subject to
substantial annual limitations as a result of certain ownership
changes that occurred in 2010 and prior years. Federal net
operating loss (NOL) carryforwards totaling $22.5 million
will be available from 2011 to 2028, subject to the annual
limitations. Federal tax credit carryforwards totaling $2.8
million will be available from 2021 to 2030, subject to the
annual limitations. State operating loss carryforwards totaling
$21.5 million will be available from 2012 to 2030, subject
to the annual limitations. State tax credit carryforwards
totaling $9.8 million will be available commencing in 2031.
The Companys use of its net operating loss and credit
carryforwards may be subject to further annual limitations for
ownership changes occurring after December 31, 2010. The
annual limitations or any future limitations could result in the
expiration of the net operating loss and credit carryforwards
before utilization.
The Company files income tax returns in the U.S. federal
jurisdiction and various state jurisdictions. The Company is
subject to U.S. federal and state income tax examinations
by tax authorities for tax years 1995 through 2009 due to net
operating losses that are being carried forward for tax purposes.
The Company does not have any unrecognized tax benefits, or
interest and penalties accrued on unrecognized tax benefits, at
December 31, 2010, or during the two years then ended. The
Companys policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of
income tax expense.
|
|
14.
|
Quarterly
Results of Operations (unaudited)
|
Following is a summary of the quarterly results of operations
for the years ended December 31, 2010 and 2009 (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
Total revenue
|
|
$
|
4,000
|
|
|
$
|
|
|
|
$
|
239
|
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,837
|
|
|
|
2,736
|
|
|
|
2,403
|
|
|
|
2,234
|
|
General and administrative
|
|
|
1,253
|
|
|
|
1,382
|
|
|
|
895
|
|
|
|
955
|
|
Restructuring and asset impairment
|
|
|
13
|
|
|
|
13
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
4,103
|
|
|
|
4,131
|
|
|
|
3,309
|
|
|
|
3,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(103
|
)
|
|
|
(4,131
|
)
|
|
|
(3,070
|
)
|
|
|
(3,056
|
)
|
Net interest expense
|
|
|
(99
|
)
|
|
|
(105
|
)
|
|
|
(92
|
)
|
|
|
(2
|
)
|
Other income (expense), including extinguishment of debt
|
|
|
(2
|
)
|
|
|
108
|
|
|
|
4,477
|
|
|
|
696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(204
|
)
|
|
|
(4,128
|
)
|
|
|
1,315
|
|
|
|
(2,362
|
)
|
Income tax benefit (provision)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(204
|
)
|
|
$
|
(4,128
|
)
|
|
$
|
1,315
|
|
|
$
|
(2,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net loss per common share
|
|
|
99,872
|
|
|
|
104,891
|
|
|
|
139,167
|
|
|
|
169,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net loss per common share
|
|
|
99,872
|
|
|
|
104,891
|
|
|
|
140,177
|
|
|
|
169,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
Total revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,883
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,726
|
|
|
|
2,927
|
|
|
|
2,426
|
|
|
|
2,327
|
|
General and administrative
|
|
|
1,398
|
|
|
|
1,368
|
|
|
|
1,323
|
|
|
|
941
|
|
Restructuring and asset impairment
|
|
|
17
|
|
|
|
205
|
|
|
|
1,638
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
5,141
|
|
|
|
4,500
|
|
|
|
5,387
|
|
|
|
3,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,141
|
)
|
|
|
(4,500
|
)
|
|
|
(504
|
)
|
|
|
(3,282
|
)
|
Net interest expense
|
|
|
(76
|
)
|
|
|
(91
|
)
|
|
|
(93
|
)
|
|
|
(96
|
)
|
Other income (expense)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
( 5,218
|
)
|
|
|
(4,594
|
)
|
|
|
(596
|
)
|
|
|
(3,379
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,218
|
)
|
|
$
|
(4,594
|
)
|
|
$
|
(596
|
)
|
|
$
|
(3,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
70,704
|
|
|
|
99,298
|
|
|
|
99,347
|
|
|
|
99,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has evaluated subsequent events that have occurred
after December 31, 2010 and determined that there were no
events or transactions occurring during this reporting period
which require recognition or disclosure in the financial
statements.
67
|
|
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 as of the end of the period covered by
this report, our chief executive officer and chief financial
officer have concluded that our disclosure controls and
procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) were effective as of the end of the
period covered by this report to ensure that information that we
are required to disclose in reports that management files or
submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms.
Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives, and our
chief executive officer and chief financial officer have
concluded that these controls and procedures are effective at
the reasonable assurance level. We believe that a
control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, within a company have been detected.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. A
companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
There are inherent limitations in the effectiveness of any
system of internal control, including the possibility of human
error and the circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only
reasonable assurances with respect to financial statement
preparation. Further, because of changes in conditions, the
effectiveness of internal control may vary over time.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2010.
In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission in Internal Control
Integrated Framework. Based on its assessment using the COSO
criteria, management concluded that our internal control over
financial reporting was effective as of December 31, 2010.
As a result of the enactment in our third quarter of the
Dodd-Frank Wall Street reform and Consumer Protection Act,
Exemption for Non-accelerated Filer, and in
accordance with Section 989G of that act, we are not
required to provide an attestation report of our independent
registered public accounting firm regarding internal control
over financial reporting for this fiscal year or thereafter,
until such time as we are no longer eligible for the exemption
set forth therein.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during our most recent fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
68
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item concerning
(i) identification and business experience of the
Companys directors, as well as legal proceedings involving
such directors and any family relationships between directors
and executive officers of the Company, (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 Proxy Statement related to the 2011 Annual
Meeting of Shareholders to be filed by the Company with the SEC
(the 2011 Proxy Statement).
Identification
of Executive Officers
The information required by this Item concerning our executive
officers is set forth in Part I of this Annual Report on
Form 10-K.
Section 16(a)
Beneficial Ownership Reporting 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 2011 Proxy Statement.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is incorporated by
reference from the section captioned Compensation
contained in the 2011 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 2011 Proxy
Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
The information required by this Item is incorporated by
reference from the section captioned Certain
Transactions contained in the 2011 Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item is incorporated by
reference from the section captioned Proposal 2:
Ratification of Selection of Independent Registered Public
Accounting Firm contained in the 2011 Proxy Statement.
69
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Financial Statements.
Included in Part II of this Annual Report on
Form 10-K:
|
|
|
|
|
|
|
Page in
|
|
|
Form 10-K
|
|
|
|
|
44
|
|
|
|
|
45
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
48
|
|
|
|
|
49
|
|
(2) Financial Statement Schedules.
All financial statement schedules are omitted because they are
not applicable or not required or because any required
information is included in the financial statements or notes
thereto.
(3) Exhibits.
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of Incorporation of the Company.
|
|
3
|
.2(2)
|
|
Amended and Restated Bylaws of the Company, as amended.
|
|
3
|
.3(3)
|
|
Certificate of Determination of Series A Junior
Participating Preferred Stock.
|
|
3
|
.4(4)
|
|
Amended and Restated Certificate of Determination of Preferences
of Series A Convertible Preferred Stock.
|
|
3
|
.5(3)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.6(3)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
3
|
.7(5)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.8(5)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
3
|
.9(6)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.10(17)
|
|
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, 3.8, 3.9, 3.10 and 3.11.
|
|
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(1)+
|
|
Form of the Companys Incentive Stock Option Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.3(1)+
|
|
Form of the Companys Non-statutory Stock Option Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.4(1)+
|
|
1996 Non-Employee Directors Stock Option Plan.
|
|
10
|
.5(1)+
|
|
Form of the Companys Non-statutory Stock Option Agreement
under the 1996 Non-Employee Directors Stock Option Plan.
|
|
10
|
.6(1)+
|
|
Form of the Companys Employee Stock Purchase Plan Offering
Document.
|
|
10
|
.7(6)+
|
|
Form of the Companys Restricted Stock Bonus Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.8(7)
|
|
Promissory Note and Security Agreement, dated July 3, 2006,
by and between the Company and Novo Nordisk A/S.
|
|
10
|
.9(7)
|
|
Amended and Restated Stock Purchase Agreement, dated as of
January 26, 2005, by and among the Company, Novo Nordisk
A/S and Novo Nordisk Pharmaceuticals, Inc.
|
|
10
|
.10(7)#
|
|
Asset Purchase Agreement, dated as of August 25, 2006, by
and between the Company and Zogenix, Inc.
|
70
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.11(7)+
|
|
Employment Agreement, dated as of August 10, 2006, with
Dr. Igor Gonda.
|
|
10
|
.12(8)
|
|
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(9)#
|
|
Restructuring Agreement, dated as of September 28, 2004, by
and among the Company, Novo Nordisk A/S and Novo Nordisk
Delivery Technologies, Inc.
|
|
10
|
.14(10)
|
|
Securities Purchase Agreement, dated as of December 17,
2004, by and among the Company and the purchasers named therein.
|
|
10
|
.15(11)#
|
|
Second Amended and Restated License Agreement, dated as of
July 3, 2006, by and between the Company and Novo Nordisk
A/S.
|
|
10
|
.16(12)
|
|
Consulting Agreement effective as of July 2, 2007 by and
between the Company and Norman Halleen.
|
|
10
|
.17(13)
|
|
Sublease between the Company and Mendel Biotechnology, Inc.,
dated July 11, 2007, under the Lease Agreement by and
between the Company and Hayward Point Eden I Limited
Partnership, a Delaware limited partnership, as
successor-in-interest
to Britannia Point Eden, LLC, as amended, for 3929 Point Eden
Way, Hayward, California.
|
|
10
|
.18(14)
|
|
Manufacturing Agreement between the Company and Enzon
Pharmaceuticals, Inc. dated August 8, 2007.
|
|
10
|
.19(15)#
|
|
Exclusive License, Development and Commercialization Agreement,
dated as of August 30, 2007, by and between the Company and
Lung Rx, Inc.
|
|
10
|
.20(15)#
|
|
Collaboration Agreement, dated as of August 31, 2007, by
and between the Company and CyDex, Inc.
|
|
10
|
.21(16)+
|
|
2005 Equity Incentive Plan, as amended
|
|
10
|
.22(17)+
|
|
Employee Stock Purchase Plan, as amended.
|
|
10
|
.23(18)
|
|
Amended and Restated Rights Agreement, dated as of
September 5, 2008 by and between the Company and
ComputerShare Trust Company, N.A.
|
|
10
|
.24(19)
|
|
Separation Agreement between the Company and Dr. Babatunde
Otulana, dated as of December 12, 2008.
|
|
10
|
.25(19)
|
|
Consulting Agreement for Independent Contractors between the
Company and Dr. Babatunde Otulana, effective as of
January 1, 2009.
|
|
10
|
.26(19)
|
|
International Scientific Advisory Agreement between the Company
and Dr. Babatunde Otulana, effective as of January 1,
2009.
|
|
10
|
.27(20)+
|
|
Amended and Restated form of Change of Control Agreement entered
into between the Company and certain of the Companys
senior officers.
|
|
10
|
.28(20)+
|
|
Amended and Restated Executive Officer Severance Benefit Plan.
|
|
10
|
.29(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of
July 30, 2009 by and between Aradigm Corporation and Igor
Gonda.
|
|
10
|
.30(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of
July 30, 2009 by and between Aradigm Corporation and Nancy
Pecota.
|
|
10
|
.31(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of
July 30, 2009 by and between Aradigm Corporation and
Jeffery Grimes.
|
|
10
|
.32(21)
|
|
Security Agreement, dated as of July 30, 2009 by and among
Aradigm Corporation, Igor Gonda, Jeffery Grimes and Nancy Pecota.
|
|
10
|
.33(22)
|
|
Securities Purchase Agreement, dated June 18, 2010, by and
among Aradigm Corporation and investors listed on the Schedule
of Buyers attached thereto.*
|
|
10
|
.34(22)
|
|
Form of Registration Rights Agreement used in connection with
the June 2010 private placement.
|
|
10
|
.35(22)
|
|
Form of Warrant used in connection with the June 2010 private
placement.
|
|
10
|
.36(23)
|
|
Stock Purchase Agreement, dated as of July 30,02010, by and
among Aradigm Corporation and Novo Nordisk A/S.*
|
|
10
|
.37(23)
|
|
Registration Rights Agreement, dated as of July 20, 2010,
by and among Aradigm Corporation and Novo Nordisk A/S.
|
|
10
|
.38(23)
|
|
First Amendment to Securities Purchase Agreement and
Registration Rights Agreement, dated as of July 20, 2010,
by and among Aradigm Corporation and the investors party thereto.
|
|
23
|
.1
|
|
Consent of Odenberg Ullakko Muranishi & Co LLP,
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.
|
71
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
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.
|
|
|
|
+ |
|
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)
filed on April 30, 1996, as amended. |
|
(2) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 1998. |
|
(3) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 29, 2002. |
|
(4) |
|
Incorporated by reference to the Companys
Form S-3
(No. 333-76584)
filed on January 11, 2002, as amended. |
|
(5) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 13, 2004. |
|
(6) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 31, 2006. |
|
(7) |
|
Incorporated by reference to the Companys
Form S-1
(No. 333-138169)
filed on October 24, 2006, as amended. |
|
(8) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 24, 1998, as amended. |
|
(9) |
|
Incorporated by reference to the Companys
Form 8-K
filed on December 23, 2004. |
|
(10) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 2006. |
|
(11) |
|
Incorporated by reference to the Companys
Form 8-K
filed on October 13, 2005. |
|
(12) |
|
Incorporated by reference to the Companys
Form 8-K
filed on July 11, 2007. |
|
(13) |
|
Incorporated by reference to the Companys
Form 8-K
filed on July 24, 2007. |
|
(14) |
|
Incorporated by reference to the Companys
Form 8-K
filed on August 14, 2007. |
|
(15) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 14, 2007. |
|
(16) |
|
Incorporated by reference to the Companys definitive proxy
statement filed on April 7, 2008. |
|
(17) |
|
Incorporated by reference to the Companys
Form 8-K
filed on May 21, 2009. |
|
(18) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 12, 2008. |
|
(19) |
|
Incorporated by reference to the Companys
Form 8-K
filed on December 19, 2008. |
|
(20) |
|
Incorporated by reference to the Companys
Form 8-K
filed on January 8, 2009. |
|
(21) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 6, 2009. |
|
(22) |
|
Incorporated by reference to the Companys
Form 8-K
filed on June 21, 2010. |
|
(23) |
|
Incorporated by reference to the Companys
Form 8-K
filed on August 2, 2010. |
|
(24) |
|
Incorporated by reference to the Companys
Form 8-K
filed on September 20, 2010. |
(b) Index to Exhibits.
See Exhibits listed under Item 15(a) (3).
(c) Financial Statement Schedules.
All financial statement schedules are omitted because they are
not applicable or not required or because the required
information is included in the financial statements or notes
thereto.
Aradigm, AERx, AERx Essence and AERx Strip are registered
trademarks of Aradigm Corporation.
* Other names and brands may be claimed as the property of
others.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Hayward, State of California, on the
24th day of March 2011.
ARADIGM CORPORATION
Igor Gonda
President and Chief Executive Officer
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints, jointly and
severally, Igor Gonda and Nancy E. Pecota, 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 Annual 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 or her
name.
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this Annual Report on
Form 10-K
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/ Igor
Gonda
Igor
Gonda
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
March 24, 2011
|
|
|
|
|
|
/s/ Nancy
E. Pecota
Nancy
E. Pecota
|
|
Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
March 24, 2011
|
|
|
|
|
|
/s/ Virgil
D. Thompson
Virgil
D. Thompson
|
|
Chairman of the Board and Director
|
|
March 24, 2011
|
|
|
|
|
|
/s/ Frank
H. Barker
Frank
H. Barker
|
|
Director
|
|
March 24, 2011
|
|
|
|
|
|
/s/ Tamar
D. Howson
Tamar
D. Howson
|
|
Director
|
|
March 24, 2011
|
|
|
|
|
|
/s/ John
M. Siebert
John
M. Siebert
|
|
Director
|
|
March 24, 2011
|
73
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of Incorporation of the Company.
|
|
3
|
.2(2)
|
|
Amended and Restated Bylaws of the Company, as amended.
|
|
3
|
.3(3)
|
|
Certificate of Determination of Series A Junior
Participating Preferred Stock.
|
|
3
|
.4(4)
|
|
Amended and Restated Certificate of Determination of Preferences
of Series A Convertible Preferred Stock.
|
|
3
|
.5(3)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.6(3)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
3
|
.7(5)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.8(5)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
3
|
.9(6)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
3
|
.10(17)
|
|
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, 3.8, 3.9, 3.10 and 3.11.
|
|
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(1)+
|
|
Form of the Companys Incentive Stock Option Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.3(1)+
|
|
Form of the Companys Non-statutory Stock Option Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.4(1)+
|
|
1996 Non-Employee Directors Stock Option Plan.
|
|
10
|
.5(1)+
|
|
Form of the Companys Non-statutory Stock Option Agreement
under the 1996 Non-Employee Directors Stock Option Plan.
|
|
10
|
.6(1)+
|
|
Form of the Companys Employee Stock Purchase Plan Offering
Document.
|
|
10
|
.7(6)+
|
|
Form of the Companys Restricted Stock Bonus Agreement
under the 2005 Equity Incentive Plan.
|
|
10
|
.8(7)
|
|
Promissory Note and Security Agreement, dated July 3, 2006,
by and between the Company and Novo Nordisk AS
|
|
10
|
.9(7)
|
|
Amended and Restated Stock Purchase Agreement, dated as of
January 26, 2005, by and among the Company, Novo Nordisk
A/S and Novo Nordisk Pharmaceuticals, Inc.
|
|
10
|
.10(7)#
|
|
Asset Purchase Agreement, dated as of August 25, 2006, by
and between the Company and Zogenix, Inc.
|
|
10
|
.11(7)+
|
|
Employment Agreement, dated as of August 10, 2006, with
Dr. Igor Gonda.
|
|
10
|
.12(8)
|
|
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(9)#
|
|
Restructuring Agreement, dated as of September 28, 2004, by
and among the Company, Novo Nordisk A/S and Novo Nordisk
Delivery Technologies, Inc.
|
|
10
|
.14(10)
|
|
Securities Purchase Agreement, dated as of December 17,
2004, by and among the Company and the purchasers named therein.
|
|
10
|
.15(11)#
|
|
Second Amended and Restated License Agreement, dated as of
July 3, 2006, by and between the Company and Novo Nordisk
A/S.
|
|
10
|
.16(12)
|
|
Consulting Agreement effective as of July 2, 2007 by and
between the Company and Norman Halleen.
|
|
10
|
.17(13)
|
|
Sublease between the Company and Mendel Biotechnology, Inc.,
dated July 11, 2007, under the Lease Agreement by and
between the Company and Hayward Point Eden I Limited
Partnership, a Delaware limited partnership, as
successor-in-interest
to Britannia Point Eden, LLC, as amended, for 3929 Point Eden
Way, Hayward, California.
|
74
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.18(14)
|
|
Manufacturing Agreement between the Company and Enzon
Pharmaceuticals, Inc. dated August 8, 2007.
|
|
10
|
.19(15)#
|
|
Exclusive License, Development and Commercialization Agreement,
dated as of August 30, 2007, by and between the Company and
Lung Rx, Inc.
|
|
10
|
.20(15)#
|
|
Collaboration Agreement, dated as of August 31, 2007, by
and between the Company and CyDex, Inc.
|
|
10
|
.21 (16)+
|
|
2005 Equity Incentive Plan, as amended
|
|
10
|
.22(17)+
|
|
Employee Stock Purchase Plan, as amended.
|
|
10
|
.23(18)
|
|
Amended and Restated Rights Agreement, dated as of
September 5, 2008 by and between the Company and
ComputerShare Trust Company, N.A.
|
|
10
|
.24(19)
|
|
Separation Agreement between the Company and Dr. Babatunde
Otulana, dated as of December 12, 2008.
|
|
10
|
.25(19)
|
|
Consulting Agreement for Independent Contractors between the
Company and Dr. Babatunde Otulana, effective as of
January 1, 2009.
|
|
10
|
.26(19)
|
|
International Scientific Advisory Agreement between the Company
and Dr. Babatunde Otulana, effective as of January 1,
2009.
|
|
10
|
.27(20)+
|
|
Amended and Restated form of Change of Control Agreement entered
into between the Company and certain of the Companys
senior officers.
|
|
10
|
.28(20)+
|
|
Amended and Restated Executive Officer Severance Benefit Plan.
|
|
10
|
.29(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of
July 30, 2009 by and between Aradigm Corporation and Igor
Gonda.
|
|
10
|
.30(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of
July 30, 2009 by and between Aradigm Corporation and Nancy
Pecota.
|
|
10
|
.31(21)+
|
|
Amended and Restated Change of Control Agreement, dated as of
July 30, 2009 by and between Aradigm Corporation and
Jeffery Grimes.
|
|
10
|
.32(21)
|
|
Security Agreement, dated as of July 30, 2009 by and among
Aradigm Corporation, Igor Gonda, Jeffery Grimes and Nancy Pecota.
|
|
10
|
.33(22)
|
|
Securities Purchase Agreement, dated June 18, 2010, by and
among Aradigm Corporation and investors listed on the Schedule
of Buyers attached thereto.*
|
|
10
|
.34(22)
|
|
Form of Registration Rights Agreement used in connection with
the June 2010 private placement.
|
|
10
|
.35(22)
|
|
Form of Warrant used in connection with the June 2010 private
placement.
|
|
10
|
.36(23)
|
|
Stock Purchase Agreement, dated as of July 30,02010, by and
among Aradigm Corporation and Novo Nordisk A/S.*
|
|
10
|
.37(23)
|
|
Registration Rights Agreement, dated as of July 20, 2010,
by and among Aradigm Corporation and Novo Nordisk A/S.
|
|
10
|
.38(23)
|
|
First Amendment to Securities Purchase Agreement and
Registration Rights Agreement, dated as of July 20, 2010,
by and among Aradigm Corporation and the investors party thereto.
|
|
23
|
.1
|
|
Consent of Odenberg Ullakko Muranishi & Co LLP,
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.
|
|
|
|
+ |
|
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)
filed on April 30, 1996, as amended. |
75
|
|
|
(2) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 1998. |
|
(3) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 29, 2002. |
|
(4) |
|
Incorporated by reference to the Companys
Form S-3
(No. 333-76584)
filed on January 11, 2002, as amended. |
|
(5) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 13, 2004. |
|
(6) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 31, 2006. |
|
(7) |
|
Incorporated by reference to the Companys
Form S-1
(No. 333-138169)
filed on October 24, 2006, as amended. |
|
(8) |
|
Incorporated by reference to the Companys
Form 10-K
filed on March 24, 1998, as amended. |
|
(9) |
|
Incorporated by reference to the Companys
Form 8-K
filed on December 23, 2004. |
|
(10) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on August 14, 2006. |
|
(11) |
|
Incorporated by reference to the Companys
Form 8-K
filed on October 13, 2005. |
|
(12) |
|
Incorporated by reference to the Companys
Form 8-K
filed on July 11, 2007. |
|
(13) |
|
Incorporated by reference to the Companys
Form 8-K
filed on July 24, 2007. |
|
(14) |
|
Incorporated by reference to the Companys
Form 8-K
filed on August 14, 2007. |
|
(15) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 14, 2007. |
|
(16) |
|
Incorporated by reference to the Companys definitive proxy
statement filed on April 7, 2008. |
|
(17) |
|
Incorporated by reference to the Companys
Form 8-K
filed on May 21, 2009. |
|
(18) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 12, 2008. |
|
(19) |
|
Incorporated by reference to the Companys
Form 8-K
filed on December 19, 2008. |
|
(20) |
|
Incorporated by reference to the Companys
Form 8-K
filed on January 8, 2009. |
|
(21) |
|
Incorporated by reference to the Companys
Form 10-Q
filed on November 6, 2009. |
|
(22) |
|
Incorporated by reference to the Companys
Form 8-K
filed on June 21, 2010. |
|
(23) |
|
Incorporated by reference to the Companys
Form 8-K
filed on August 2, 2010. |
|
(24) |
|
Incorporated by reference to the Companys
Form 8-K
filed on September 20, 2010. |
76