e424b3
Filed
Pursuant to Rule 424(b)(3)
Registration
No. 333-176387
PROSPECTUS
Aradigm Corporation
Up to 25,000,000 Shares of
Common Stock
This prospectus relates to the resale of up to
25,000,000 shares of our common stock, no par value per
share, being offered by the selling shareholders identified in
this prospectus, including their respective transferees, donees,
pledgees or other successors in interest. These shares consist
of 25,000,000 outstanding shares of common stock issued in a
private placement that closed on July 7, 2011, which we
refer to in this prospectus as the July 2011 private
placement. We will not receive any of the proceeds from the sale
of common stock by the selling shareholders under this
prospectus. We have agreed to bear the expenses (other than any
underwriting discounts or commissions or agents
commissions) in connection with the registration of the common
stock being offered under this prospectus by the selling
shareholders.
The selling shareholders may sell all or a portion of the shares
of common stock held by them and offered hereby from time to
time directly or through one or more underwriters,
broker-dealers or agents. If the shares of common stock are sold
through underwriters or broker-dealers, the selling shareholders
will be responsible for underwriting discounts or commissions or
agents commissions.
The shares of common stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the
time of the sale, at varying prices determined at the time of
sale or at negotiated prices. See Plan of
Distribution beginning on page 57 of this prospectus.
Our common stock is quoted on the OTC Bulletin Board under
the symbol ARDM. The closing price for our common
stock on August 3, 2011 was $0.19 per share.
Investing in our common stock involves risk. You should
carefully consider the risk factors beginning on page 4 of
this prospectus before making a decision to invest in our common
stock.
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus or
any prospectus supplement. This prospectus is not an offer of
these securities in any jurisdiction where an offer and sale is
not permitted.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this prospectus is September 1, 2011
Table of
Contents
|
|
|
|
|
|
|
Page
|
|
|
|
|
1
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
15
|
|
|
|
|
16
|
|
|
|
|
23
|
|
|
|
|
41
|
|
|
|
|
44
|
|
|
|
|
53
|
|
|
|
|
55
|
|
|
|
|
56
|
|
|
|
|
58
|
|
|
|
|
58
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
|
|
62
|
|
|
|
|
62
|
|
|
|
|
F-1
|
|
PROSPECTUS
SUMMARY
This summary highlights material information about us that is
described more fully elsewhere in this prospectus. It may not
contain all of the information that you find important. You
should carefully read this entire document, including the
Risk Factors section beginning on page 4 of
this prospectus and the financial statements and related notes
to those statements appearing elsewhere in this prospectus
before making a decision to invest in our common stock.
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 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 June 30, 2011, we had an accumulated deficit of
$359.2 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
milestone and royalty payments associated with the sale of
Intraject-related assets to Zogenix, proceeds from the June 2011
royalty financing transaction 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 disease 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 inhaled formulations, ARD-3100
(Lipoquintm)
and ARD-3150
(Pulmaquintm),
of the antibiotic ciprofloxacin that are delivered by inhalation
for the management of infections associated with the severe
respiratory diseases cystic fibrosis (CF) and non-cystic
fibrosis bronchiectasis (BE). The formulations differ in the
proportion of rapidly available and slow release ciprofloxacin.
ARD-3150 uses the slow release liposomal formulation (ARD-3100)
mixed with a small amount of ciprofloxacin dissolved in an
aqueous medium. 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 requested orphan drug
designation from the FDA for ARD-3150 for the management of
bronchiectasis and in June 2011 we were granted orphan drug
designation for ciprofloxacin for inhalation for this
indication. We may seek orphan drug designation for other
eligible product candidates we develop. We have reported the
results of one successful Phase 2b trial with ARD-3100 and 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.
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
1
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.
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 respiratory disease market
as well as other pharmaceutical markets that would benefit from
the efficient, non-invasive inhalation delivery of drugs.
Corporate
Information
We were incorporated in California in 1991. Our principal
executive offices and mailing address is
3929 Point Eden Way, Hayward, California 94545, and
the main telephone number of our principal executive offices is
(510) 265-9000.
Our website address is www.aradigm.com.
THE
OFFERING
This prospectus relates to the resale of up to
25,000,000 shares of our common stock, no par value per
share, being offered by the selling shareholders identified in
this prospectus, including their respective transferees, donees,
pledgees or other successors in interest. These shares consist
of 25,000,000 outstanding shares of common stock issued in the
July 2011 private placement.
|
|
|
Common stock being offered by selling shareholders |
|
25,000,000 shares |
|
Common stock outstanding prior to and after the offering |
|
198,114,301 shares(1) |
|
Use of proceeds |
|
We will not receive any of the proceeds from the sale of common
stock by the selling shareholders under this prospectus. |
|
OTC Bulletin Board Symbol |
|
ARDM |
|
Risk Factors |
|
The shares offered by this prospectus are speculative and
involve a high degree of risk and investors purchasing these
shares should not purchase these shares unless they can afford
the loss of their entire investment. See Risk
Factors beginning on page 4. |
|
|
|
(1) |
|
As of July 30, 2011. Includes the shares of common stock
being offered under this prospectus. |
2
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus 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 prospectus, 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, probably,
potentially, 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 in this prospectus and other reports filed with
the United States Securities and Exchange Commission (the
SEC). Forward-looking statements include our belief
that our cash, cash equivalents and short-term investments as of
June 30, 2011 and the proceeds from the July 2011 private
placement will be sufficient to enable us to fund our operations
through at least the second quarter of 2012, our expectation
that we will incur operating losses for the foreseeable future,
our anticipations regarding revenue, collaboration agreements
and our longer-term strategy and our expectations regarding
clinical trials and orphan drug designations.
These forward-looking statements and our business are subject to
significant risks including, but not limited to, our ability to
obtain additional financing or partnering agreements in order to
fund Phase 3 clinical trials of our inhaled ciprofloxacin
product candidates, our ability to obtain clearance from the FDA
for conducting our inhaled ciprofloxacin Phase 3 clinical
trials, 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
on a large scale, are uneconomical to market, may be precluded
from commercialization by proprietary rights of third parties or
may not gain acceptance from health care professionals and
patients.
Investors are cautioned not to place undue reliance on the
forward-looking statements contained herein, which speak only as
of the date of the filing of this prospectus. 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 prospectus or to reflect the occurrence of
unanticipated events.
3
RISK
FACTORS
In addition to the other information contained in this
prospectus, and risk factors set forth in the 2010 Annual Report
on
Form 10-K
and our other filings with the SEC, the following risk factors
should be considered carefully before you decide whether to buy,
hold or sell our common stock. Our business, financial
condition, results of operations and stock price could be
materially adversely affected by any of these risks. Additional
risks not presently known to us or that we currently deem
immaterial may also impair our business, financial conditions,
results of operations and stock price.
The risk factors included herein include any material changes
to and supersede the risk factors associated with our business
previously disclosed in Part I, Item 1A, Risk
Factors of the 2010 Annual Report on
Form 10-K.
We have marked with a double asterisk (**) those risk factors
that reflect substantive changes from the risk factors included
in the 2010 Annual Report on
Form 10-K.
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 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 believe our cash, cash equivalents and short-term investments
as of June 30, 2011 and the proceeds from the July 2011
private placement will be sufficient to enable us to fund our
operations through at least the second quarter of 2012. We
currently have fewer than 2 million authorized unallocated
common shares available for future equity financings and we may
not be able to use common shares for future equity financings
without shareholder approval. 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. If we are unable to obtain capital on acceptable
terms, we may be required to defer our product development
activities. 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:
|
|
|
|
|
our progress in the application of our delivery and formulation
technologies, which may require further refinement of these
technologies;
|
|
|
|
the number of product development programs we pursue and the
pace of each program;
|
|
|
|
our progress with formulation development;
|
|
|
|
the scope, rate of progress, results and costs of preclinical
testing and clinical trials;
|
|
|
|
the time and costs associated with seeking and maintaining
regulatory approvals;
|
|
|
|
our ability to outsource the manufacture of our product
candidates and the costs of doing so;
|
|
|
|
the time and costs associated with establishing in-house
resources to market and sell certain of our products;
|
4
|
|
|
|
|
our ability to establish collaborative arrangements with others
and the terms of those arrangements;
|
|
|
|
the costs of preparing, filing, prosecuting, maintaining and
enforcing patent claims, and
|
|
|
|
our need to acquire licenses, or other rights for our product
candidates.
|
Since inception, we have financed our operations primarily
through private placements and public offerings of our capital
stock, contract research funding and interest earned on
investments. 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 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
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 June 30,
2011, we have an accumulated deficit of approximately
$359.2 million. We have not had any significant direct
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:
|
|
|
|
|
continue drug product development efforts;
|
|
|
|
conduct preclinical testing and clinical trials;
|
|
|
|
pursue additional applications for our existing delivery
technologies;
|
|
|
|
outsource the commercial-scale production of our
products; and
|
|
|
|
establish a sales and marketing force to commercialize certain
of our proprietary products if these products obtain regulatory
approval.
|
To achieve and sustain profitability, we must, alone or with
others, successfully develop, obtain regulatory approval for,
manufacture, market and sell our products. We expect to incur
substantial expenses in our efforts to develop and commercialize
products and we may never generate sufficient product or
contract research revenues to become profitable or to sustain
profitability.
**Our dependence on future collaborators may delay or
terminate certain of our programs, and any such delay or
termination would harm our business prospects and stock
price.
Our commercialization strategy for certain of our product
candidates depends on our ability to enter into agreements with
collaborators to obtain assistance and funding for the
development and potential commercialization of our product
candidates. Supporting diligence activities conducted by
potential collaborators and negotiating the financial and other
terms of a collaboration agreement are long and complex
processes with uncertain results. Even if we are successful in
entering into one or more collaboration agreements,
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
5
revenues. In addition, we could have disputes with our 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 future
collaborative arrangements may not be successful.
**We
are dependent upon Zogenix and its partners to successfully
market and sell the SUMAVEL DosePro needle-free delivery system
in order to continue 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
wholly-owned subsidiarys ability to repay the term loan
entered into in June 2011. While the term loan is non-recourse
to the assets of Aradigm Corporation, the term loan agreement
contains a minimum royalty covenant. If the minimum royalty
covenant is breached and the subsidiary does not cure the breach
through a cash contribution to pay down the accrued principal
and interest, then the lenders have the right to declare the
agreement in default and obtain the right to all future
royalties and payments due to Aradigm under the Zogenix asset
purchase agreement.
**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 safety testing and clinical trials do not
necessarily predict the results that we will get from subsequent
or more extensive preclinical safety testing and clinical
trials. Pre-clinical safety testing and 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 pre-clinical
studies and 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 both of our Phase 2b
clinical trials (ORBIT-1 and ORBIT-2) with inhaled ciprofloxacin
showed promising initial efficacy and safety results in patients
with non-cystic fibrosis bronchiectasis and our Phase 2a
clinical trials showed promising results in both patients with
cystic fibrosis and non-cystic fibrosis bronchiectasis, there is
no guarantee that 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.
**The
results of animal toxicology (preclinical safety)
studies of our product candidates required for late stage
clinical development and product approval may not be as
favorable as the results from earlier experiments. Adverse
toxicology findings may necessitate additional animal safety
studies, or lead to more extensive requirements for safety
information from human studies. These factors could result in
additional costs and delays or prevent commercialization of our
products.
Although we typically select drugs for development that already
have a substantial amount of safety data associated with them,
and we also conduct a variety of preclinical studies, including
animal inhalation toxicology studies, to support our product
development, longer term safety studies in animals may be
required before late stage clinical trials and product approval.
For example, the regulatory authorities may request that we
conduct two year carcinogenicity studies if they think that
there are grounds to believe that our product could cause
cancer. Longer term animal safety studies may produce toxicity
findings that were not found in the shorter earlier studies,
which
6
could prevent commercialization of our products or could
necessitate the conduct of further animal safety studies,
leading to delays and additional costs. Toxicology findings from
animal studies may also be the reason for more extensive safety
monitoring and longer and larger human clinical trials than we
originally anticipated, further adding to the cost and time
prior to product commercialization.
**If
our future clinical trials are delayed because of delays in
obtaining FDA clearance to initiate the trials, delays in
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, obtaining FDA clearance to initiate the trials
and the timely enrollment of patients. Our ability to initiate
future clinical trials is dependent upon obtaining clearance
from the FDA following their review of extensive preclinical
safety testing data and the results of previous human clinical
trials. 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 future clinical trials because of delays
in obtaining FDA clearance, delays in planned patient enrollment
or other problems may result in increased costs, program delays,
or both, and the loss of potential revenues.
We are
subject to extensive regulation, including the requirement of
approval before any of our product candidates can be marketed.
We may not obtain regulatory approval for our product candidates
on a timely basis, or at all.
We 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
7
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 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 inhaled 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 for the
management of cystic fibrosis and bronchiectasis and to our
ciprofloxacin for inhalation for the management of
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.
8
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 inhaled 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.
**In
order to market certain of our proprietary products, we may
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 may establish our own sales, marketing and distribution
capabilities to market certain 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 may 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 collaboration 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 patients that are cost-effective as compared to the benefits
of alternative therapies. Our ability to demonstrate this
depends on a variety of factors, including:
|
|
|
|
|
the demonstration of efficacy and safety in clinical trials;
|
|
|
|
the existence, prevalence and severity of any side effects;
|
|
|
|
the potential or perceived advantages or disadvantages compared
to alternative treatments;
|
|
|
|
the timing of market entry relative to competitive treatments;
|
|
|
|
the relative cost, convenience, product dependability and ease
of administration;
|
|
|
|
the strength of marketing and distribution support;
|
|
|
|
the sufficiency of coverage and reimbursement of our product
candidates by governmental and other third-party payors; and
|
|
|
|
the product labeling or product insert required by the FDA or
regulatory authorities in other countries.
|
9
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 inhaled 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.
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
10
significant loss to us. In addition, because patent applications
in the United States are currently maintained in secrecy for a
period of time prior to issuance, patent applications in certain
other countries generally are not published until more than
18 months after they are first filed, and publication of
discoveries in scientific or patent literature often lags behind
actual discoveries, we cannot be certain that we were the first
creator of inventions covered by our pending patent applications
or that we were the first to file patent applications on such
inventions.
We are
in a highly competitive market, and our competitors have
developed or may develop alternative therapies for our target
indications, which would limit the revenue potential of any
product we may develop.
We are in competition with pharmaceutical, biotechnology and
drug delivery companies, hospitals, research organizations,
individual scientists and nonprofit organizations engaged in the
development of drugs and therapies for the disease indications
we are targeting. Our competitors may succeed before we can, and
many already have succeeded, in developing competing
technologies for the same disease indications, obtaining FDA
approval for products or gaining acceptance for the same markets
that we are targeting. If we are not first to
market, it may be more difficult for us and our future
collaborators to enter markets as second or subsequent
competitors and become commercially successful. We are aware of
a number of companies that are developing or have developed
therapies to address indications we are targeting, including
major pharmaceutical companies such as Bayer, 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 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
11
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.
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
12
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:
|
|
|
|
|
investor perception of us;
|
|
|
|
our available cash;
|
|
|
|
market conditions relating to our segment of the industry or the
securities markets in general;
|
|
|
|
investor perception of the future royalty stream from Zogenix;
|
|
|
|
sales of our stock by certain large institutional shareholders;
|
|
|
|
research analyst recommendations and our ability to meet or
exceed quarterly performance expectations of analysts or
investors;
|
|
|
|
failure to establish or delays in establishing new collaborative
relationships;
|
|
|
|
fluctuations in our operating results;
|
|
|
|
announcements of technological innovations or new commercial
products by us or our competitors;
|
|
|
|
publicity regarding actual or potential developments relating to
products under development by us or our competitors;
|
|
|
|
developments or disputes concerning patents or proprietary
rights;
|
|
|
|
delays in the development or approval of our product candidates;
|
|
|
|
regulatory developments in both the United States and foreign
countries;
|
|
|
|
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;
|
|
|
|
future sales or expected sales of substantial amounts of common
stock by shareholders;
|
|
|
|
our ability to raise capital; and
|
|
|
|
economic and other external factors.
|
In the past, class action securities litigation has often been
instituted against companies promptly following volatility in
the market price of their securities. Any such litigation
instigated against us would, regardless of its merit, result in
substantial costs and a diversion of managements attention
and resources.
Our
common stock 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
13
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 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 July 5, 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
14
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.
USE OF
PROCEEDS
We will not receive any of the proceeds from the sale of common
stock by the selling shareholders under this prospectus. All
proceeds from the sale of common stock under this prospectus
will be paid directly to the selling shareholders. We have
agreed to bear the expenses (other than any underwriting
discounts or commissions or agents commissions) in
connection with the registration of the common stock being
offered hereby by the selling shareholders.
15
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below 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 prospectus,
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, probably,
potentially, 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 in this prospectus and other reports filed with
the United States Securities and Exchange Commission (the
SEC). Forward-looking statements include our belief
that our cash, cash equivalents and short-term investments as of
June 30, 2011 and the proceeds from the July 2011 private
placement will be sufficient to enable us to fund our operations
through at least the second quarter of 2012, our expectation
that we will incur operating losses for the foreseeable future,
our anticipations regarding revenue, collaboration agreements
and our longer-term strategy and our expectations regarding
clinical trials and orphan drug designations.
These forward-looking statements and our business are subject
to significant risks including, but not limited to, our ability
to obtain additional financing or partnering agreements in order
to fund Phase 3 clinical trials of our inhaled
ciprofloxacin product candidates, our ability to obtain
clearance from the FDA for conducting our inhaled ciprofloxacin
Phase 3 clinical trials, 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 on a large scale, are
uneconomical to market, may be precluded from commercialization
by proprietary rights of third parties or may not gain
acceptance from health care professionals and patients.
Investors are cautioned not to place undue reliance on the
forward-looking statements contained herein, which speak only as
of the date of the filing of this prospectus. 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 prospectus 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 ciprofloxacin formulations 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 June 30, 2011, we had an accumulated deficit of
$359.2 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
milestone and royalty payments associated with the sale of
Intraject-related assets to Zogenix, proceeds from the June 2011
royalty financing transaction and interest earned on cash
equivalents and short-term investments.
16
Over the last five years, our business has focused on
opportunities in the development of drugs for the treatment of
severe respiratory disease 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 inhaled formulations, ARD-3100
(Lipoquintm)
and ARD-3150
(Pulmaquintm),
of the antibiotic ciprofloxacin that are delivered by inhalation
for the management of infections associated with the severe
respiratory diseases cystic fibrosis (CF) and non-cystic
fibrosis bronchiectasis (BE). The formulations differ in the
proportion of rapidly available and slow release ciprofloxacin.
ARD-3150 uses the slow release liposomal formulation (ARD-3100)
mixed with a small amount of ciprofloxacin dissolved in an
aqueous medium. 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 requested orphan drug
designation from the FDA for ARD-3150 for the management of
bronchiectasis and in June 2011 we were granted orphan drug
designation for ciprofloxacin for inhalation for this
indication. We may seek orphan drug designation for other
eligible product candidates we develop. We have reported the
results of one successful Phase 2b trial with ARD-3100 and 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 a 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) 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 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 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 from 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
17
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
(Pulmaquin) 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 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. As announced in May 2011,
further statistical analysis concluded that the reduction from
baseline in Pseudomonas aeruginosa CFUs with ARD-3150 was
rapid and persistent throughout the treatment cycles as
exemplified by the statistically significant reductions
of the mean log CFU values in the ARD-3150 group versus the
placebo at day 14 and day 28 during the first treatment cycle,
as well as at the end of the second and third cycles of
treatment (days 84 and 140, respectively).
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 95 patients
and completed enrollment in March 2011. The ORBIT-1 study design
called for four weeks of once-daily inhaled doses of the active
drug or once-daily inhaled placebo. Two doses of the active drug
were 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 was a
standard measure of antibacterial activity the
change from baseline in sputum Pseudomonas aeruginosa
colony forming units (CFUs). Secondary endpoints included
quality of life measurements and improvement of outcomes with
respect to exacerbations. Lung function changes were monitored
for safety. In June 2011, we announced positive top line data
from the ORBIT-1 study. The primary endpoint - the mean change
in Pseudomonas aeruginosa colony forming units per gram
of sputum (CFUs) from baseline to day 28 was met in
the full analysis population: The full analysis set included 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 (p<0.001) of 2.942 log10 CFUs in
the 3mL ARD-3100 group and a significant mean reduction
18
(p< 0.001) of 3.842 log10 CFUs in the 2mL ARD-3100 group
compared to placebos. Pooled placebo groups had a mean reduction
of log10 CFUs of 0.437. There was no statistically significant
difference between the 2 mL and 3 mL ARD-3100 doses.
ARD-3100 was well-tolerated and no bronchodilator treatment was
mandated before inhaled study treatments. There were no
statistically significant differences between the active and
placebo groups in the number of patients experiencing at least
one respiratory treatment-emergent adverse event. The incidence
of serious adverse events (SAEs) was low; there were a total of
6 SAEs and none of them were treatment related.
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 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., 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 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. On January 13, 2010, Zogenix 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.
In December 2010, Zogenix was 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, 2011, we entered into an $8.5 million
royalty financing agreement (the Transaction) with a
syndicate of lenders arranged by PBS Capital Management LLC
(PBS Capital). The agreement created a debt
obligation (the Term Loan) that will be repaid
through and secured by royalties from net sales of the
SUMAVEL®
DoseProtm
(sumatriptan injection) needle-free delivery system payable to
Aradigm under its Asset Purchase Agreement (APA)
with Zogenix.
Under the terms of the royalty financing agreement, we received
a loan of $8.5 million, less fees, transaction and legal
expenses (estimated to be approximately $473,000) and an
additional $250,000 set aside for an Interest Reserve Account.
The lenders will be entitled to receive 100% of all royalties
payable to us under the APA until the principal and accrued
interest of the Term Loan are fully repaid, after which time the
benefit of any further royalties made under the APA will accrue
to Aradigm. The Term Loan will accrue interest at the rate equal
to the greater of a) LIBOR or
b) one-and-a-half
percent (1.50%), plus a margin of
fourteen-and-a-half
percent (14.5%). To the extent royalty payments are insufficient
to pay accrued and unpaid interest under the financing, the
shortfall will be funded from the Interest Reserve Account or,
if the account is insufficient to pay all of the interest due,
the shortfall will be capitalized and added to the principal
balance of the Term Loan. The lenders were granted a security
interest in the assets of an Aradigm subsidiary that holds
Aradigms rights to receive royalty payments under the APA.
The lenders have no recourse to other assets of Aradigm for
repayment of the loan. Amortization of the Term Loan will occur
to the extent that royalties payments received for any quarter
exceed accrued interest due for that quarter.
We have the right to prepay the Term Loan after June 21,
2012, subject to the payment of the principal balance plus a
prepayment fee of eight percent (8%) of the outstanding balance
if prepaid in months
13-24
following the Transaction closing date of June 21, 2011;
four percent (4%) if prepaid in months
25-36; and
two percent (2%) if
19
prepaid in months
37-48. There
will be no prepayment fee for prepaying the Term Loan after the
forty-eight (48) month anniversary of the closing date. In
addition, we have the right to make partial prepayments in an
amount no less than the greater of (i) ten percent (10%) of
the principal balance of the Term Loan outstanding as of the
applicable prepayment date or (ii) $1,000,000. Under no
circumstances will the receipt of royalty payments from Zogenix
in excess of the accrued interest then due be considered
prepayments under the Term Loan.
In connection with the Transaction, Aradigm issued to the
lenders warrants to purchase a total of 2,840,909 shares of
Aradigm common stock at a strike price of $0.22 per share,
representing a 20% premium above the average closing price of
Aradigm common stock for the ten trading days immediately
preceding the closing of the Transaction. The warrants expire on
December 31, 2016.
On July 7, 2011, we closed a private placement, which we
refer to in this registration statement as the July 2011 private
placement, in which we sold 25,000,000 shares of our common
stock to accredited investors (which included a few
then-existing significant shareholders) under the terms of a
securities purchase agreement that we entered into with the
selling shareholders on July 5, 2011. At the closing of the
July 2011 private placement, we received approximately
$4.75 million in aggregate gross proceeds from the sale of
the common stock. After deducting fees and expenses, the
aggregate net proceeds from the sale of the common stock were
approximately $4.4 million.
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.
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.
20
Impairment
of Long-Lived Assets
In accordance with
ASC 360-10,
Property Plant and 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 (ASC 420), 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
this guidance, 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 such costs are
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 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 June 30, 2011 and
December 31, 2010, 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.
We regularly analyze the status of our deferred tax assets and
our ability to utilize them to offset future taxable income,
such as income received from collaboration or partnering
transactions, and such availability cannot be assured.
21
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.
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 our Annual Report on
Form 10-K.
Recent
Accounting Pronouncements
See Note 2 to the accompanying unaudited condensed
consolidated financial statements included in this prospectus
for information on recent accounting pronouncements.
Results
of Operations
Three
and six months ended June 30, 2011 and 2010
We reduced our net loss by approximately $1.2 million for
the three months ended June 30, 2011 as compared with the
three months ended June 30, 2010. This favorable result
occurred because of lower research and development costs and the
receipt of quarterly royalty payments from Zogenix in the three
months ended June 30, 2011. Our net loss increased by
approximately $1.0 million for the six months ended
June 30, 2011 as compared with the six months ended
June 30, 2010. This unfavorable result was due to the
one-time receipt of the $4.0 million milestone from Zogenix
recorded as royalty revenue in the first quarter of 2010
partially offset by significantly lower research and development
expenses during the six month period ended June 30, 2011 as
compared with the comparable period in the prior year. Research
and development expenses were lower despite our continued
investment in our inhaled ciprofloxacin program, including the
expenses related to our two Phase 2b clinical trials.
We recorded revenue in the three months ended June 30, 2011
for the Zogenix quarterly royalty receipts of approximately
$0.2 million as compared to zero revenue for the three
months ended June 30, 2010. Total revenue was approximately
$0.4 million for the six months ended June 30, 2011 as
compared with $4.0 million in revenue for the six months
ended June 30, 2010. The $4.0 million in royalty
revenue related to the milestone payment that was due upon the
initial commercialization of Zogenixs SUMAVEL DosePro
product.
Operating expenses were approximately $3.0 million for the
three months ended June 30, 2011 which represented an
approximately $1.1 million decrease from the three months
ended June 30, 2010. Research and development expenses
decreased approximately $1.2 million and general and
administrative expenses increased by approximately
$0.1 million as compared with the three months ended
June 30, 2010. Operating expenses were approximately
$5.7 million for the six months ended June 30, 2011,
which represented an approximately $2.6 million decrease as
compared with the six months ended June 30, 2010. Research
and development expenses decreased approximately
$2.5 million and general and administrative expenses
decreased approximately $0.1 million as compared with the
six months ended June 30, 2010.
22
The decrease in research and development expenses was due to
slightly lower headcount, lower depreciation expense and lower
clinical trials costs. For the quarter ended June 30, 2011,
lower clinical trials costs were mainly due to lower contract
manufacturing costs related to the production of inhaled
ciprofloxacin for the Phase 2b trials and lower clinical costs
due to the ramp up of the Phase 2b trials that occurred in the
prior year period.
Liquidity
and Capital Resources
As of June 30, 2011, we had cash, cash equivalents and
short-term investments of approximately $9.4 million and
total working capital of approximately $7.2 million. We
believe that cash, cash equivalents and short-term investments
at June 30, 2011, as well as the proceeds from the July
2011 private placement, will be sufficient to enable us to fund
our operations through at least the second quarter of 2012.
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 milestone and royalty
payments associated with the sale of Intraject-related assets to
Zogenix, proceeds from the June 2011 royalty financing
transaction and interest earned on investments. We have incurred
significant losses and negative cash flows from operations since
our inception. At June 30, 2011, we had an accumulated
deficit of approximately $359.2 million and
shareholders equity of approximately $0.2 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
ciprofloxacin for the bronchiectasis and cystic fibrosis
indications. If we are unable to find financing on acceptable
terms, we may be required to defer our product development
activities.
Six
months ended June 30, 2011
Total cash and cash equivalents increased by approximately
$3.2 million for the six months ended June 30, 2011,
compared to December 31, 2010. The increase in cash and
cash equivalents was primarily due to the net proceeds of
approximately $8.1 million from the royalty financing
transaction in June 2011. This increase was offset by cash used
in operations of approximately $4.3 million, as well as
cash used for the net purchase of securities of approximately
$0.7 million.
Six
months ended June 30, 2010
Total cash and cash equivalents increased by approximately
$5.7 million for the six months ended June 30, 2010,
compared to December 31, 2009. The increase in cash and
cash equivalents was primarily due to the net proceeds of
approximately $3.7 million from the sale of common stock in
the June 2010 Private Placement and the net proceeds from the
sale of short-term investments of approximately
$5.2 million. This increase was partially offset by cash
used in operations of approximately $3.3 million. Cash used
in operations was favorably impacted by the receipt of the
$4.0 million milestone payment from Zogenix.
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 active, wholly-owned subsidiary incorporated
in Delaware, Aradigm Royalty Financing LLC, and one inactive,
wholly-owned subsidiary domiciled in the United Kingdom.
DESCRIPTION
OF THE BUSINESS
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
23
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 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 June 30, 2011, we had an accumulated deficit of
$359.2 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
milestone and royalty payments associated with the sale of
Intraject-related assets to Zogenix, proceeds from the June 2011
royalty financing transaction 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 disease 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 inhaled formulations, ARD-3100
(Lipoquintm)
and ARD-3150
(Pulmaquintm),
of the antibiotic ciprofloxacin that are delivered by inhalation
for the management of infections associated with the severe
respiratory diseases cystic fibrosis (CF) and non-cystic
fibrosis bronchiectasis (BE). The formulations differ in the
proportion of rapidly available and slow release ciprofloxacin.
ARD-3150 uses the slow release liposomal formulation (ARD-3100)
mixed with a small amount of ciprofloxacin dissolved in an
aqueous medium. 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 requested orphan drug
designation from the FDA for ARD-3150 for the management of
bronchiectasis and in June 2011 we were granted orphan drug
designation for ciprofloxacin for inhalation for this
indication. We may seek orphan drug designation for other
eligible product candidates we develop. We have reported the
results of one successful Phase 2b trial with ARD-3100 and 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.
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
24
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 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:
|
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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
|
25
|
|
|
|
|
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.
|
|
|
|
|
|
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 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.
|
|
|
|
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.
|
Proprietary
Programs Under Development
Inhaled
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
26
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
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.
27
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 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 Inhaled 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 ciprofloxacin
(ARD-3100 and ARD-3150) that differ in the proportion of rapidly
available and slow release ciprofloxacin. ARD-3150 (also called
Pulmaquintm)
uses the slow release liposomal formulation (ARD-3100, also
called
Lipoquintm)
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
28
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-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. As announced in May 2011,
further statistical analysis concluded that the reduction from
baseline in Pseudomonas aeruginosa CFUs with ARD-3150 was
rapid and persistent throughout the treatment cycles as
exemplified by the statistically significant reductions
of the mean log CFU values in the ARD-3150 group versus the
placebo at day 14 and day 28 during the first treatment cycle,
as well as at the end of the second and third cycles of
treatment (days 84 and 140, respectively).
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 95 patients
and completed enrollment in March 2011. The ORBIT-1 study design
called for four weeks of once-daily inhaled doses of the active
drug or once-daily inhaled placebo. Two doses of the active drug
were 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 was a
standard measure of antibacterial activity the
change from baseline in sputum Pseudomonas aeruginosa
colony forming units (CFUs). Secondary endpoints included
quality of life measurements and improvement of outcomes with
respect to exacerbations. Lung function changes were monitored
for safety.
In June 2011, we announced positive top line data from the
ORBIT-1 study. The primary endpoint - the mean change in
Pseudomonas aeruginosa colony forming units per gram of
sputum (CFUs) from baseline to day 28 was met in the
full analysis population: The full analysis set included 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 (p<0.001) of 2.942 log10 CFUs in
the 3mL ARD-3100 group and a significant mean reduction (p<
0.001) of 3.842 log10 CFUs in the 2mL ARD-3100 group compared to
placebos. Pooled placebo groups had a mean reduction of log10
CFUs of 0.437. There was no statistically significant difference
between the 2 mL and 3 mL ARD-3100 doses. ARD-3100 was
well-tolerated and no bronchodilator treatment was mandated
before inhaled study treatments. There were no statistically
significant differences between the active and placebo groups in
the number of patients
29
experiencing at least one respiratory treatment-emergent adverse
event. The incidence of serious adverse events (SAEs) was low;
there were a total of 6 SAEs and none of them were treatment
related.
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 FDA-approved, widely-accepted nebulizer
system for each of these Phase 2b trials.
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 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 inhaled 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 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 provided funding for our development efforts 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
30
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.
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
31
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 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. On January 13, 2010, Zogenix 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.
In December 2010, Zogenix was 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
32
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.
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
33
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 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
34
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:
|
|
|
|
|
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.
|
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, 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:
|
|
|
|
|
preclinical laboratory and animal tests, and formulation studies;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
the submission to the FDA of a New Drug Application, or NDA, and
FDAs acceptance of the NDA for filing;
|
35
|
|
|
|
|
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
|
|
|
|
FDA review and approval of the NDA.
|
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.
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. The analysis of the results of 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:
|
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
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
(Pulmaquin) 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,
36
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 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. As announced in May 2011,
further statistical analysis concluded that the reduction from
baseline in Pseudomonas aeruginosa CFUs with ARD-3150 was
rapid and persistent throughout the treatment cycles as
exemplified by the statistically significant reductions
of the mean log CFU values in the ARD-3150 group versus the
placebo at day 14 and day 28 during the first treatment cycle,
as well as at the end of the second and third cycles of
treatment (days 84 and 140, respectively).
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 95 patients
and completed enrollment in March 2011. The ORBIT-1 study design
called for four weeks of once-daily inhaled doses of the active
drug or once-daily inhaled placebo. Two doses of the active drug
were 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 was a
standard measure of antibacterial activity the
change from baseline in sputum Pseudomonas aeruginosa
colony forming units (CFUs). Secondary endpoints included
quality of life measurements and improvement of outcomes with
respect to exacerbations. Lung function changes were monitored
for safety.
In June 2011, we announced positive top line data from the
ORBIT-1 study. The primary endpoint - the mean change in
Pseudomonas aeruginosa colony forming units per gram of
sputum (CFUs) from baseline to day 28 was met in the
full analysis population: The full analysis set included 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 (p<0.001) of 2.942 log10 CFUs in
the 3mL ARD-3100 group and a significant mean reduction (p<
0.001) of 3.842 log10 CFUs in the 2mL ARD-3100 group compared to
placebos. Pooled placebo groups had a mean reduction of log10
CFUs of 0.437. There was no statistically significant difference
between the 2 mL and 3 mL ARD-3100 doses. ARD-3100 was
well-tolerated and no bronchodilator treatment was mandated
before inhaled study treatments. There were no statistically
significant differences between the active and placebo groups in
the number of patients experiencing at least one respiratory
treatment-emergent adverse event. The incidence of serious
adverse events (SAEs) was low; there were a total of 6 SAEs and
none of them were treatment related.
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.
37
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 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
38
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 requested orphan drug designation from the
FDA for ARD-3150 for the management of bronchiectasis and in
June 2011 we were granted orphan drug designation for
ciprofloxacin for inhalation for this indication. We may seek
orphan drug designation for other eligible product candidates we
develop. 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. In June 2011, we were granted
orphan drug designation by the FDA for ciprofloxacin for
inhalation for the management of bronchiectasis.
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 approval. The regulatory approval and
oversight process in other countries includes all of the risks
associated with the FDA process described above.
39
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:
|
|
|
|
|
Name
|
|
Affiliation
|
|
Area of Expertise
|
|
Peter R. Byron, Ph.D.
|
|
Medical College of Virginia, Virginia Commonwealth University
|
|
Aerosol Science/Pharmaceutics
|
Peter S. Creticos, M.D.
|
|
The Johns Hopkins University School of Medicine
|
|
Allergy/Immunology/Asthma
|
Stephen J. Farr, Ph.D.
|
|
Zogenix, Inc.
|
|
Pulmonary Delivery/Pharmaceutics
|
Michael Konstan, M.D.
|
|
Rainbow Babies and Childrens Hospital
|
|
Pulmonary Diseases/Cystic Fibrosis
|
Babatunde Otulana, M.D.
|
|
Aerovance, Inc.
|
|
Pulmonary Diseases/Cystic Fibrosis/Regulatory
|
Adam Wanner, M.D.
|
|
University of Miami
|
|
Chronic Obstructive Pulmonary Diseases (COPD)
|
Martin Wasserman, Ph.D.
|
|
Roche, AtheroGenics (retired)
|
|
Asthma
|
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 our Annual Reports 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
prospectus 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.
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
40
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.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive
Officers and Directors
Our directors and executive officers and their ages as of
March 31, 2011 are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Igor Gonda, Ph.D.
|
|
|
63
|
|
|
President, Chief Executive Officer and Director
|
Nancy E. Pecota
|
|
|
51
|
|
|
Vice President, Finance and Chief Financial Officer
|
Frank H. Barker(1)(2)(3)
|
|
|
80
|
|
|
Director
|
Tamar D. Howson(2)
|
|
|
62
|
|
|
Director
|
John M. Siebert, Ph.D.(1)(2)(3)
|
|
|
71
|
|
|
Director
|
Virgil D. Thompson(1)(2)(3)
|
|
|
71
|
|
|
Chairman of the Board and Director
|
|
|
|
(1) |
|
Member of the Audit Committee. |
|
(2) |
|
Member of the Compensation Committee. |
|
(3) |
|
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,
41
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 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.
The following is a brief discussion of the specific experience,
qualifications, attributes or skills that led to the conclusion
that our directors and nominees should serve as one of our
directors at this time:
We believe that our directors have an appropriate balance of
knowledge, experience, attributes, skills and expertise required
for our Board as a whole and that we have sufficient independent
directors to comply with applicable laws and regulations. We
believe that our directors have a broad range of personal
characteristics including leadership, management, scientific,
technological, business, marketing and financial experience and
abilities to act with integrity, with sound judgment and
collegiality, to consider strategic proposals, to assist with
the development of our strategic plan and oversee its
implementation, to oversee our risk management efforts and
executive compensation, to provide leadership, to provide
required expertise on Board committees and to commit the
requisite time for preparation and attendance at Board and
committee meetings.
In addition, four of our five directors are independent under
the listing standards of the Nasdaq Global Market
(Nasdaq) (Dr. Gonda, our Chief Executive
Officer, being the only exception as he is an employee) and our
Nominating and Corporate Governance Committee believes that all
five directors are independent of the influence
42
of any particular shareholder or group of shareholders whose
interests may diverge from the interests of our shareholders as
a whole.
We believe that each director brings a strong background and set
of skills to the Board, giving the Board as a whole competence
and experience from a wide variety of areas.
Dr. Gonda has served as our Chief Executive Officer
since 2006 and as one of our directors since 2001. In addition
to his leadership, strategic planning and extensive knowledge of
the day to day operations of our business, he has a commercial,
scientific and academic background in the delivery of
pharmaceuticals using inhalation. His education includes degrees
in chemistry and physical chemistry.
Mr. Thompson, our Chairman of the Board, is our
longest serving director giving him substantial knowledge of our
company and its business. Mr. Thompson has extensive
experience in the life sciences industry and has served as an
executive with numerous pharmaceutical and drug delivery
companies, both public and private. He also brings experience as
a director of other public and private life sciences companies.
His education includes degrees in pharmacy and law.
Mr. Barkers career at Johnson &
Johnson, Inc., a diversified health care company, has given him
broad experience in leadership, executive management, global
operations and consensus building. Mr. Barkers
service on our Board since 1999 has given him a substantial
knowledge of our company and its business. His education
includes a degree in business administration.
Dr. Siebert has extensive experience in the life
sciences industry, including as Chairman and Chief Executive
Officer of a privately held specialty pharmaceutical company,
President and Chief Executive Officer of a publicly traded drug
delivery company and additional management and executive
management roles at drug delivery and pharmaceutical companies.
Our Board has determined that Dr. Sieberts
background, especially his executive management roles, qualifies
him as our Audit Committee financial expert. His education
includes degrees in chemistry and organic chemistry.
Ms. Howson, our newest director, brings a strong
background and focus on strategic transactions and
commercialization opportunities, particularly those with
pharmaceutical companies. She currently serves as a director of
several other public and private life sciences companies. Her
education includes an MBA with a focus on finance and
international business.
Independence
of the Board of Directors
We have chosen to apply the listing standards of the Nasdaq in
determining the independence of our directors. The Board
consults with counsel to ensure that the Boards
determinations are consistent with all relevant securities and
other laws and regulations regarding the definition of
independent, including those set forth in pertinent
listing standards of the Nasdaq, as in effect from time to time.
Consistent with these considerations, after review of all
relevant transactions or relationships between each director, or
any of his or her family members, and us, our senior management
and our independent registered public accounting firm, the Board
affirmatively has determined that the following four directors
are independent within the meaning of the applicable Nasdaq
listing standards: Mr. Barker, Ms. Howson,
Dr. Siebert, and Mr. Thompson. In making this
determination, the Board found that none of these directors had
a material or disqualifying relationship with the Company.
Dr. Gonda, our President and Chief Executive Officer, is
not an independent director within the meaning of the applicable
Nasdaq standards by virtue of his employment with Aradigm. In
addition, each person who served as a director for any portion
of 2010 was independent within the meaning of the applicable
Nasdaq listing standards, except for Dr. Gonda.
Code of
Ethics
We have adopted the Aradigm Corporation Code of Business Conduct
and Ethics that applies to all of our officers, directors and
employees. The Code of Business Conduct and Ethics is available
on our website at www.aradigm.com. If we make any substantive
amendments to the Code of Business Conduct and Ethics or grant
43
any waiver from a provision of the Code to any executive officer
or director, we will promptly disclose the nature of the
amendment or waiver on our website.
COMPENSATION
The policies of the Compensation Committee, or the Committee,
with respect to the compensation of executive officers,
including the Chief Executive Officer, or CEO, are designed to
provide compensation sufficient to attract, motivate and retain
executives of outstanding ability and potential and to establish
an appropriate relationship between executive compensation and
the creation of shareholder value. To meet these goals, the
Committee recommends executive compensation packages to our
Board of Directors that are based on a mix of salary, bonus and
equity awards.
Overall, the Board and the Committee seek to provide total
compensation packages that are competitive in terms of total
potential value to our executives, and that are tailored to the
unique characteristics of our Company in order to create an
executive compensation program that will adequately reward our
executives for their roles in creating value for our
shareholders. The Board and the Committee intend to provide
executive compensation packages that are competitive with other
similarly situated companies in our industry. Historically, the
Board and the Committee generally weighted executives
compensation packages more heavily in favor of equity-based
compensation versus salary, as they believe performance and
equity-based compensation is important to maintain a strong link
between executive incentives and the creation of shareholder
value. The Board and the Committee believe that performance and
equity-based compensation are the most important component of
the total executive compensation package for maximizing
shareholder value while, at the same time, attracting,
motivating and retaining high-quality executives. For 2010, the
Board and the Committee continued their emphasis on equity-based
compensation and placed added emphasis on contingent cash
compensation payable upon the achievement of certain goals of
particular importance in growing shareholder value. Given the
Companys current financial situation and market
capitalization, the state of the equity markets and the
Companys proposed business plan, the Board and the
Committee believed that equity-based compensation and contingent
cash compensation payable upon the achievement of goals of
particular importance to the Company remain important tools to
motivate the Companys executive officers.
The Board and the Committee have reviewed this Compensation
Discussion and Analysis with the Companys management.
Benchmarking
of Compensation Practices
The Board and the Committee believe it is important when making
compensation-related decisions to be informed as to current
practices of similarly situated publicly held companies in the
life sciences industry. In late 2008, given the Board and
Committees focus on equity-based compensation, the Board
and the Committee retained a consultant to review equity-based
compensation of executives in the biotechnology industry. The
consultant prepared a study reviewing the equity-based
compensation practices of 120 publicly held
small-to-medium
size biotechnology companies. In addition to this benchmarking
study, the Board and the Committee take into account input from
other sources, including past benchmarking studies, and publicly
available data relating to the compensation practices and
policies of other companies within and outside of our industry.
Benchmarking studies were used primarily in making compensation
decisions for Dr. Igor Gonda, our President and Chief
Executive Officer, Ms. Nancy Pecota, our Vice President,
Finance and Chief Financial Officer, and Mr. D. Jeffery
Grimes, our former Vice President, Legal Affairs, General
Counsel & Corporate Secretary. Given the
Companys operating performance and continued need for
capital, in 2010 the Board and the Committee retained total cash
compensation for these three executive officers at the same
level as paid in 2009. Consistent with the Boards and the
Committees greater emphasis on equity-based compensation,
in 2009 they sought to establish equity compensation for these
three executive officers at a level approximately equal to the
equity-based compensation paid at the 75th percentile of
comparable companies in the life sciences industry, based on the
survey conducted in late 2008.
44
The Committee has in the past retained and may in the future
retain the services of third-party executive compensation
specialists, as the Committee sees fit, in connection with the
establishment of compensation and related policies. The
Committee did not retain the services of third-party executive
compensation specialists for establishing 2010 compensation and
related policies as these services are costly and the Company is
focused on conserving cash.
Compensation
Components
Base Salary. Generally, the Board and the
Committee believe that executive base salaries should be set
near the median of the range of salaries for executives in
similar positions and with similar responsibilities at
comparable companies. The Board and the Committee believe that
maintaining base salary amounts at or near the industry median
minimizes competitive disadvantage while conserving the
Companys cash resources and avoiding paying amounts in
excess of what they believe to be necessary to motivate
executives to meet corporate goals. Base salaries are typically
reviewed annually. In the past, management has presented the
Committee with its initial recommendations for executive salary
levels and the Committee and Board have determined whether to
adjust these base salary recommendations to realign such
salaries with median market levels after taking into account
individual responsibilities, performance, experience as well as
the benchmarking data reviewed by the Committee.
For 2009, the Board, upon recommendation of the Committee,
established base salaries for Dr. Gonda, Ms. Pecota
and Mr. Grimes of $380,000, $238,000 and $230,000,
respectively. For 2010, management recommended to the Board and
Committee that base salaries for Dr. Gonda, Ms. Pecota
and Mr. Grimes be retained at their 2009 levels. Given the
Companys financial position, management felt, and the
Board agreed, that an increase in base salary for 2010 was not
appropriate.
Executive
Bonus Plan.
In addition to base salaries, the Board and the Committee
believe that performance-based cash bonuses can play an
important role in providing incentives to our executives to
achieve defined corporate goals.
In early 2009, the Board, upon the recommendation of the
Committee, reviewed the target bonus amount (defined as a set
percentage of base salary) for each executive. The target bonus
amount was set at a level that, upon achievement of 100% of the
target goals, would have resulted in bonus payments that the
Board and the Committee believed to be at or near the median
level for target bonus amounts for comparable companies included
in the benchmark studies and that, upon achievement beyond the
target goals, could have resulted in bonuses of up to 150% of
the target bonus amount. In early 2009, the Board, upon
recommendation of the Committee, established 2009 target bonus
awards (as a percentage of base salary) of 50% for
Dr. Gonda and 40% for Ms. Pecota and Mr. Grimes.
The Committee also reviewed a detailed set of overall corporate
performance goals (target goals) prepared by management that
were intended to apply to the executives bonus awards and,
with some distinctions, to the bonus awards for all of our other
employees. The Committee then worked with management to develop
final corporate performance goals that were set at a level the
Committee believed management could achieve over the next year.
For each individual corporate goal, the Committee established
relative weights and then set target performance for
Level 1 satisfaction (50% of target payout for that goal),
Level 2 satisfaction (100% of target payout for that goal)
and Level 3 satisfaction (150% of target payout for that
goal) of the corporate goal, with the attainment of each
specified level of performance tied to a specific percentage
payout of the target bonus amount for that goal. The relative
weights for each individual corporate goal could be changed by
the Board during the year as a result of external and internal
events and their impact upon the Company.
The goals were designed to lead to results that would maximize
shareholder value. For example, at the start of 2009, the Board
and Committee determined that the ARD-3100/3150 program (i.e.,
the Companys liposomal ciprofloxacin programs for the
management of infections in patients with bronchiectasis and
cystic fibrosis) would likely drive the Companys value in
2009, and so they weighted the goal related to development of
the ARD-3100/3150 program higher than the other operational
performance goals.
At the end of 2009, the Board, upon the recommendation of the
Committee, determined the level of achievement for each
corporate goal, on a goal by goal basis, and awarded credit for
the achievement of goals as a percentage of the target bonus.
Final determinations as to bonus levels were then based on the
achievement of
45
these corporate goals, which are the same for all executives, as
well as the Boards and the Committees assessment as
to the overall success of the Company and the development of the
business.
Bonus payments under the annual bonus plan were contingent on
continued employment with the Company at the end of 2009.
In January 2010, the Board and Committee determined the
executive team had satisfied corporate goals to a level that
would have entitled them to a payout of 30% of their target
bonus amounts. Management recommended to the Board and Committee
not to pay the executives a bonus for 2009. Management felt, and
the Board agreed, that given the Companys cash position
and the economic climate, a bonus was not appropriate.
In January 2010, the Board, upon recommendation of the
Committee, revised the Executive Bonus Plan to convert it from
an annual performance evaluation period to a multi-year
performance evaluation period. The Board established, upon
recommendation of the Committee, performance objectives that are
not dependent upon the objective being achieved within a fixed
time period, in order to incentivize the executives to focus on
the achievement of longer term goals that could be significant
value creation events for our shareholders. The objectives focus
on partnering the Companys programs, raising non-dilutive
capital for the Company, advancing the
ARD-3100/3150
program and the achievement of other significant strategic
objectives. The bonus will be paid upon achievement of the
objective and will be in the form of cash
and/or
restricted stock. In general, if the achievement of the
objective results in the receipt of cash by the Company then the
bonus will be paid in cash; if the achievement of the objective
is of strategic importance to the Company but does not generate
cash then the bonus will be paid in the form of restricted stock.
No payouts were made in 2010 to any executive under the revised
Executive Bonus Plan.
Equity Awards. The Board and the Committee
believe that providing a significant portion of our
executives total compensation package in stock options and
restricted stock awards aligns the incentives of our executives
with the interests of our shareholders and with our long-term
success. The Board and the Committee develop their equity award
determinations based on their judgments as to whether the
complete compensation packages provided to our executives,
including prior equity awards, are sufficient to retain,
motivate and adequately award the executives.
We grant equity awards through our 2005 Equity Incentive Plan,
which was adopted by our Board and shareholders to permit the
grant of stock options, stock appreciation rights, restricted
shares, restricted stock units, performance shares and other
stock-based awards to our officers, directors, scientific
advisory board members, employees and consultants. All of our
employees, directors, scientific advisory board members and
consultants are eligible to participate in the 2005 Equity
Incentive Plan. All options we grant have an exercise price
equal to the fair market value of our common stock on the date
of grant.
For 2009, the Board and Committee decided to grant equity awards
as a combination of stock options and restricted stock awards.
The stock options granted in 2009 vest quarterly over two years
and the restricted stock awards vest annually over one year. In
July 2009, the Committee granted Dr. Gonda, Ms. Pecota
and Mr. Grimes restricted stock awards for 600,000, 200,000
and 200,000 shares of our common stock, respectively. These
grants vested 100% on August 1, 2010 for Dr. Gonda and
Ms. Pecota. Mr. Grimes was no longer an employee of
the Company on August 1, 2010; therefore, his restricted
stock award did not vest. In addition, Dr. Gonda was
granted two awards of 200,000 shares each, which would vest
upon achievement of certain objectives related to the
ARD-3100/3150 program. The Committee felt that the 2009 equity
awards were necessary to bring our executives equity
compensation levels to a level the Committee believes is
necessary to retain a talented and capable management team
during a critical time period for the ARD-3100/3150 program.
During 2010, the objectives for one of these 200,000 share
awards to Dr. Gonda was met and will vest upon approval of
the Compensation Committee, while the other award was cancelled
for non-achievement of the stated objectives.
In September 2010, the Committee granted Dr. Gonda and
Ms. Pecota restricted stock awards for 500,000 and
300,000 shares of our common stock, respectively. These
grants vest 100% on September 16, 2011, contingent upon
continued employment. The Committee granted these awards in
order to encourage retention of executives important to the
realization of the Companys business objectives.
46
The Committee anticipates making future equity award grants to
executives annually, subject to its discretion. The Committee
believes this award structure is consistent with our executive
compensation policies.
Severance Benefits. The Board, upon
recommendation of the Committee, previously adopted an Amended
and Restated Executive Officer Severance Plan, dated as of
December 31, 2008, and approved change of control
agreements with each of our executive officers, the terms of
which are more fully described below in the section entitled
Potential Payments Upon Termination or Change in
Control. The Board and the Committee believe these
severance and change in control benefits are an essential
element of our executive compensation package and assist us in
recruiting and retaining talented individuals. Our business is
inherently risky and the Board and the Committee believe the
severance benefits encourage our executives to take necessary
but reasonable business risks to increase shareholder value. The
Board and the Committee believe the change of control benefits
align our executives interests more greatly in favor of
corporate liquidity events that can be potentially valuable to
our shareholders. They have established these severance and
change of control benefits at levels that they feel are
comparable to benefits offered to executives in similar
positions and with similar responsibilities at comparable
companies.
Other Compensation. All of our executives are
eligible to participate in our employee benefit plans, including
medical, dental, life insurance and 401(k) plans. These plans
are available to all employees and do not discriminate in favor
of executive officers. It is generally our policy to not extend
significant perquisites to our executives that are not available
to our employees generally. We have no current plans to make
changes to levels of benefits and perquisites provided to
executives.
Summary
Compensation Table
The following table sets forth information regarding
compensation earned in 2010 and 2009 by the individual serving
as our principal executive officer during 2010 and our two most
highly compensated executive officers (other than our principal
executive officer) who were serving as executive officers at
some point during the year ended 2010 (these individuals are
collectively referred to as our named executive
officers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
Incentive Plan
|
|
All Other
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards(1)
|
|
Awards(1)
|
|
Compensation
|
|
Compensation
|
|
Total
|
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Igor Gonda, PhD
|
|
|
2010
|
|
|
|
380,000
|
|
|
|
|
|
|
|
90,000
|
|
|
|
68,750
|
|
|
|
|
|
|
|
34,961
|
|
|
|
573,711
|
|
President and Chief
|
|
|
2009
|
|
|
|
380,000
|
|
|
|
|
|
|
|
172,000
|
|
|
|
52,675
|
|
|
|
|
|
|
|
30,028
|
|
|
|
634,703
|
|
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nancy Pecota
|
|
|
2010
|
|
|
|
238,000
|
|
|
|
|
|
|
|
54,000
|
|
|
|
41,250
|
|
|
|
|
|
|
|
7,989
|
|
|
|
341,239
|
|
Vice President, Finance and
|
|
|
2009
|
|
|
|
238,000
|
|
|
|
|
|
|
|
46,750
|
|
|
|
30,100
|
|
|
|
|
|
|
|
4,750
|
|
|
|
319,600
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. Jeffery Grimes(2)
|
|
|
2010
|
|
|
|
108,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188,762
|
|
|
|
296,762
|
|
Former Vice President,
|
|
|
2009
|
|
|
|
230,000
|
|
|
|
|
|
|
|
46,750
|
|
|
|
30,100
|
|
|
|
|
|
|
|
14,341
|
|
|
|
321,191
|
|
Legal Affairs, General Counsel
and Corporate Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For 2010 and 2009, amounts represent the grant date fair value
of awards and options that were issued in that year. |
|
(2) |
|
Mr. Grimes employment with the Company terminated as
of June 18, 2010. During 2010, Mr. Grimes received
$157,374 in severance payments and $20,078 in accrued vacation
payout which are included in All Other Compensation. |
47
All Other Compensation in the summary compensation table above
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
401(k)
|
|
Stock
|
|
|
|
|
|
|
|
|
Health Care
|
|
Insurance
|
|
Matching
|
|
Equity
|
|
|
|
|
|
|
|
|
Contribution
|
|
Premiums
|
|
Contributions
|
|
Incentive
|
|
All Other
|
|
Total
|
Name
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Igor Gonda, Ph.D.
|
|
|
2010
|
|
|
|
21,398
|
|
|
|
1,980
|
|
|
|
8,250
|
|
|
|
3,333
|
|
|
|
|
|
|
|
34,961
|
|
|
|
|
2009
|
|
|
|
18,428
|
|
|
|
2,100
|
|
|
|
8,250
|
|
|
|
1,250
|
|
|
|
|
|
|
|
30,028
|
|
Nancy Pecota
|
|
|
2010
|
|
|
|
836
|
|
|
|
1,414
|
|
|
|
5,739
|
|
|
|
|
|
|
|
|
|
|
|
7,989
|
|
|
|
|
2009
|
|
|
|
573
|
|
|
|
1,499
|
|
|
|
2,678
|
|
|
|
|
|
|
|
|
|
|
|
4,750
|
|
D. Jeffery Grimes(1)
|
|
|
2010
|
|
|
|
6,119
|
|
|
|
725
|
|
|
|
3,316
|
|
|
|
1,150
|
|
|
|
177,452
|
|
|
|
188,762
|
|
|
|
|
2009
|
|
|
|
5,433
|
|
|
|
1,449
|
|
|
|
6,209
|
|
|
|
1,250
|
|
|
|
|
|
|
|
14,341
|
|
|
|
|
(1) |
|
Mr. Grimes employment with the Company terminated as
of June 18, 2010. During 2010, Mr. Grimes received
$157,374 in severance payments and $20,078 in accrued vacation
payout which are included in All Other Compensation. |
2010
Grants of Plan-Based Award
The following table sets forth information regarding plan-based
awards to our named executive officers in 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
Grant
|
|
|
|
|
|
|
Estimated Future
|
|
Estimated Future
|
|
Awards:
|
|
Exercise
|
|
Date Fair
|
|
|
|
|
|
|
Payouts Under Non-
|
|
Payouts Under
|
|
Number of
|
|
or Base
|
|
Value of
|
|
|
|
|
|
|
Equity Incentive
|
|
Equity Incentive
|
|
Securities
|
|
Price of
|
|
Stock and
|
|
|
|
|
|
|
Plan Awards(1)
|
|
Plan Awards
|
|
Underlying
|
|
Option
|
|
Option
|
|
|
Grant
|
|
Approval
|
|
Target
|
|
Maximum
|
|
Target
|
|
Maximum
|
|
Options
|
|
Awards
|
|
Awards(2)
|
Name
|
|
Date
|
|
Date
|
|
($)
|
|
($)
|
|
(#)
|
|
(#)
|
|
(#)
|
|
($/sh)
|
|
($)
|
|
Igor Gonda, Ph.D.
|
|
|
9/17/2010
|
|
|
|
9/17/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
0.00
|
|
|
|
90,000
|
|
|
|
|
9/17/2010
|
|
|
|
9/17/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
0.18
|
|
|
|
68,750
|
|
|
|
|
1/01/2010
|
|
|
|
1/01/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nancy Pecota
|
|
|
9/17/2010
|
|
|
|
9/17/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
0.00
|
|
|
|
54,000
|
|
|
|
|
9/17/2010
|
|
|
|
9/17/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
0.18
|
|
|
|
41,250
|
|
|
|
|
1/01/2010
|
|
|
|
1/01/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. Jeffery Grimes
|
|
|
1/1/2010
|
|
|
|
1/1/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects each executive officers participation in our 2010
Executive Bonus Plan. The amount of bonus actually earned by
each executive officer was zero, as indicated in the summary
compensation table above. |
|
(2) |
|
The method and assumptions used to calculate the value of stock
and option awards granted to our named executive officers is
discussed in Note 9 of the notes to our financial
statements included in this prospectus. |
48
Outstanding
Equity Awards at December 31, 2010
The following table provides information regarding each
unexercised stock equity award held by each of our named
executive officers as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Market or
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
Payout Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares, Units
|
|
Unearned
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
or Other
|
|
Shares,
|
|
|
|
|
Underlying Unexercised
|
|
Option
|
|
|
|
Rights That
|
|
Units or Other
|
|
|
|
|
Options
|
|
Exercise
|
|
Option
|
|
Have Not
|
|
Rights That
|
|
|
|
|
Exercisable
|
|
Unexercisable
|
|
Price (1)
|
|
Expiration
|
|
Vested
|
|
Have Not Vested
|
Name
|
|
|
|
(#)
|
|
(#)
|
|
($)
|
|
Date
|
|
(#)
|
|
($)
|
|
Igor Gonda, Ph.D.
|
|
|
(8
|
)
|
|
|
62,500
|
|
|
|
437,500
|
|
|
|
0.18
|
|
|
|
9/17/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
85,000
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
6,800
|
|
|
|
|
(2
|
)
|
|
|
153,125
|
|
|
|
196,875
|
|
|
|
0.25
|
|
|
|
1/21/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
375,000
|
|
|
|
125,000
|
|
|
|
1.60
|
|
|
|
12/04/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
51,000
|
|
|
|
|
(4
|
)
|
|
|
500,000
|
|
|
|
|
|
|
|
1.87
|
|
|
|
08/10/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
1.52
|
|
|
|
05/18/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
5.30
|
|
|
|
05/19/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
5.30
|
|
|
|
05/20/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
5.30
|
|
|
|
05/13/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
6.50
|
|
|
|
05/15/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
4.75
|
|
|
|
02/19/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
17.25
|
|
|
|
05/21/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
17.15
|
|
|
|
05/17/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
24.10
|
|
|
|
02/11/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
17.20
|
|
|
|
09/20/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,312
|
|
|
|
|
|
|
|
30.00
|
|
|
|
03/15/2011
|
|
|
|
|
|
|
|
|
|
Nancy Pecota
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
51,000
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,500
|
|
|
|
2,975
|
|
|
|
|
(2
|
)
|
|
|
87,500
|
|
|
|
112,500
|
|
|
|
0.25
|
|
|
|
1/21/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
126,562
|
|
|
|
98,438
|
|
|
|
0.39
|
|
|
|
09/30/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
37,500
|
|
|
|
262,500
|
|
|
|
0.18
|
|
|
|
9/17/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the fair market value of a share of our common stock
on the grant date of the option. |
|
(2) |
|
The option vests over four years with 1/16 of the shares of
underlying common stock vesting every three months from the
grant date. |
|
(3) |
|
The restricted stock award vests in full if within four years
following the grant of the award the company achieves certain
product and product-pipeline development milestones. |
|
(4) |
|
The option vests over four years with 1/4 of the shares of
underlying common stock vesting on the first anniversary of the
grant date and 1/48 of the shares of underlying common stock
vesting each month thereafter. |
|
(5) |
|
The option vests over four years with 1/4 of the shares of
underlying common stock vesting on the first anniversary of the
grant date and 1/16 of the shares of underlying common stock
vesting every three months thereafter. |
|
(6) |
|
Each restricted stock award will vest 1/2 of the shares on the
first anniversary of the grant date and 1/2 of the shares on the
second anniversary of the grant date. |
|
(7) |
|
Each restricted stock award will vest on September 16, 2011. |
49
|
|
|
(8) |
|
The option vests over two years with 1/8 of the shares of
underlying common stock vesting every three months from the
grant date. |
2010
Option Exercises and Stock Vested
None of our named executive officers exercised options in 2009
or 2010. Mr. Gonda had 840,000 shares of restricted
stock awards vest in 2010. Ms. Pecota had
217,500 shares of restricted stock awards vest in 2010.
Mr. Grimes had 17,500 shares of restricted stock
awards vest in 2010.
Pension
Benefits
None of our named executive officers participate in or have
account balances in qualified or non-qualified defined benefit
plans sponsored by us. The Committee may elect to adopt
qualified or non-qualified defined benefit plans in the future
if the Committee determines that doing so is in our best
interests.
Nonqualified
Deferred Compensation
None of our named executive officers participate in or have
account balances in nonqualified defined contribution plans or
other nonqualified deferred compensation plans maintained by us.
The Committee may elect to provide our officers and other
employees with non-qualified defined contribution or other
nonqualified deferred compensation benefits in the future if the
Committee determines that doing so is in our best interests.
Potential
Payments Upon Termination or Change in Control
The following table sets forth potential payments payable to our
current executive officers upon termination of employment or a
change in control. The Committee may in its discretion revise,
amend or add to the benefits if it deems advisable. The table
below reflects amounts payable to our current executive officers
assuming their employment was terminated on December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
without
|
|
|
|
|
|
|
|
|
|
|
|
Cause or
|
|
|
|
|
|
Termination
|
|
|
|
|
|
Constructive
|
|
|
|
|
|
Without
|
|
|
|
|
|
Termination
|
|
|
|
|
|
Cause Prior to a
|
|
|
|
|
|
Following a
|
|
|
|
|
|
Change in
|
|
|
Change in
|
|
|
Change
|
|
|
|
|
|
Control
|
|
|
Control
|
|
|
in Control
|
|
Name
|
|
Benefit
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Igor Gonda, Ph.D.
|
|
Salary
|
|
|
380,000
|
|
|
|
|
|
|
|
760,000
|
|
|
|
Bonus
|
|
|
190,000
|
|
|
|
|
|
|
|
380,000
|
|
|
|
Option acceleration(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock award acceleration(1)
|
|
|
|
|
|
|
51,000
|
|
|
|
176,800
|
|
|
|
Benefits continuation
|
|
|
21,773
|
|
|
|
|
|
|
|
43,545
|
|
|
|
Career transition assistance
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value:
|
|
|
591,773
|
|
|
|
51,000
|
|
|
|
1,380,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nancy Pecota
|
|
Salary
|
|
|
238,000
|
|
|
|
|
|
|
|
238,000
|
|
|
|
Bonus
|
|
|
95,200
|
|
|
|
|
|
|
|
95,200
|
|
|
|
Option acceleration(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock award acceleration(1)
|
|
|
|
|
|
|
|
|
|
|
53,975
|
|
|
|
Benefits continuation
|
|
|
8,003
|
|
|
|
|
|
|
|
8,003
|
|
|
|
Career transition assistance
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value:
|
|
|
341,203
|
|
|
|
|
|
|
|
405,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The value of the stock and option award acceleration was
calculated using a value of $0.17 per share of common stock,
which was the last reported closing sale price of our common
stock on December 31, 2010. |
50
Termination without cause prior to a change in
control. If any of our executives is terminated
by us without cause prior to a change in control, upon executing
a general release and waiver, such executive is entitled to
receive (less applicable withholding taxes) in a lump sum
payment or in installments, at our discretion:
|
|
|
|
|
an amount equal to such executives annual base salary;
|
|
|
|
an amount equal to 50% of annual base salary for Dr. Gonda
and 40% of annual base salary for Ms. Pecota, representing
historical target bonus; and
|
|
|
|
continuation of such executives health insurance benefits
for 12 months.
|
Acceleration upon a change in control. If we
undergo a change in control on or prior to December 31,
2011, the 300,000 share restricted stock award granted to
Dr. Gonda will vest in full.
Termination without cause or constructive termination
following a change in control. If any of our
executives is terminated by us without cause or constructively
terminated (which includes a material reduction in title or
duties, a material reduction in salary or benefits or a
relocation of 50 miles or more) during the
18-month
period following a change in control, upon executing a general
release and waiver, such executive is entitled to receive (less
applicable withholding taxes):
|
|
|
|
|
a lump sum payment equal to twice such executives annual
base salary, in the case of Dr. Gonda, and such
executives annual base salary, in the case of
Ms. Pecota;
|
|
|
|
a lump sum payment equal to such executives annual base
salary multiplied by (i) 100%, in the case of
Dr. Gonda, and (ii) 40%, in the case of
Ms. Pecota, representing twice such executives
historical target bonus, in the case of Dr. Gonda, and such
executives historical target bonus, in the case of
Ms. Pecota;
|
|
|
|
continuation of such executives health insurance benefits
for 24 months, in the case of Dr. Gonda, and
12 months, in the case of Ms. Pecota;
|
|
|
|
reimbursement of actual career transition assistance
(outplacement services) incurred by such executive within six
months of termination in an amount up to $20,000, in the case of
Dr. Gonda, and $10,000, in the case of
Ms. Pecota; and
|
|
|
|
acceleration of vesting of any stock options or restricted stock
awards that remain unvested as of the date of such
executives termination.
|
Compensation
Committee Interlocks and Insider Participation
No interlocking relationship exists between our Board or the
Committee and the board of directors or the compensation
committee of any other company, nor has any such interlocking
relationship existed in the past.
Non-Employee
Director Compensation
The following table sets forth a summary of the compensation we
paid to our non-employee directors in 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
Option
|
|
Restricted Stock
|
|
|
|
|
Paid in Cash
|
|
Awards(1)
|
|
Awards(1)
|
|
Total
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Frank H. Barker(2)
|
|
|
28,000
|
|
|
|
9,140
|
|
|
|
30,000
|
|
|
|
67,140
|
|
Tamar D. Howson(3)
|
|
|
|
|
|
|
20,745
|
|
|
|
7,714
|
|
|
|
28,459
|
|
John M. Siebert(4)
|
|
|
53,000
|
|
|
|
9,140
|
|
|
|
15,000
|
|
|
|
77,140
|
|
Virgil D. Thompson(5)
|
|
|
62,500
|
|
|
|
9,140
|
|
|
|
25,000
|
|
|
|
96,640
|
|
|
|
|
(1) |
|
Amount represents the grant date fair value of options and
restricted stock awards granted in 2010. |
|
(2) |
|
Mr. Barker owns stock options for 387,500 shares of
our common stock as of December 31, 2010, of which
337,500 shares are vested as of December 31, 2010. In
addition, Mr. Barker owns 125,000 restricted stock awards
at December 31, 2010, none of which has vested. |
51
|
|
|
(3) |
|
Ms. Howson owns stock options for 150,000 shares of
our commons stock as of December 31, 2010 of which none are
vested as of December 31, 2010. In addition Ms. Howson
owns 42,857 restricted stock awards at December 31, 2010,
none of which has vested. |
|
(4) |
|
Dr. Siebert owns stock options for 370,000 shares of
our common stock as of December 31, 2010, of which
320,000 shares are vested as of December 31, 2010. In
addition, Dr. Siebert owns 125,000 restricted stock units
at December 31, 2010, none of which has vested. |
|
(5) |
|
Mr. Thompson owns stock options for 449,500 shares of
our common stock as of December 31, 2010, of which
399,500 shares are vested as of December 31, 2010. In
addition, Mr. Thompson owns 208,333 restricted stock units
at December 31, 2010, none of which has vested. |
In 2011, the Chairman of the Board will receive an annual
retainer in the value of $50,000 and all other non-employee
directors will receive an annual retainer in the value of
$30,000. The retainers may be paid in cash or an equivalent
value of restricted stock at the option of the director. Board
members also receive additional annual retainers for serving on
Board committees. The additional annual retainer for the
Chairman of the Audit Committee will be $15,000 and the
additional annual retainer for all other members of the Audit
Committee will be $5,000. The additional annual retainer for the
Chairman of the Compensation Committee and the Chairman of the
Nominating and Corporate Governance Committee will be $10,000
and the additional annual retainer for all other members will be
$5,000. The Board retainer covers six meetings in a year and, if
exceeded, the Chairman of the Board will receive $1,500 for each
additional meeting and the other Board members will receive
$1,000 for each additional meeting. If the number of meetings in
a year for any given committee exceeds four, the chairman of the
committee will receive $1,500 for each additional meeting and
the other committee members will receive $1,000 for each
additional meeting. Our directors are also entitled to receive
reimbursement of reasonable
out-of-pocket
expenses incurred by them to attend Board meetings.
In addition to the cash and restricted stock compensation, each
non-employee director will be granted an annual stock option
grant.
52
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of our common stock as of July 29, 2011 by:
(i) each director; (ii) each of our named executive
officers; (iii) all of our executive officers and directors
as a group; and (iv) all those known by us to be beneficial
owners of more than five percent of our common stock.
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership Common(1)
|
|
|
Number of Shares
|
|
Percent of Total (%)
|
|
First Eagle Investment Management.(2)
|
|
|
72,337,652
|
|
|
|
36.51
|
|
1345 Avenue of the Americas
|
|
|
|
|
|
|
|
|
New York, NY 10105
|
|
|
|
|
|
|
|
|
Novo Nordisk A/S(3)
|
|
|
26,204,122
|
|
|
|
13.23
|
|
Novo Alle DK 2880
|
|
|
|
|
|
|
|
|
Bagsvaerd G7
|
|
|
|
|
|
|
|
|
Boxer Capital LLC(4)
|
|
|
15,651,418
|
|
|
|
7.90
|
|
445 Marine View Avenue
|
|
|
|
|
|
|
|
|
Suite 100
|
|
|
|
|
|
|
|
|
Del Mar, CA 92014
|
|
|
|
|
|
|
|
|
Conus Partners, Inc.(5)
|
|
|
11,267,245
|
|
|
|
5.62
|
|
49 West 38th Street, 11th Floor
|
|
|
|
|
|
|
|
|
New York, NY 10018
|
|
|
|
|
|
|
|
|
Igor Gonda, Ph.D.(6)
|
|
|
3,282,267
|
|
|
|
1.66
|
|
Nancy Pecota(7)
|
|
|
978,750
|
|
|
|
*
|
|
Virgil D. Thompson(8)
|
|
|
976,462
|
|
|
|
*
|
|
Frank H. Barker(9)
|
|
|
952,145
|
|
|
|
*
|
|
John M. Siebert, Ph.D.(10)
|
|
|
696,697
|
|
|
|
*
|
|
Tamar D. Howson(11)
|
|
|
219,831
|
|
|
|
|
|
All executive officers and directors as a
group (6 persons)(12)
|
|
|
7,106,152
|
|
|
|
3.59
|
|
|
|
|
* |
|
Less than one percent |
|
(1) |
|
This table is based upon information supplied by officers,
directors and principal shareholders and Forms 3,
Forms 4 and Schedules 13D and 13G filed with the Securities
and Exchange Commission (SEC). Unless otherwise
indicated in the footnotes to this table and subject to
community property laws where applicable, we believe that each
of the shareholders named in this table has sole voting and
investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on
198,114,301 shares of common stock outstanding on
July 29, 2011. Unless otherwise indicated, the address of
each person on this table is
c/o Aradigm
Corporation, 3929 Point Eden Way, Hayward, California, 94545. |
|
(2) |
|
Based upon information contained in a schedule 13G filed with
the SEC on September 22, 2010 and in a Form 4 filed
with the SEC on July 11, 2011, First Eagle Investment
Management (FEIM) (formerly Arnhold and S.
Bleichroeder Advisors, LLC), an investment adviser registered
under Section 203 of the Investment Advisers Act of 1940,
is deemed to be the beneficial owner of 72,337,652 shares
or 36.51% of the Common Stock believed to be outstanding, as a
result of acting as investment advisor to various clients.
Clients of FEIM have the right to receive and the ultimate power
to direct the receipt of dividends from, or the proceeds of the
sale of, such securities. First Eagle Value in Biotechnology
Master Fund, Ltd., a Cayman Islands company for which FEIM acts
as investment adviser, may be deemed to beneficially own
36,588,965 of these 72,337,652 shares. In addition,
21 April Fund Ltd., a Cayman Islands company for which
FEIM acts as an investment adviser, may be deemed to
beneficially own 19,177,029 of these 72,337,652 shares. DEF
Associates N.V., a Netherlands Antilles company for which FEIM
acts as an investment adviser, may be deemed to beneficially own
7,473,328 of these 72,337,652 shares. 21 April Fund,
L.P., a Delaware limited partnership for which FEIM acts as an
investment adviser, may be deemed to beneficially own 5,619,787
of these 72,337,652 shares. DEF Associates LP, a limited
partnership, may be deemed to beneficially own 2,498,800 of
these 72,337,652 shares. |
53
|
|
|
(3) |
|
Based upon information contained in a Form 4, filed with
the SEC on November 09, 2010. |
|
(4) |
|
Based upon information supplied to us by the shareholder on
August 15, 2011. |
|
(5) |
|
Based upon information contained in a Schedule 13G, filed
with the SEC on February 24, 2011. |
|
(6) |
|
Includes 1,498,500 stock options shares which are exercisable
within 60 days of July 29, 2011. The number of shares
also includes 500,000 shares pursuant to restricted stock
awards that have not vested. Additionally, the number of shares
does not include a total of 300,000 shares that vest only
upon the occurrence of certain future events pursuant to a
restricted stock bonus agreement between Dr. Gonda and
Aradigm. |
|
(7) |
|
Includes 443,750 stock options which are exercisable within
60 days of July 29, 2011. The number of shares also
includes 300,000 shares pursuant to restricted stock awards
that have not vested. |
|
(8) |
|
Includes 476,400 stock options which are exercisable within
60 days of July 29, 2011. The number of shares also
includes 98,685 shares pursuant to restricted stock awards
that have not vested and 208,333 shares pursuant to
restricted stock units that have not vested. |
|
(9) |
|
Includes 410,500 stock options which are exercisable within
60 days of July 29, 2011. The number of shares also
includes 118,422 shares pursuant to restricted stock awards
that have not vested. |
|
(10) |
|
Includes 395,000 stock options which are exercisable within
60 days of July 29, 2011. The number of shares also
includes 203,947 shares pursuant to restricted stock units
that have not vested. |
|
(11) |
|
Includes 137,500 stock options which are exercisable within
60 days of July 29, 2011. The number of shares also
includes 60,903 shares pursuant to restricted stock awards
that have not vested. |
|
(12) |
|
See footnotes (6) through (11) above. |
Equity
Compensation Plan Information
The following table summarizes our equity compensation plan
information as of December 31, 2010. Information is
included for the equity compensation plans approved by our
shareholders. There are no equity compensation plans not
approved by our shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
Available for
|
|
|
|
|
|
|
Future Issuance
|
|
|
Common Stock to
|
|
|
|
Under Equity
|
|
|
be Issued Upon
|
|
Weighted-Average
|
|
Compensation
|
|
|
Exercise of
|
|
Exercise Price of
|
|
Plans (Excluding
|
|
|
Outstanding Options
|
|
Outstanding Options
|
|
Securities Reflected
|
|
|
and Rights
|
|
and Rights
|
|
in Column (a))
|
Plan Category
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity compensation plans approved by Aradigm shareholders
|
|
|
6,354,758
|
(1)
|
|
$
|
1.32
|
|
|
|
4,529,288
|
(2)
|
Equity compensation plans not approved by Aradigm shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Issuable pursuant to our 1996 Equity Incentive Plan, the 1996
Non-Employee Directors Plan and the 2005 Equity Incentive
Plan. |
|
(2) |
|
Includes 2,570,010 shares reserved under our Employee Stock
Purchase Plan (See Note 9 to our audited financial
statements included elsewhere in this prospectus). |
Change in
Control
There were no arrangements, known to us, including any pledge by
any person of our securities the operation of which may at a
subsequent date result in a change in control of our company.
54
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Review,
Approval or Ratification of Transactions with Related
Persons
The Board has adopted, in writing, a policy and procedures for
the review of related person transactions. Any related person
transaction we propose to enter into must be reported to our
Chief Financial Officer and, unless otherwise reviewed and
approved by the Board, shall be reviewed and approved by the
Audit Committee in accordance with the terms of the policy,
prior to effectiveness or consummation of any related person
transaction, whenever practicable. The policy defines a
related person transaction as any financial
transaction, arrangement or relationship (including any
indebtedness or guarantee of indebtedness), or any series of
similar transactions, arrangements or relationships in which
Aradigm (i) was or is to be a participant, (ii) the
amount involved exceeds $120,000 and (iii) a Related Person
(as defined therein) had or will have a direct or indirect
material interest. In addition, any related person transaction
previously approved by the Audit Committee or otherwise already
existing that is ongoing in nature shall be reviewed by the
Audit Committee annually to ensure that such related person
transaction has been conducted in accordance with the previous
approval granted by the Audit Committee, if any, and that all
required disclosures regarding the related person transaction
are made. Transactions involving compensation of executive
officers shall be reviewed and approved by the Compensation
Committee in the manner specified in the charter of the
Compensation Committee. As appropriate for the circumstances,
the Audit Committee shall review and consider the Related
Persons interest in the related person transaction, the
approximate dollar value of the amount involved in the related
person transaction, the approximate dollar value of the amount
of the Related Persons interest in the transaction without
regard to the amount of any profit or loss, whether the
transaction was undertaken in the ordinary course of business,
whether the transaction with the Related Person is proposed to
be, or was, entered into on terms no less favorable to the
Company than terms that could have been reached with an
unrelated third party, the purpose of, and the potential
benefits to us of the transaction and any other information
regarding the related person transaction or the Related Person
in the context of the proposed transaction that would be
material to investors in light of the circumstances of the
particular transaction.
June 2010
Private Placement
On June 21, 2010, we closed a private placement, which we
refer to in this prospectus as 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 under the terms of a
securities purchase agreement that we entered into with the
investors on June 18, 2010.
The investors who purchased common stock and warrants at the
closing of the June 2010 private placement included the
following investors for which First Eagle Investment Management,
LLC (who, immediately prior to the June 2010 private placement,
was then deemed to be the beneficial owner of more than five
percent of our common stock) serves as investment adviser:
(i) 21 April Fund, L.P., (ii) 21 April Fund,
Ltd., (iii) DEF Associates N.V. and (iv) First Eagle
Value in Biotechnology Master Fund, Ltd. At the closing of the
June 2010 private placement, these investors for which First
Eagle Investment Management, LLC serves as investment adviser
collectively purchased 19,433,408 shares of our common
stock and warrants to purchase an aggregate of
4,215,239 shares of our common stock for an aggregate
purchase price of approximately $2.3 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 incorporation to
increase the total number of authorized shares of our common
stock to cover the shares issuable upon exercise of the
warrants, these four investors fully exercised their warrants at
an exercise price of $0.1184 per share and we received an
aggregate of approximately $0.5 million in additional
proceeds from the exercise of their warrants. Consistent with
our policy and procedures for the review of related person
transactions, the June 2010 private placement was approved by
our Board of Directors.
July 2011
Private Placement
On July 7, 2011, we closed a private placement, which we
refer to in this prospectus as the July 2011 private placement,
in which we sold 25,000,000 shares of our common stock to
accredited investors under the terms of a securities purchase
agreement that we entered into with the investors on
July 5, 2011.
55
The investors who purchased common stock at the closing of the
July 2011 private placement included the following investors for
which First Eagle Investment Management, LLC (who, immediately
prior to the July 2011 private placement, was then deemed to be
the beneficial owner of more than five percent of our common
stock) serves as investment adviser: (i) 21 April
Fund L.P., (ii) 21 April Fund, Ltd.,
(iii) DEF Associates N.V., (iv) DEF Associates L.P.
and (v) First Eagle Value in Biotechnology Master Fund,
Ltd. At the closing of the July 2011 private placement, these
investors for which First Eagle Investment Management LLC serves
as investment adviser collectively purchased
10,625,000 shares of our common stock for an aggregate
purchase price of approximately $2.0 million. Consistent
with our policy and procedures for the review of related person
transactions, the July 2011 private placement was approved by
our Board of Directors.
SELLING
SHAREHOLDERS
This prospectus generally covers the resale of up to
25,000,000 shares of our common stock being offered by the
selling shareholders identified in the table below. These shares
consist of 25,000,000 outstanding shares of common stock issued
in the July 2011 private placement.
We have entered into registration rights agreements with the
selling shareholders pursuant to which we have agreed to file a
registration statement, of which this prospectus is a part,
under the Securities Act of 1933, as amended (the
Securities Act), registering the resale by the
selling shareholders of the shares of common stock covered by
this prospectus. We have also agreed to cause such registration
statement to become effective, and to keep such registration
statement effective. Our failure to satisfy the deadlines set
forth in the registration rights agreements may subject us to
payment of certain monetary penalties pursuant to the terms of
the registration rights agreements.
We are registering the shares of common stock covered by this
prospectus in order to permit the selling shareholders to offer
the shares for resale from time to time.
The table below lists the selling shareholders and other
information regarding the beneficial ownership (as determined
under Section 13(d) of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder) of the
shares of common stock held by each of the selling shareholders.
The table below has been prepared based on information supplied
to us by the selling shareholders. Except as indicated in the
footnotes to the table below, the selling shareholders have not
had any material relationship with us within the past three
years, except for their ownership of our common stock.
The second column lists the number of shares of common stock
beneficially owned by the selling shareholders, based on their
respective ownership of shares of common stock, as of
July 7, 2011. This column includes the shares of common
stock being offered under this prospectus.
The third column lists the maximum number of shares of common
stock being offered by the selling shareholders under this
prospectus.
The fourth and fifth columns assume the sale of all of the
shares offered by the selling shareholders pursuant to this
prospectus.
56
The selling shareholders may sell all, some or none of their
shares in this offering. See Plan of Distribution.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
Number of
|
|
|
|
|
Shares of
|
|
Shares of
|
|
Shares of
|
|
Percentage of
|
|
|
Common
|
|
Common
|
|
Common
|
|
Common Stock
|
|
|
Stock Owned
|
|
Stock to be
|
|
Stock Owned
|
|
Outstanding
|
|
|
Prior to
|
|
Sold Pursuant to
|
|
After
|
|
After
|
Name of Selling Shareholder
|
|
Offering(a)
|
|
this Prospectus
|
|
Offering(b)
|
|
Offering(c)
|
|
21 April Fund, L.P. (1)
|
|
|
5,619,787
|
|
|
|
1,000,000
|
|
|
|
4,619,787
|
|
|
|
2.33
|
%
|
21 April Fund, Ltd. (2)
|
|
|
19,177,029
|
|
|
|
2,718,750
|
|
|
|
16,458,279
|
|
|
|
8.31
|
%
|
DEF Associates LP(3)
|
|
|
2,498,800
|
|
|
|
400,000
|
|
|
|
2,098,800
|
|
|
|
1.06
|
%
|
DEF Associates N.V. (4)
|
|
|
7,473,328
|
|
|
|
1,193,750
|
|
|
|
6,279,578
|
|
|
|
3.17
|
%
|
First Eagle Value in Biotechnology Master Fund, Ltd. (5)
|
|
|
36,588,965
|
|
|
|
5,312,500
|
|
|
|
31,276,465
|
|
|
|
15.79
|
%
|
Boxer Capital, LLC(6)
|
|
|
15,651,418
|
|
|
|
8,125,000
|
|
|
|
7,526,418
|
|
|
|
3.80
|
%
|
Fidelity Select Portfolios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biotechnology Portfolio(7)
|
|
|
6,398,160
|
|
|
|
5,920,360
|
|
|
|
477,800
|
|
|
|
0.02
|
%
|
Fidelity Advisor Series VII:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity Advisor Biotechnology Fund(7)
|
|
|
351,440
|
|
|
|
329,640
|
|
|
|
21,800
|
|
|
|
0
|
%
|
|
|
|
|
|
The selling shareholder is an affiliate of a broker-dealer.
Based on information provided to us by such selling shareholder,
such selling shareholder purchased the shares being offered for
resale in the ordinary course of business and, at the time of
purchase, such selling shareholder had no agreements or
understandings, directly or indirectly, with any person to
distribute the shares. |
|
* |
|
Less than 1% |
|
(a) |
|
Includes the shares of common stock being offered under this
prospectus. Unless otherwise indicated in the footnotes to this
table and subject to community property laws where applicable,
we believe that each of the selling shareholders named in this
table has sole voting and investment power with respect to the
shares indicated as beneficially owned. |
|
(b) |
|
Assumes all of the shares of common stock being offered under
this prospectus are sold in the offering. |
|
(c) |
|
Applicable percentage ownership is based on
198,114,301 shares of common stock outstanding as of
July 30, 2011. |
|
(1) |
|
First Eagle Investment Management, LLC, a Delaware limited
liability company and a U.S. registered investment adviser
serves as investment adviser to the selling shareholder. First
Eagle Investment Management, LLC is a subsidiary of Arnhold and
S. Bleichroeder Holdings, Inc., a Delaware corporation. Michael
M. Kellen may be deemed to have voting and investment control
over the shares held by the selling shareholder. |
|
(2) |
|
First Eagle Investment Management, LLC, a Delaware limited
liability company and a U.S. registered investment adviser
serves as investment adviser to the selling shareholder. First
Eagle Investment Management, LLC is a subsidiary of Arnhold and
S. Bleichroeder Holdings, Inc., a Delaware corporation. Michael
M. Kellen may be deemed to have voting and investment control
over the shares held by the selling shareholder. |
|
(3) |
|
First Eagle Investment Management, LLC, a Delaware limited
liability company and a U.S. registered investment adviser
serves as investment adviser to the selling shareholder. First
Eagle Investment Management, LLC is a subsidiary of Arnhold and
S. Bleichroeder Holdings, Inc., a Delaware corporation. Michael
M. Kellen may be deemed to have voting and investment control
over the shares held by the selling shareholder. |
|
(4) |
|
First Eagle Investment Management, LLC, a Delaware limited
liability company and a U.S. registered investment adviser
serves as investment adviser to the selling shareholder. First
Eagle Investment Management, LLC is a subsidiary of Arnhold and
S. Bleichroeder Holdings, Inc., a Delaware corporation. |
57
|
|
|
|
|
Dan DeClue may be deemed to have voting and investment control
over the shares held by the selling shareholder. |
|
(5) |
|
First Eagle Investment Management, LLC, a Delaware limited
liability company and a U.S. registered investment adviser
serves as investment adviser to the selling shareholder. First
Eagle Investment Management, LLC is a subsidiary of Arnhold and
S. Bleichroeder Holdings, Inc., a Delaware corporation. Dan
DeClue may be deemed to have voting and investment control over
the shares held by the selling shareholder. |
|
(6) |
|
Boxer Asset Management is the majority member of Boxer Capital,
LLC, a limited liability corporation. Joseph C. Lewis may
be deemed to have voting and investment control over the shares
held by the selling shareholders. |
|
(7) |
|
Fidelity Management & Research Company
(Fidelity), 82 Devonshire Street, Boston,
Massachusetts 02109, a wholly-owned subsidiary of FMR LLC and an
investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, is the beneficial owner of
6,749,600 Units of ARADIGM CORPORATION, (the
Company) as a result of acting as investment adviser to
various investment companies registered under Section 8 of
the Investment Company Act of 1940. Edward C. Johnson 3d and FMR
LLC, through its control of Fidelity, and the funds each has
sole power to dispose of the 6,749,600 Units owned by the Funds.
Members of the family of Edward C. Johnson 3d, Chairman of FMR
LLC, are the predominant owners, directly or through trusts, of
Series B voting common shares of FMR LLC, representing 49%
of the voting power of FMR LLC. The Johnson family group and all
other Series B shareholders have entered into a
shareholders voting agreement under which all
Series B voting common shares will be voted in accordance
with the majority vote of Series B voting common shares.
Accordingly, through their ownership of voting common shares and
the execution of the shareholders voting agreement,
members of the Johnson family may be deemed, under the
Investment Company Act of 1940, to form a controlling group with
respect to FMR LLC. Neither FMR LLC nor Edward C. Johnson 3d,
Chairman of FMR LLC, has the sole power to vote or direct the
voting of the shares owned directly by the Fidelity Funds, which
power resides with the Funds Boards of Trustees. Fidelity
carries out the voting of the shares under written guidelines
established by the Funds Boards of Trustees. |
DETERMINATION
OF OFFERING PRICE
The selling shareholders will determine at what price they may
sell the shares of common stock offered by this prospectus, and
such sales may be made at prevailing market prices, or at
privately negotiated prices.
PLAN OF
DISTRIBUTION
We are registering 25,000,000 shares of common stock previously
issued to permit the resale of these shares of common stock by
the holders of the common stock from time to time after the date
of this prospectus. We will not receive any of the proceeds from
the sale by the selling shareholders of the shares of common
stock. We will bear all fees and expenses incident to our
obligation to register the shares of common stock.
The selling shareholders may sell all or a portion of the shares
of common stock held by them and offered hereby from time to
time directly or through one or more underwriters,
broker-dealers or agents. If the shares of common stock are sold
through underwriters or broker-dealers, the selling shareholders
will be responsible for underwriting discounts or commissions or
agents commissions. The shares of common stock may be sold
in one or more transactions at fixed prices, at prevailing
market prices at the time of the sale, at varying prices
determined at the time of sale or at negotiated prices. These
sales may be effected in transactions, which may involve crosses
or block transactions, pursuant to one or more of the following
methods:
|
|
|
|
|
on any national securities exchange or quotation service on
which the securities may be listed or quoted at the time of sale;
|
|
|
|
in the
over-the-counter
market;
|
|
|
|
in transactions otherwise than on these exchanges or systems or
in the
over-the-counter
market;
|
58
|
|
|
|
|
through the writing or settlement of options, whether such
options are listed on an options exchange or otherwise;
|
|
|
|
ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
|
|
|
|
block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
|
|
|
|
purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
|
|
|
|
an exchange distribution in accordance with the rules of the
applicable exchange;
|
|
|
|
privately negotiated transactions;
|
|
|
|
short sales made after the date the Registration Statement is
declared effective by the SEC;
|
|
|
|
agreements between broker-dealers and the selling
securityholders to sell a specified number of such shares at a
stipulated price per share;
|
|
|
|
a combination of any such methods of sale; and
|
|
|
|
any other method permitted pursuant to applicable law.
|
The selling shareholders may also sell shares of common stock
under Rule 144 promulgated under the Securities Act of
1933, as amended, if available, rather than under this
prospectus. In addition, the selling shareholders may transfer
the shares of common stock by other means not described in this
prospectus If the selling shareholders effect such transactions
by selling shares of common stock to or through underwriters,
broker-dealers or agents, such underwriters, broker-dealers or
agents may receive commissions in the form of discounts,
concessions or commissions from the selling shareholders or
commissions from purchasers of the shares of common stock for
whom they may act as agent or to whom they may sell as principal
(which discounts, concessions or commissions as to particular
underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection
with sales of the shares of common stock or otherwise, the
selling shareholders may enter into hedging transactions with
broker-dealers, which may in turn engage in short sales of the
shares of common stock in the course of hedging in positions
they assume. The selling shareholders may also sell shares of
common stock short and deliver shares of common stock covered by
this prospectus to close out short positions and to return
borrowed shares in connection with such short sales. The selling
shareholders may also loan or pledge shares of common stock to
broker-dealers that in turn may sell such shares.
The selling shareholders may pledge or grant a security interest
in some or all of the shares of common stock owned by them and,
if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of
common stock from time to time pursuant to this prospectus or
any amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending, if
necessary, the list of selling shareholders to include the
pledgee, transferee or other successors in interest as selling
shareholders under this prospectus. The selling shareholders
also may transfer and donate the shares of common stock in other
circumstances in which case the transferees, donees, pledgees or
other successors in interest will be the selling beneficial
owners for purposes of this prospectus.
To the extent required by the Securities Act and the rules and
regulations thereunder, the selling shareholders and any
broker-dealer participating in the distribution of the shares of
common stock may be deemed to be underwriters within
the meaning of the Securities Act, and any commission paid, or
any discounts or concessions allowed to, any such broker-dealer
may be deemed to be underwriting commissions or discounts under
the Securities Act. At the time a particular offering of the
shares of common stock is made, a prospectus supplement, if
required, will be distributed, which will set forth the
aggregate amount of shares of common stock being offered and the
terms of the offering, including the name or names of any
broker-dealers or agents, any discounts, commissions and other
terms constituting compensation from the selling shareholders
and any discounts, commissions or concessions allowed or
re-allowed or paid to broker-dealers.
Under the securities laws of some states, the shares of common
stock may be sold in such states only through registered or
licensed brokers or dealers. In addition, in some states, the
shares of common stock may not be sold
59
unless such shares have been registered or qualified for sale in
such state or an exemption from registration or qualification is
available and is complied with.
There can be no assurance that any selling shareholder will sell
any or all of the shares of common stock registered pursuant to
the registration statement, of which this prospectus forms a
part.
The selling shareholders and any other person participating in
such distribution will be subject to applicable provisions of
the Securities Exchange Act of 1934, as amended (the
Exchange Act), and the rules and regulations
thereunder, including, without limitation, to the extent
applicable, Regulation M of the Exchange Act, which may
limit the timing of purchases and sales of any of the shares of
common stock by the selling shareholders and any other
participating person. To the extent applicable,
Regulation M may also restrict the ability of any person
engaged in the distribution of the shares of common stock to
engage in market-making activities with respect to the shares of
common stock. All of the foregoing may affect the marketability
of the shares of common stock and the ability of any person or
entity to engage in market-making activities with respect to the
shares of common stock.
We will pay all expenses of the registration of the shares of
common stock pursuant to the related registration rights
agreements, estimated to be $29,051.48 in total, including,
without limitation, SEC filing fees and expenses of compliance
with state securities or blue sky laws; provided,
however, a selling shareholder will pay all underwriting
discounts and selling commissions, if any. We will indemnify the
selling shareholders against liabilities, including some
liabilities under the Securities Act in accordance with the
registration rights agreements or the selling shareholders will
be entitled to contribution. We may be indemnified by the
selling shareholders against civil liabilities, including
liabilities under the Securities Act that may arise from any
written information furnished to us by the selling shareholder
specifically for use in this prospectus, in accordance with the
related registration rights agreements or we may be entitled to
contribution.
Once sold under the registration statement, of which this
prospectus forms a part, the shares of common stock will be
freely tradable in the hands of persons other than our
affiliates.
DESCRIPTION
OF SECURITIES
The following description summarizes some of the terms of our
capital stock. Because it is only a summary, it does not contain
all of the information that may be important to you and is
qualified in its entirety by reference to the relevant
provisions of our Amended and Restated Articles of
Incorporation, our Amended and Restated Bylaws and our amended
and restated shareholder rights plan.
For a complete description you should refer to our Amended and
Restated Articles of Incorporation, our Amended and Restated
Bylaws and our amended and restated shareholder rights plan,
which are incorporated by reference as exhibits to the
registration statement of which the prospectus is a part.
General
As of the date of this prospectus, we are authorized by our
amended and restated articles of incorporation to issue an
aggregate of 213,527,214 shares of common stock. In
addition, as of the date of this prospectus, we are authorized
by our amended and restated articles of incorporation to issue
an aggregate of 5,000,000 shares of preferred stock.
As of July 30, 2011, there were:
|
|
|
|
|
198,114,301 shares of common stock issued and outstanding,
which includes the shares of common stock being offered under
this prospectus; and
|
|
|
|
no shares of preferred stock issued and outstanding.
|
Common
Stock
All outstanding shares of common stock are of the same class and
have equal rights and attributes. The holders of common stock
are entitled to one vote per share on all matters submitted to a
vote of shareholders of the Company. All shareholders are
entitled to share equally in dividends, if any, as may be
declared from time to time by
60
the Board of Directors out of funds legally available. In the
event of liquidation, the holders of common stock are entitled
to share ratably in all assets remaining after payment of all
liabilities. The shareholders do not have cumulative or
preemptive rights.
The transfer agent and registrar for our common stock is
Computershare (formerly Equiserve Trust Company).
Preferred
Stock
Our Board of Directors is empowered, without shareholder
approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect
the voting power or other rights of the holders of common stock.
We may issue some or all of the preferred stock to effect a
business combination. In addition, the preferred stock could be
utilized as a method of discouraging, delaying or preventing a
change in control of us. Although we do not currently intend to
issue any shares of preferred stock, we cannot assure you that
we will not do so in the future.
Shareholder
Rights Plan
In September 2008, we 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, we distribute 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 our 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 our company or to
deprive our shareholders of their interest in our companys
long-term value. The shareholder rights plan seeks to achieve
these goals by encouraging a potential acquirer to negotiate
with our board of directors. The rights will expire at the close
of business on September 8, 2018.
MARKET
FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
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
|
|
2011
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.25
|
|
|
$
|
0.16
|
|
Second Quarter
|
|
|
0.22
|
|
|
|
0.15
|
|
Third Quarter (through August 3, 2011)
|
|
|
0.20
|
|
|
|
0.18
|
|
61
As of July 30, 2011, there were 160 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.
LEGAL
MATTERS
The validity of the shares of our common stock offered hereby
has been passed upon for us by Morrison & Foerster
LLP, San Francisco, California.
EXPERTS
The audited financial statements for the years ended
December 31, 2010 and 2009 have been included in this
prospectus in reliance upon the report of Odenberg Ullakko
Muranishi & Co LLP, an independent registered public
accounting firm, and their authority as experts in accounting
and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We are a public company and file annual, quarterly and special
reports, proxy statements and other information with the SEC.
You may read and copy any document we file at the SECs
public reference room at 100 F Street, NE,
Washington, D.C. 20549. You can request copies of these
documents by writing to the SEC and paying a fee for the copying
cost. Please call the SEC at
1-800-SEC-0330
for more information about the operation of the public reference
room. Our SEC filings are also available, at no charge, to the
public at the SECs website at
http://www.sec.gov.
We have filed with the SEC a Registration Statement on
Form S-1
under the Securities Act with respect to the shares of common
stock being offered by this prospectus. This prospectus is part
of that registration statement. This prospectus does not contain
all of the information set forth in the registration statement
or the exhibits to the registration statement. For further
information with respect to us and the shares we are offering
pursuant to this prospectus, you should refer to the
registration statement and its exhibits. Statements contained in
this prospectus as to the contents of any contract, agreement or
other document referred to are not necessarily complete, and you
should refer to the copy of that contract or other documents
filed as an exhibit to the registration statement. You may read
or obtain a copy of the registration statement at the SECs
public reference facilities and Internet site referred to above.
62
ARADIGM
CORPORATION
|
|
|
|
|
Page
|
|
Unaudited Condensed Consolidated Financial Statements:
|
|
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
Audited Financial Statements:
|
|
|
|
|
F-15
|
|
|
F-16
|
|
|
F-17
|
|
|
F-18
|
|
|
F-19
|
|
|
F-20
|
F-1
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
(Note 1)
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,481
|
|
|
$
|
5,295
|
|
Short-term investments
|
|
|
899
|
|
|
|
251
|
|
Receivables
|
|
|
97
|
|
|
|
180
|
|
Prepaid and other current assets
|
|
|
480
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,957
|
|
|
|
5,906
|
|
Property and equipment, net
|
|
|
1,319
|
|
|
|
1,553
|
|
Notes receivable
|
|
|
56
|
|
|
|
54
|
|
Other assets
|
|
|
583
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,915
|
|
|
$
|
7,628
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
212
|
|
|
$
|
257
|
|
Accrued clinical and cost of other studies
|
|
|
921
|
|
|
|
993
|
|
Accrued compensation
|
|
|
716
|
|
|
|
327
|
|
Facility lease exit obligation
|
|
|
108
|
|
|
|
99
|
|
Other accrued liabilities
|
|
|
778
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,735
|
|
|
|
2,126
|
|
Deferred rent
|
|
|
121
|
|
|
|
99
|
|
Facility lease exit obligation, non-current
|
|
|
677
|
|
|
|
729
|
|
Other non-current liabilities
|
|
|
75
|
|
|
|
75
|
|
Note payable, net of discount and accrued interest
|
|
|
8,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
11,753
|
|
|
|
3,029
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, 5,000,000 shares authorized, none
outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value; authorized shares: 213,527,214 at
June 30, 2011 and December 31, 2010; issued and
outstanding shares: 173,114,301 at June 30, 2011;
172,304,235 at December 31, 2010
|
|
|
359,328
|
|
|
|
358,424
|
|
Accumulated deficit
|
|
|
(359,166
|
)
|
|
|
(353,825
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
162
|
|
|
|
4,599
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
11,915
|
|
|
$
|
7,628
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
F-2
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
|
(Unaudited)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty revenue
|
|
|
184
|
|
|
|
|
|
|
|
366
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,584
|
|
|
|
2,736
|
|
|
|
3,064
|
|
|
|
5,573
|
|
General and administrative
|
|
|
1,440
|
|
|
|
1,382
|
|
|
|
2,575
|
|
|
|
2,635
|
|
Restructuring and asset impairment
|
|
|
10
|
|
|
|
13
|
|
|
|
20
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,034
|
|
|
|
4,131
|
|
|
|
5,659
|
|
|
|
8,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,850
|
)
|
|
|
(4,131
|
)
|
|
|
(5,293
|
)
|
|
|
(4,234
|
)
|
Interest income
|
|
|
1
|
|
|
|
4
|
|
|
|
3
|
|
|
|
14
|
|
Interest expense
|
|
|
(46
|
)
|
|
|
(109
|
)
|
|
|
(53
|
)
|
|
|
(218
|
)
|
Other income (expense), net
|
|
|
1
|
|
|
|
108
|
|
|
|
2
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,894
|
)
|
|
$
|
(4,128
|
)
|
|
$
|
(5,341
|
)
|
|
$
|
(4,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
170,731
|
|
|
|
104,891
|
|
|
|
170,435
|
|
|
|
102,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
F-3
ARADIGM
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,341
|
)
|
|
$
|
(4,332
|
)
|
Adjustments to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Amortization and accretion of investments
|
|
|
1
|
|
|
|
26
|
|
Depreciation and amortization
|
|
|
240
|
|
|
|
322
|
|
Stock-based compensation expense
|
|
|
378
|
|
|
|
451
|
|
Compensation expense from warrants for services rendered
|
|
|
428
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
83
|
|
|
|
(239
|
)
|
Prepaid and other current assets
|
|
|
(262
|
)
|
|
|
(171
|
)
|
Other assets
|
|
|
(470
|
)
|
|
|
3
|
|
Accounts payable
|
|
|
(46
|
)
|
|
|
376
|
|
Accrued compensation
|
|
|
389
|
|
|
|
311
|
|
Other liabilities
|
|
|
290
|
|
|
|
138
|
|
Deferred rent
|
|
|
22
|
|
|
|
(13
|
)
|
Facility lease exit obligation
|
|
|
(43
|
)
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(4,331
|
)
|
|
|
(3,252
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Purchases of short-term investments
|
|
|
(1,149
|
)
|
|
|
|
|
Proceeds from sales and maturities of short-term investments
|
|
|
500
|
|
|
|
5,200
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(654
|
)
|
|
|
5,195
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from private placement of common stock, net
|
|
|
|
|
|
|
3,719
|
|
Proceeds from issuance of common stock
|
|
|
60
|
|
|
|
43
|
|
Proceeds from issuance of note payable
|
|
|
8,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
8,171
|
|
|
|
3,762
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
3,186
|
|
|
|
5,705
|
|
Cash and cash equivalents at beginning of period
|
|
|
5,295
|
|
|
|
3,903
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
8,481
|
|
|
$
|
9,608
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
F-4
ARADIGM
CORPORATION
June 30, 2011
|
|
1.
|
Organization,
Basis of Presentation and Liquidity
|
Organization
Aradigm Corporation (the Company, we,
our, or us) 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 any revenues from the sale of products
in the upcoming year, except for royalty revenue from Zogenix.
The Company operates as a single operating segment.
Basis
of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with United States
generally accepted accounting principles for interim financial
information and with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with United
States generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission (the SEC). In
the opinion of management, the financial statements reflect all
adjustments, which are of a normal recurring nature, necessary
for fair presentation. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2010, as filed with the SEC
on March 25, 2011 (the 2010 Annual Report on
Form 10-K).
The results of the Companys operations for the interim
periods presented are not necessarily indicative of operating
results for the full fiscal year or any future interim period.
The balance sheet at December 31, 2010 has been derived
from the audited financial statements at that date, but does not
include all of the information and footnotes required by United
States generally accepted accounting principles for complete
financial statements. For further information, please refer to
the financial statements and notes thereto included in the 2010
Annual Report on
Form 10-K.
The accompanying unaudited condensed consolidated financial
statements include the accounts of Aradigm Corporation and the
Companys active wholly-owned subsidiary, Aradigm Royalty
Financing LLC. All intercompany transactions have been
eliminated.
Liquidity
The Company had cash, cash equivalents and short-term
investments of approximately $9.4 million as of
June 30, 2011. Management believes that this amount, as
well as the proceeds from the July 2011 private placement (see
Note 12), will be sufficient to fund operations through at
least the second quarter of 2012.
|
|
2.
|
Summary
of Significant Accounting Policies
|
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 expenses associated with the June 2011
royalty financing transaction and for payments received from
product development and license agreements as they relate to
revenue recognition, assumptions for valuing options and
warrants, and income taxes. Actual results could differ
materially from these estimates.
F-5
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
and 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 investments, which consist solely of debt
securities, at the time of purchase. All investments are
classified as
available-for-sale,
carried at estimated fair value and reported in cash and cash
equivalents or 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 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 value of the securities held
and records a loss equal to the amount of any such decline. No
such reductions were 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.
Impairment
of Long-Lived Assets
In accordance with 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.
Accounting
for Costs Associated with Exit or Disposal
Activities
In accordance with ASC 420, Exit or Disposal Cost
Obligations (ASC 420), 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
credit-adjusted risk-free rate that was used to measure the
liability initially.
F-6
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
Recognition
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 (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.
In accordance with contract terms, milestone payments from
collaborative research agreements are considered reimbursements
for costs incurred under the agreements and, accordingly, are
recognized as revenue either upon completion of the milestone
effort, when payments are contingent upon completion of the
effort, or are based on actual efforts expended over the
remaining term of the agreement when payments precede the
required efforts. 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.
Royalty revenue will be earned under the terms of the asset sale
agreement with Zogenix. The Company will recognize revenue when
the amounts under this agreement can be determined and when
collectability is probable. The Company has no performance
obligations under this agreement. The Company anticipates
recognizing revenue from quarterly royalty payments one quarter
in arrears since it believes it will not be able to determine
quarterly royalty earnings until it receives the royalty
statements from Zogenix.
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 such costs are 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 Companys employee stock purchase
plan. This guidance requires companies to estimate the fair
value of share-based payment awards on the date of the grant
using an option-pricing model. The Company has adopted the
simplified method to calculate the beginning balance of the
additional paid-in capital, or APIC pool of excess tax benefits,
and to determine the subsequent effect on the APIC pool and
statement of cash flows of the tax effects of stock-based
compensation awards.
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 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 income
F-7
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
taxes in each of the jurisdictions in which it operates. This
process involves the Company estimating its current tax exposure
under the most recent tax laws and assessing temporary
differences resulting from differing treatment of items for tax
and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included in the balance
sheets.
The Company assesses the likelihood that it will be able to
recover its deferred tax assets. It considers all available
evidence, both positive and negative, including the 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 it will recover its deferred tax assets,
the Company records a valuation allowance against the deferred
tax assets that it estimates will not ultimately be recoverable.
At June 30, 2011 and December 31, 2010, the Company
believed that the amount of its 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, the Company would recognize a
benefit to its tax provision in the period in which it
determines that it is more likely than not that it will recover
its 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
during the period less the weighted-average number of restricted
shares of common stock subject to repurchase. Potentially
dilutive securities were not included in the net loss per common
share calculation for the three and six months ended
June 30, 2011 and 2010, because the inclusion of such
shares would have had an anti-dilutive effect.
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, 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 ASU
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.
In June 2011, the Financial Accounting Standards Board issued
ASU 2011-05,
Comprehensive Income (Topic 220): Presentation of
Comprehensive Income. ASU
2011-05
eliminates the option to present components of other
comprehensive income as part of the statement of changes in
stockholders equity and instead requires separate
statements of comprehensive income. The amendment is effective
for the fiscal years, and interim periods
F-8
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
within those years, beginning after December 15, 2011. We
do not expect the adoption of ASU
2011-05 to
have a material impact on our financial position and results of
operation.
|
|
3.
|
Cash,
Cash Equivalents and Short-Term Investments
|
At June 30, 2011 and December 31, 2010, the amortized
cost of the Companys cash, cash equivalents and short-term
investments approximated their fair values. The Company
considers all liquid investments purchased with a maturity of
three months or less to be cash equivalents. All short-term
investments at June 30, 2011 mature in less than one year.
The Company invests its cash and cash equivalents and short-term
investments in money market funds, commercial paper and
corporate and government notes. All of these securities are
classified as
available-for-sale
with the unrealized gain and loss being recorded in accumulated
other comprehensive income; there were no unrealized gains or
losses at June 30, 2011 and December 31, 2010.
|
|
4.
|
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
observable inputs. Level 3 values are based on significant
unobservable inputs. The following table presents the fair value
level for 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Balance
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
June 30, 2011
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Cash and cash equivalents
|
|
$
|
8,481
|
|
|
$
|
8,481
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
399
|
|
|
$
|
|
|
|
$
|
399
|
|
|
$
|
|
|
U.S. treasury and agencies
|
|
|
500
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
899
|
|
|
$
|
|
|
|
$
|
899
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys cash and cash equivalents at June 30,
2011 consist of cash and money market funds. Money market funds
are valued using quoted market prices. The Companys
short-term investments at June 30, 2011 consisted of
commercial paper and U.S agency notes. The Company uses an
independent third party pricing service to value its commercial
paper and other Level 2 investments. 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.
|
|
5.
|
Sublease
Agreement and Lease Exit Liability
|
On July 18, 2007, the Company entered into a sublease
agreement with Mendel Biotechnology, Inc. (Mendel),
under which the Company subleases to Mendel approximately
48,000 square feet of the
F-9
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
72,000 square foot facility located at 3929 Point Eden Way,
Hayward, CA. The Company recorded a $2.1 million impairment
expense related to the sublease for the year ended December, 31,
2007.
The Company recorded this expense and the related lease exit
liability 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 six months ended
June 30, 2011 is as follows (in thousands):
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2011
|
|
|
Balance at January 1, 2011
|
|
$
|
828
|
|
Accretion expense
|
|
|
20
|
|
Lease payments
|
|
|
(63
|
)
|
|
|
|
|
|
Balance at June 30, 2011
|
|
$
|
785
|
|
|
|
|
|
|
As of June 30, 2011, $108,000 of the $785,000 balance was
recorded as a current liability and $677,000 was recorded as a
non-current liability.
|
|
6.
|
Other
Accrued Liabilities
|
Other accrued liabilities consist of accrued rent and accrued
expenses for legal services, audit-related services and payroll
withholding liabilities.
At June 30, 2011, other accrued liabilities consisted of
accrued rent of $410,000, accrued expenses for services of
$335,000 and payroll withholding liabilities of $33,000. At
December 31, 2010, other accrued liabilities consisted of
accrued rent of $235,000, accrued expenses for services of
$178,000 and payroll withholding liabilities of $37,000. In July
2010, the Company entered into an agreement with the landlord of
the Hayward facility to defer a portion of the monthly rent
payment over a one year period. The repayment period was over
12 months beginning in September 2011, if not repaid sooner
without pre-payment penalty. Deferred amounts accrue interest at
10% per annum.
|
|
7.
|
Collaborations
and Royalty Agreements
|
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., a privately-held pharmaceutical
company. Zogenix is responsible for further development and
commercialization efforts of Intraject (now rebranded under the
name DosePro*). On January 13, 2010, Zogenix announced the
U.S. commercial launch of its SUMAVEL* DosePro product.
Under the terms of the asset sale agreement, the Company is
entitled to receive quarterly royalty payments from Zogenix in
the amount of 3% of net sales of DosePro products. Revenue will
be recognized from the quarterly royalty payments one quarter in
arrears due to the contractual sixty day lag in royalty
reporting under the asset sale agreement. The Company recorded
recurring royalty revenue of $184,000 for the quarter ended
June 30, 2011.
F-10
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Note
Payable and Accrued Interest
|
On June 21, 2011, the Company entered into an
$8.5 million royalty financing agreement with a syndicate
of lenders. The agreement created a debt obligation (the
Term Loan) that will be repaid through and secured
by royalties from net sales of the SUMAVEL DosePro (sumatriptan
injection) needle-free delivery system payable to the Company
under its Asset Purchase Agreement (APA) with
Zogenix.
Under the terms of the royalty financing agreement, the Company
received a loan of $8.5 million, less fees, transaction and
legal expenses (estimated to be approximately $473,000) and an
additional $250,000 set aside for an Interest Reserve Account.
The lenders will be entitled to receive 100% of all royalties
payable to the Company under the APA until the principal and
accrued interest of the Term Loan are fully repaid, after which
time the benefit of any further royalties made under the APA
will accrue to Aradigm. The Term Loan will accrue interest at
the rate equal to the greater of a) LIBOR or
b) one-and-a-half
percent (1.50%), plus a margin of
fourteen-and-a-half
percent (14.5%). To the extent royalty payments are insufficient
to pay accrued and unpaid interest under the financing, the
shortfall will be funded from the Interest Reserve Account or,
if the account is insufficient to pay all of the interest due,
the shortfall will be capitalized and added to the principal
balance of the Term Loan. The lenders were granted a security
interest in the assets of an Aradigm subsidiary, Aradigm Royalty
Financing LLC, which holds Aradigms rights to receive
royalty payments under the APA. The lenders have no recourse to
other assets of Aradigm for repayment of the loan. Amortization
of the Term Loan will occur to the extent that royalties
payments received for any quarter exceed accrued interest due
for that quarter.
The Company has the right to prepay the Term Loan after
June 21, 2012, subject to the payment of the principal
balance plus a prepayment fee of eight percent (8%) of the
outstanding balance if prepaid in months
13-24
following the transaction closing date of June 21, 2011;
four percent (4%) if prepaid in months
25-36; and
two percent (2%) if prepaid in months
37-48. There
will be no prepayment fee for prepaying the Term Loan after the
forty-eight (48) month anniversary of the closing date. In
addition, the Company has the right to make partial prepayments
in an amount no less than the greater of (i) ten percent
(10%) of the principal balance of the Term Loan outstanding as
of the applicable prepayment date or (ii) $1,000,000. Under
no circumstances will the receipt of royalty payments from
Zogenix in excess of the accrued interest then due be considered
prepayments under the Term Loan.
In accordance with Accounting Standards Topic 470
Debt, the Company capitalized the fees, transaction and
legal expenses of approximately $473,000 and recorded this
amount in other assets. The capitalized expenses will be
amortized to interest expense using the effective interest
method over a period of 48 months.
The Interest Reserve account was recorded in prepaid and other
current assets.
In connection with the transaction, Aradigm issued to the
lenders warrants to purchase a total of 2,840,909 shares of
Aradigm common stock at a strike price of $0.22 per share,
representing a 20% premium above the average closing price of
Aradigm common stock for the ten trading days immediately
preceding the closing of the transaction. The warrants expire on
December 31, 2016.
In accordance with Accounting Standards Topic 815, the warrants
were treated as equity instruments and their fair value was
determined to be approximately $390,000. The fair value of the
warrants is considered a discount against the note and was
recorded as a reduction of the note payable. The fair value of
the warrants will be amortized to interest expense using the
effective interest method over a period of 48 months.
F-11
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Stock-Based
Compensation and Stock Options, Awards and Units
|
The following table shows the stock-based compensation expense
included in the accompanying condensed consolidated statements
of operations for the three and six months ended June 30,
2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
57
|
|
|
$
|
41
|
|
|
$
|
122
|
|
|
$
|
92
|
|
General and administrative
|
|
|
133
|
|
|
|
149
|
|
|
|
256
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
190
|
|
|
$
|
190
|
|
|
$
|
378
|
|
|
$
|
451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no capitalized stock-based employee compensation cost
for the three and six months ended June 30, 2011 and 2010.
Since the Company incurred net losses during the quarters ended
June 30, 2011 and 2010, there was no recognized 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 $0.5 million as of June 30, 2011.
This amount will be recognized over a weighted average period of
1.25 years.
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 total fair value of
restricted stock awards that vested during the six months ended
June 30, 2011 was $79,000. The Company retained purchase
rights with respect to 2,344,043 shares of unvested
restricted stock awards issued pursuant to stock purchase
agreements at no cost per share as of June 30, 2011. As of
June 30, 2011, there was $0.2 million of total
unrecognized compensation costs, net of forfeitures, related to
non-vested stock awards which are expected to be recognized over
a weighted average period of 0.56 years.
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 selected officers, directors,
scientific advisory board members and employees of and
consultants to the Company and its affiliates could be given an
opportunity to acquire an equity interest in the Company. All
employees, directors, officers, scientific advisory board
members and consultants of the Company are eligible to
participate in the 2005 Plan. During 2000, the Board of
Directors approved the termination of the 1996 Non-Employee
Directors Stock Option Plan (the Directors
Plan). This termination had no effect on options already
outstanding under the Directors Plan.
F-12
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Option Activity
The following is a summary of activity under the 1996 Plan, the
2005 Plan and the Directors Plan for the six months ended
June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
Shares Available
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
for Grant of
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Option, Award or
|
|
|
Number of
|
|
|
|
|
|
Exercise
|
|
|
|
Unit
|
|
|
Shares
|
|
|
Exercise Price Range
|
|
|
Price
|
|
|
Balance at January 1, 2011
|
|
|
1,959,278
|
|
|
|
6,354,758
|
|
|
$
|
0.12
|
|
|
|
|
|
|
$
|
64.69
|
|
|
$
|
1.32
|
|
Options granted
|
|
|
(500,000
|
)
|
|
|
500,000
|
|
|
|
0.18
|
|
|
|
|
|
|
|
0.19
|
|
|
|
0.19
|
|
Options cancelled
|
|
|
84,898
|
|
|
|
(84,898
|
)
|
|
$
|
0.25
|
|
|
|
|
|
|
$
|
64.69
|
|
|
$
|
9.69
|
|
Restricted share awards granted
|
|
|
(328,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted share units awarded
|
|
|
(78,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2011
|
|
|
1,136,281
|
|
|
|
6,769,860
|
|
|
$
|
0.12
|
|
|
|
|
|
|
$
|
24.10
|
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2011 for
those stock options for which the quoted market price was in
excess of the exercise price
(in-the-money
options). As of June 30, 2011, options to purchase
4,820,616 shares of common stock were exercisable and had
an aggregate intrinsic value of $52,000. No stock options were
exercised during the six months ended June 30, 2011.
A summary of the Companys unvested restricted stock and
performance bonus stock award as of June 30, 2011 is
presented below representing the maximum number of shares that
could be earned or vested under the 2005 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Balance at December 31, 2010
|
|
|
2,448,273
|
|
|
$
|
0.44
|
|
Restricted share awards issued
|
|
|
328,948
|
|
|
|
0.19
|
|
Restricted share awards vested
|
|
|
(433,178
|
)
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2011
|
|
|
2,344,043
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
During the three months ended June 30, 2011, the Company
issued 78,947 shares of restricted stock units with no
exercise price to a non-employee member 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 2011, 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.
|
|
10.
|
Net Loss
Per Common Share
|
The Company computes basic net loss per common share using the
weighted-average number of shares of common stock outstanding
during the period less the weighted-average number of shares of
common stock subject to repurchase. The effects of including the
incremental shares associated with options, warrants and
unvested restricted stock are anti-dilutive, and are not
included in the diluted weighted average number of shares of
common stock outstanding for the six month periods ended
June 30, 2011 and 2010.
F-13
ARADIGM
CORPORATION
NOTES TO
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company excluded the following securities from the
calculation of diluted net loss per common share for the six
months ended June 30, 2011 and 2010, as their effect would
be anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Outstanding stock options
|
|
|
6,770
|
|
|
|
4,962
|
|
Unvested restricted stock
|
|
|
2,344
|
|
|
|
2,497
|
|
Unvested restricted stock units
|
|
|
412
|
|
|
|
333
|
|
Outstanding common stock warrants
|
|
|
3,591
|
|
|
|
7,527
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss includes net loss and other comprehensive
income (loss), which for the Company is primarily comprised of
unrealized holding gains and losses on the Companys
available-for-sale
securities that are excluded from the accompanying condensed
consolidated statements of operations in computing net loss and
reported separately in shareholders equity. Comprehensive
loss and its components are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Net loss
|
|
$
|
(5,341
|
)
|
|
$
|
(4,332
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on
available-for-sale
securities
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(5,341
|
)
|
|
$
|
(4,334
|
)
|
|
|
|
|
|
|
|
|
|
July
2011 Private Placement
On July 5, 2011, the Company entered into a definitive
agreement for the sale of common stock to three existing
shareholders, including accounts managed by First Eagle
Investment Management LLC and Tavistock Life Sciences, in a
private placement for aggregate gross proceeds of
$4.75 million. The closing of the private placement
occurred on July 7, 2011. Under the terms of the agreement,
the Company agreed to sell an aggregate of
25,000,000 shares of common stock at a price of $0.19 per
share. After deducting for fees and expenses, the net proceeds
from the sale of the shares of common stock are anticipated to
be approximately $4.4 million. The Company will be
required, among other things, to file a resale registration
statement within 30 days following the closing that covers
the resale by the purchasers of the shares.
F-14
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
F-15
For the quarterly period ended
December 31,2010
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.
F-16
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.
F-17
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.
F-18
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.
F-19
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
F-20
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
F-21
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
F-22
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,
F-23
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
F-24
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,
F-25
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
F-26
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.
F-27
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 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.
F-28
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.
F-29
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.
F-30
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
F-31
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.
F-32
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
F-33
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
F-34
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.
F-35
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
F-36
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
2011 Royalty Financing
On June 21, 2011, the Company entered into an
$8.5 million royalty financing agreement with a syndicate
of lenders. The agreement created a debt obligation (the
Term Loan) that will be repaid through and secured
by royalties from net sales of the SUMAVEL DosePro (sumatriptan
injection) needle-free delivery system payable to the Company
under its Asset Purchase Agreement (APA) with
Zogenix.
Under the terms of the royalty financing agreement, the Company
received a loan of $8.5 million, less fees, transaction and
legal expenses (estimated to be approximately $400,000) and an
additional $250,000 set aside for an Interest Reserve Account.
The lenders will be entitled to receive 100% of all royalties
payable to the Company under the APA until the principal and
accrued interest of the Term Loan are fully repaid, after which
time the benefit of any further royalties made under the APA
will accrue to Aradigm. The Term Loan will accrue interest at
the rate equal to the greater of a) LIBOR or
b) one-and-a-half
percent (1.50%), plus a margin of
fourteen-and-a-half
percent (14.5%). To the extent royalty payments are insufficient
to pay accrued and unpaid interest under the financing, the
shortfall will be funded from the Interest Reserve Account or,
if the account is insufficient to pay all of the interest due,
the shortfall will be capitalized and added to the principal
balance of the Term Loan. The lenders were granted a security
interest in the assets of an Aradigm subsidiary, Aradigm Royalty
Financing LLC, which holds Aradigms rights to receive
royalty payments under the APA. The lenders have no recourse to
other assets of Aradigm for repayment of the loan. Amortization
of the Term Loan will occur to the extent that royalties
payments received for any quarter exceed accrued interest due
for that quarter.
The Company has the right to prepay the Term Loan after
June 21, 2012, subject to the payment of the principal
balance plus a prepayment fee of eight percent (8%) of the
outstanding balance if prepaid in months
13-24
following the transaction closing date of June 21, 2011;
four percent (4%) if prepaid in months
25-36; and
two percent (2%) if prepaid in months
37-48. There
will be no prepayment fee for prepaying the Term Loan after the
forty-eight (48) month anniversary of the closing date. In
addition, the Company has the right to make partial prepayments
in an amount no less than the greater of (i) ten percent
(10%) of the principal balance of the Term Loan outstanding as
of
F-38
ARADIGM
CORPORATION
NOTES TO
FINANCIAL STATEMENTS (Continued)
the applicable prepayment date or (ii) $1,000,000. Under no
circumstances will the receipt of royalty payments from Zogenix
in excess of the accrued interest then due be considered
prepayments under the Term Loan.
In connection with the Transaction, Aradigm issued to the
lenders warrants to purchase a total of 2,840,909 shares of
Aradigm common stock at a strike price of $0.22 per share,
representing a 20% premium above the average closing price of
Aradigm common stock for the ten trading days immediately
preceding the closing of the Transaction. The warrants expire on
December 31, 2016. The $0.4 million calculated fair
value of the warrants, as well as the $250,000 that was
established as the Interest Reserve Account, were recorded in
prepaid and other current assets. In accordance with Accounting
Standards Topic 470 Debt , the Company also
recorded $473,000 of loan costs which were capitalized and
recorded in other assets. The fair value of the warrants and the
capitalized loan costs will be amortized over a four year period.
July
2011 Private Placement
On July 5, 2011, the Company entered into a definitive
agreement for the sale of common stock to three existing
shareholders, including accounts managed by First Eagle
Investment Management LLC and Tavistock Life Sciences, in a
private placement for aggregate gross proceeds of
$4.75 million. The closing of the private placement
occurred on July 7, 2011. Under the terms of the agreement,
the Company agreed to sell an aggregate of
25,000,000 shares of common stock at a price of $0.19 per
share. After deducting for fees and expenses, the net proceeds
from the sale of the shares of common stock are anticipated to
be approximately $4.4 million. The Company will be
required, among other things, to file a resale registration
statement within 30 days following the closing that covers
the resale by the purchasers of the shares.
F-39
Aradigm Corporation
Up to 25,000,000 shares of
Common Stock
PROSPECTUS
September 1,
2011
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus or
any prospectus supplement. This prospectus is not an offer of
these securities in any jurisdiction where an offer and sale is
not permitted.