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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-51820
Alexza Pharmaceuticals, Inc.
(Exact name of Registrant as specified in its charter)
| Delaware | 77-0567768 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) |
2091 Stierlin Court
Mountain View, California 94043
(Address of Principal Executive Offices including Zip Code)
Registrant’s telephone number, including area code:
(650) 944-7000
Securities registered pursuant to Section 12 (b) of the Act:
| Title of Each Class |
Name of Each Exchange on Which Registered | |
| Common Stock, par value $0.0001 per share | Nasdaq Global Market |
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (of for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of Form 10-K or any amendments to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filer þ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant was $93,337,699 based on the closing sale price of the Registrant’s common stock on The NASDAQ Global Market on June 30, 2011. Shares of the Registrant’s common stock beneficially owned by each executive officer and director of the Registrant and by each person known by the Registrant to beneficially own 10% or more of its outstanding common stock have been excluded, in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant’s common stock as of March 1, 2012 was 116,136,338.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed within 120 days after the end of the Registrant’s fiscal year ended December 31, 2011 are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated therein.
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ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
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The names “Alexza Pharmaceuticals, Inc.,” “Alexza,” “Staccato” and “ADASUVE” are trademarks of Alexza Pharmaceuticals, Inc. We have registered the trademarks “Alexza Pharmaceuticals,” “Alexza” and “Staccato” with the U.S. Patent and Trademark Office. All other trademarks, trade names and service marks appearing in this Annual Report on Form 10-K are the property of their respective owners.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report constitute forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Examples of these statements include, but are not limited to, statements regarding: the adequacy of our capital to support our operations, our ability to raise additional funds and the potential terms of such potential financings, the prospects of us receiving approval to market ADASUVE in the United States or other countries, the implications of interim or final results of our clinical trials, the progress and timing of our research programs, including clinical testing, the extent to which our issued and pending patents may protect our products and technology, the potential of our product candidates to lead to the development of safe or effective therapies, our ability to enter into collaborations, our future operating expenses, our future losses, our future expenditures and the sufficiency of our cash resources. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain.
In addition, you should refer to the “Risk Factors” section of this Annual Report for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report will prove to be accurate. Further more, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our website.
| Item 1. Business |
We are a pharmaceutical company focused on the research, development and commercialization of novel proprietary products for the acute treatment of central nervous system, or CNS, conditions. All of our product candidates are based on our proprietary technology, the Staccato system. The Staccato system vaporizes an excipient-free drug to form a condensation aerosol that, when inhaled, allows for rapid systemic drug delivery. Because of the particle size of the aerosol, the drug is quickly absorbed through the deep lung into the bloodstream, providing speed of therapeutic onset that is comparable to intravenous, or IV, administration but with greater ease, patient comfort and convenience.
In early 2010, we conducted a thorough review of our product pipeline, evaluating current and potential new Staccato-based product candidates. This review yielded three categories of Staccato-based product candidates: (1) product candidates where we believe we can add value through internal development, (2) product candidates where we have developed the product idea, but where a development partner is required, and (3) product candidates based on new ideas, primarily focused on new chemical entities, where the Staccato technology can facilitate better or more effective delivery. In July 2010, we announced that, in addition to AdasuveTM (Staccato
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loxapine), or ADASUVE, AZ-007 (Staccato zaleplon) and Staccato nicotine would remain in active development. Active development on the remainder of our development pipeline is suspended.
We are continuing to seek partners to support development and commercialization of our product candidates. We believe that, based on our cash, cash equivalents and marketable securities balance at December 31, 2011, the subsequent receipt of the upfront payment from Grupo Ferrer Internacional, S.A., or Grupo Ferrer, pursuant to our Collaboration, License and Supply Agreement, or the Ferrer Agreement, with Grupo Ferrer executed in October 2011, net of our $5 million payment to the former stockholders of Symphony Allegro, Inc., or Allegro, net proceeds of approximately $20.4 million from our recently completed underwritten public offering, the March 2012 amendment of the Ferrer Agreement and our current expected cash usage, accounting for the February 2012 reduction in our workforce, we have sufficient capital resources to meet our anticipated cash needs, at our current cost levels, into the fourth quarter of 2012. We are unable to assert that our financial position is sufficient to fund operations beyond that date, and as a result, there is substantial doubt about our ability to continue as a going concern. In December 2011, we retained Lazard to assist in exploring strategic options to enhance stockholder value, including a possible sale or disposition of one or more corporate assets, a strategic business combination, partnership or other transaction. We may not be able to raise sufficient capital on acceptable terms, or at all, to continue development of ADASUVE or our other programs or to continue operations and we may not be able to execute any strategic transaction.
Our lead product candidate is:
ADASUVE (Staccato loxapine). We are developing ADASUVE for the acute treatment of agitation in adults with schizophrenia or bipolar disorder. In December 2009, we submitted a New Drug Application, or NDA, for ADASUVE with the U.S. Food and Drug Administration, or the FDA. In October 2010, we received a Complete Response Letter, or CRL, from the FDA regarding our NDA for ADASUVE. In August 2011, we resubmitted the ADASUVE NDA, which was accepted for filing by the FDA as a complete, class 2 response to the FDA's CRL. The FDA indicated a Prescription Drug User Fee Act, or PDUFA, goal date for the ADASUVE NDA of February 4, 2012. In December 2012, the ADASUVE NDA was reviewed by the Psychopharmacologic Drugs Advisory Committee, or PDAC, and at the end of the meeting, the PDAC voted to recommend that ADASUVE be approved for use as a single dose in 24 hours when used with the FDA recommended Risk Evaluation and Mitigation Strategy, or REMS, for the treatment for agitation in patients with schizophrenia or bipolar mania. The vote on this question was 9/8/1 (yes/no/abstain). In January 2012, we submitted an updated REMS program to the FDA. In a notice received from the FDA in January 2012, the PDUFA goal date for the ADASUVE NDA was extended 90 days from February 4, 2012 to May 4, 2012.
A CRL is issued by the FDA indicating that an NDA review cycle is complete and the application is not ready for approval in its present form. In the CRL, the FDA stated that its primary clinical safety concern was related to data from the three Phase 1 pulmonary safety studies with ADASUVE. This concern was primarily based on observed, dose-related post-dose decreases in forced expiratory volume in one second, or FEV1, a standard measure of lung function, in healthy subjects and in subjects with asthma or chronic obstructive pulmonary disease, or COPD. The FDA also noted that decreases in FEV1 were recorded in subjects who were administered device-only, placebo versions of ADASUVE. In the information package submitted to the FDA in response to the CRL and in preparation for the End-of-Review meeting, we presented evidence that we believe demonstrates the placebo device is safe, including a blinded expert review of the flow-volume loops data from the healthy subject study as further evidence that there appears to be no consistent pattern suggestive of airway obstruction in these subjects. We also provided an analysis that we believe shows that there is no meaningful temporal relationship between placebo administration and decreases in FEV1. We believe this evidence and analysis confirm that the changes seen were likely background events in the population studied, where the repeated and extensive pulmonary function testing may have contributed to some of the observations. Additionally, we believe we showed that the aerosol characterization does not indicate a basis for concern. We reiterated these arguments in our NDA resubmission.
In the information package, we also believe we showed that the pulmonary safety program in subjects with asthma or COPD had identified patients who may be susceptible to bronchospasm, the nature of this adverse event, and how it can be managed. We stated we believe the risk in these patients could be mitigated through labeling and a REMS program. At the End-of-Review meeting, the FDA stated that it would be reasonable to
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propose a REMS program for the use of Staccato loxapine, and requested that as part of our resubmission, we provide a detailed REMS proposal including labeling, a medication guide, a communication plan and post-approval studies to manage the potential risks.
The CRL also raised issues relating to the suitability of our stability studies and certain other Chemistry, Manufacturing, and Controls, or CMC, concerns, including items relating to the FDA’s pre-approval manufacturing inspection. Because ADASUVE incorporates a novel delivery system, the CRL included input from the FDA’s Center for Devices and Radiological Health, or the CDRH. In the CRL, the CDRH requested a human factors study and related analysis to validate that the product can be used effectively in the proposed clinical setting. We finalized the protocol with input from the FDA and completed this study in the second quarter of 2011. We are not currently required to conduct any additional efficacy or safety clinical trials for ADASUVE. The CDRH also requested further bench testing of the product under an additional “worst-case” manufacturing scenario. We have completed this additional “worst-case” bench testing of the product, submitted the data to the FDA and believe that this issue has been adequately addressed.
In April 2011, we completed a Type C meeting with the FDA. The primary purpose of this meeting was to discuss preliminary draft labeling and initial REMS program proposals. The FDA granted this meeting at our request, as a follow-on activity to discussions during our End-of-Review meeting held in December 2010. In the information package submitted to the FDA in preparation for this guidance meeting, we included updated draft labeling and a medication guide, and initial proposals for an ADASUVE REMS program, including a draft communication plan and draft post-approval study outline.
In November 2011, we submitted an information package to the FDA in preparation for the review by the PDAC of the ADASUVE NDA. This information package is available on-line at www.fda.gov. In December 2011, the ADASUVE NDA was the subject of a PDAC meeting. At the end of the meeting, the PDAC voted to recommend that ADASUVE be approved for use as a single dose in 24 hours when used with the FDA recommended REMS, for the treatment for agitation in patients with schizophrenia or bipolar mania. The vote on this question was 9/8/1 (yes/no/abstain).
The FDA takes an advisory committee’s advice into consideration as part of its review of an NDA, but is not bound by an advisory committee's recommendations. After reviewing and discussing the ADASUVE data and the FDA proposed REMS, the committee voted on the following additional questions:
| • | Does the committee conclude that ADASUVE (loxapine) inhalation powder has been shown to be effective as a treatment for agitation in patients with schizophrenia or bipolar mania? The resulting vote was: 17/1/0 (yes/no/abstain). |
| • | Does the committee conclude that ADASUVE (loxapine) inhalation powder has been shown to be acceptably safe for use as a treatment for agitation in patients with schizophrenia or bipolar mania: |
a. When used in conjunction with the REMS proposed by the sponsor? The resulting vote was: 1/17/0 (yes/no/abstain).
b. When used in conjunction with the REMS proposed by the FDA? The resulting vote was: 5/12/1 (yes/no/abstain).
| • | Does the committee conclude that ADASUVE (loxapine) inhalation powder would be acceptably safe for use as a single dose in 24 hours as a treatment for agitation in patients with schizophrenia or bipolar mania when used in conjunction with the REMS proposed by FDA? The resulting vote was: 11/5/2 (yes/no/abstain). |
In November and December 2011, the FDA completed its Pre-Approval Inspection, or PAI, of the Alexza facility in Mountain View, California and issued a Form FDA483 containing inspectional observations.
In October 2010, we were notified that ADASUVE was eligible for submission to the European Medicines Agency, or EMA, for an opinion regarding the potential approval of ADASUVE through the centralized marketing authorization procedure. Marketing authorization granted by the European Commission on the basis of the opinion issued by the EMA are valid in all of the European Union member states. In November 2010, we received notification of the Rapporteur/Co-Rapporteur appointments for ADASUVE. In May 2011, we conducted a meeting with the Rapporteur and, in July 2011, we conducted a meeting with the Co-Rapporteur. We
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also have been notified that ADASUVE is acceptable for submission as a trade name and have completed work on the Pediatric Investigation Plan for the Marketing Authorization Application, or MAA, submission. On October 26, 2011, the EMA accepted the submission of our ADASUVE MAA. In February 2012, we received the Day 80 Assessment Report from the EMA regarding our MAA for ADASUVE. The Day 80 Assessment Report for ADASUVE outlines major objections pertaining to the extrapolation of the Phase 3 study population to the intended patient population, pulmonary safety in patients with active airways disease and recommendations to address this issue via the risk management plan, other aspects of the risk management plan, and the need to obtain a European Union Good Manufacturing Practices certificate for the Alexza manufacturing facility and commercial manufacturing process. We expect that specific questions will be posed by the EMA in the 120 Day Committee for Medicinal Products for Human Use, or CHMP, List of Questions.
In October 2011, we entered into a commercial partnership with Grupo Ferrer pursuant to the Ferrer Agreement to commercialize ADASUVE in Europe, Latin America, Russia and the Commonwealth of Independent States countries, or the Ferrer Territories. Under the terms of the Ferrer Agreement, in January 2012 we received an upfront cash payment of $10 million, $5 million of which was paid to the former Allegro stockholders. We are eligible to receive additional milestone payments contingent on individual country commercial sales initiation and cumulative net sales targets. We are responsible for filing and obtaining marketing authorization from the European Commission on the basis of the ADASUVE MAA submitted to the EMA. Grupo Ferrer will be responsible for satisfaction of all other regulatory and pricing reimbursement requirements to market and sell ADASUVE in the Ferrer Territories. Grupo Ferrer will have the exclusive rights to commercialize ADASUVE in the Ferrer Territories. We will supply ADASUVE to Grupo Ferrer for all of its commercial sales, and will receive a specified per-unit transfer price. Either party may terminate the Ferrer Agreement for the other party’s uncured material breach or bankruptcy. The Ferrer Agreement continues in effect on a country-by-country basis until the later of the last to expire patent covering ADASUVE in such country or 12 years after first commercial sale. The Ferrer Agreement is subject to earlier termination in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy or insolvency of either party.
In March 2012, we entered into an amendment to the Ferrer Agreement. Grupo Ferrer and Alexza agreed to eliminate a future potential milestone payment in exchange for Grupo Ferrer’s purchase of $3 million of our common stock. Grupo Ferrer agreed to purchase approximately 2.42 million shares of our common stock for $1.24 per share in March 2012. During 2012, up to an additional $8 million of our common stock may be purchased by Grupo Ferrer, upon a request by us and subject to acceptance by Grupo Ferrer, in exchange for the elimination of additional milestones at a price per share that will be a premium to the market price on the date of purchase.
Our other product candidates in active development are:
| • | AZ-007 (Staccato zaleplon). We have completed Phase 1 testing for AZ-007. This product candidate is being developed for the treatment of insomnia in patients who have difficulty falling asleep, including patients who awake in the middle of the night and have difficulty falling back asleep. In the Phase 1 study, AZ-007 delivered an IV-like pharmacokinetic profile with a median time to peak drug concentration of 1.6 minutes. Pharmacodynamics, measured as sedation assessed on a 100 mm visual-analog scale, showed onset of effect as early as 2 minutes after dosing. During 2011, we completed the necessary process development work to transfer AZ-007 from our original single-dose clinical product device to our current single-dose commercial product device. |
| • | Staccato nicotine is designed to help smokers quit by addressing both the chemical and behavioral components of nicotine addiction by delivering nicotine replacement via inhalation. On August 25, 2010, we entered into a license and development agreement, or the Cypress Agreement, with Cypress Bioscience, Inc., or Cypress, for Staccato nicotine. According to the terms of the Cypress Agreement, Cypress paid us a non-refundable upfront payment of $5 million to acquire the worldwide license for the Staccato nicotine technology. In addition, following the completion of certain preclinical and clinical milestones relating to the Staccato nicotine technology, if Cypress elects to continue the development of Staccato nicotine, Cypress is obligated to pay to us an additional technology transfer payment of $1 million. We have a carried interest of 50% prior to the technology transfer payment and 10% after the |
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| completion of certain development activities and receipt of the technology transfer payment, subject to adjustment in certain circumstances, in the net proceeds of any sale or license by Cypress of the Staccato nicotine assets and the carried interest will be subject to put and call rights in certain circumstances. Under the Cypress Agreement, Cypress has responsibility for preclinical, clinical and regulatory aspects of the development of Staccato nicotine, along with the commercialization of the product. Through 2011, Cypress has paid us a total of $3.9 million for our efforts to execute the defined development plan for Cypress. In January 2011, Cypress was acquired by Ramius Value and Opportunity Advisors LLC, Royalty Pharma, US Partner, LP, Royalty Pharma US Partners 2008, LP and RP Investment Corp., or collectively, Royalty Pharma. We do not know what, if any, impact this will have on the partnership. |
Our product candidates not in active development are:
| • | AZ-104 (Staccato loxapine, low-dose). AZ-104, a lower-dose version of ADASUVE, is designed for the treatment of patients suffering from acute migraine headaches. AZ-104 has completed a Phase 1 clinical trial in healthy subjects and two Phase 2 clinical trials in patients with migraine headaches. |
| • | AZ-002 (Staccato alprazolam). AZ-002 has completed a Phase 1 clinical trial in healthy subjects and a Phase 2a proof-of-concept clinical trial in panic disorder patients for the treatment of panic attacks, an indication we are not planning to pursue. However, given the safety profile, the successful and reproducible delivery of alprazolam, and the IV-like pharmacological effect demonstrated to date, we may in the future assess AZ-002 for other possible indications and renewed clinical development. |
| • | AZ-003 (Staccato fentanyl). We have completed and announced positive results from a Phase 1 clinical trial of AZ-003 in opioid-naïve healthy subjects. This product candidate is designed for the treatment of patients with acute pain, including patients with breakthrough cancer pain and postoperative patients with acute pain episodes. |
Other than those licensed to Grupo Ferrer for our ADASUVE product and Cypress for our Staccato nicotine product candidate, we have retained all rights to our product candidates and the Staccato system. We intend to capitalize on our internal resources to develop certain product candidates and to identify routes to utilize external resources to develop and commercialize other product candidates.
Market Opportunity for Acute and Intermittent Conditions
Acute and intermittent medical conditions are characterized by a rapid onset of symptoms that are temporary and severe, and that occur at irregular intervals, unlike the symptoms of chronic medical conditions that continue at a relatively constant level over time. Approved drugs for the treatment of many acute and intermittent conditions, such as antipsychotics to treat agitation, triptans to treat migraine headaches and benzodiazepines to treat anxiety, are typically delivered either in tablets or by injections. Traditional inhalation technologies are also being developed to treat these conditions. These delivery methods have the following advantages and disadvantages:
| • | Oral Tablets. Oral tablets or capsules are convenient and cost effective, but they generally do not provide rapid onset of action. Oral tablets may require at least one to four hours to achieve peak plasma levels. Also, some drugs, if administered as a tablet or capsule, do not achieve adequate or consistent bioavailability due to the degradation of the drug by the stomach or liver or inability to be absorbed into the bloodstream. |
| • | Injections. IV or intramuscular, or IM, injections provide a more rapid onset of action than oral tablets and can sometimes be used to titrate potent drugs with very rapid changes in effect. Titration refers to the ability of a patient or care giver to administer an initial dose of medication and then determine if the medication is effective; if the medication is effective no further dosing is required. However, if the medication is not yet effective, another dose can be administered repeating this process until the medication has had an adequate effect. However, with a few exceptions, injections generally are administered by trained medical personnel in a medical care setting. Other forms of injections result in an onset of action that is generally substantially slower than IV injection, although often faster than oral administration. All forms of injections are invasive, can be painful to some patients and are often expensive. In addition, many drugs are not water soluble and can be difficult to formulate in an injectable form. |
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| • | Traditional Inhalation. Traditional dry powder and aerosolized inhalation delivery systems have been designed and used primarily for local delivery of drugs to the airways, not to the deep lung for rapid systemic drug delivery. Certain recent variants of these systems, however, can provide systemic delivery of drugs, either for the purpose of rapid onset of action or to enable noninvasive delivery of drugs that are not orally bioavailable. Nevertheless, many of these systems have difficulty in generating appropriate drug particle sizes or consistent emitted doses for deep lung delivery. To achieve appropriate drug particle sizes and consistent emitted doses, most traditional inhalation systems require the use of excipients and additives such as detergents, stabilizers and solvents, which may potentially cause toxicity or allergic reactions. Many traditional inhalation devices require patient coordination to deliver the correct drug dose, leading to potentially wide variations in the drug delivered to a patient. |
As a result of these limitations, we believe there is a significant unmet medical and patient need for products for the treatment of acute and intermittent conditions that can be delivered in precise amounts, provide rapid therapeutic onset, and are noninvasive and easy to use.
Our Solution: Staccato System
Our Staccato system rapidly vaporizes an excipient-free drug compound to form a proprietary condensation aerosol that is inhaled and rapidly achieves systemic blood circulation via deep lung absorption. The Staccato system consistently creates aerosol particles averaging one to three and one-half microns in size, which is the most appropriate size for deep lung inhalation and absorption into the bloodstream.
We believe our Staccato system matches delivery characteristics and product attributes to patient needs for acute and intermittent conditions, with the following advantages:
| • | Rapid Onset. The aerosol produced with the Staccato system is designed to be rapidly absorbed through the deep lung with a speed of therapeutic onset comparable to an IV injection, generally achieving peak plasma levels of drug in two to five minutes. |
| • | Ease of Use. The Staccato system is breath actuated, and a patient simply inhales to administer the drug dose. Unlike injections, the Staccato system is noninvasive and may not require caregiver assistance. The aerosol produced with the Staccato system is relatively insensitive to patient inhalation rates. Unlike many other inhalation technologies, the patient does not need to learn a special breathing pattern. In addition, the Staccato device is small and easily portable. |
| • | Consistent Particle Size and Dose. The Staccato system uses rapid heating of the drug film to create consistent and appropriate particle sizes for deep lung inhalation and absorption into the bloodstream. The Staccato system also produces a consistent high emitted dose, regardless of the patient’s breathing pattern. |
| • | Broad Applicability. We have screened over 400 drugs, and approximately 200 have exhibited initial vaporization feasibility using our Staccato system. The Staccato system can deliver both water-soluble and water-insoluble drugs and eliminates the need for excipients and additives such as detergents, stabilizers and solvents, avoiding the side effects that may be associated with the excipients or additives. |
| • | Design Flexibility. The Staccato system can incorporate multiple features, including lockout to potentially enhance safety, the convenience of patient titration, and a variety of dose administration regimens. |
Drug Candidates Based on the Staccato System
We combine small molecule drugs with our Staccato system to create proprietary product candidates. We believe that the drugs we are currently using are no longer eligible for patent protection as chemical entities or have their patent protection expiring in the next several years. These drugs have been widely used, and we believe their biological activity and safety are well understood and characterized. We have received composition of matter patent protection on the Staccato aerosolized forms of these drugs. We also intend to collaborate with pharmaceutical companies to develop new chemical entities, including compounds that might otherwise not be suitable for development because of limitations of traditional delivery methods.
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Since our inception, we have screened more than 400 drug compounds, identifying approximately 200 drug compounds that demonstrate initial vaporization feasibility for delivery with our technology. We believe that a number of these drug compounds, when delivered by the Staccato system, would have a desirable therapeutic profile for the treatment of various acute and intermittent conditions. We are initially focusing on developing proprietary products by combining our Staccato system with small molecule drugs that have been in use for many years and are well-characterized to create Staccato-based aerosolized forms of these drugs. Since 2004, we have filed six (6) investigational New Drug Applications, or INDs, and dosed more than 2,400 subjects and patients in clinical trials.
Staccato System
Our product candidates employing Staccato system consist of three core components: (1) a heat source that includes an inert metal substrate; (2) a thin film of an excipient-free drug compound, also known as an active pharmaceutical ingredient, or API, coated on the substrate; and (3) an airway through which the patient inhales. The left panel of the illustration below depicts these core components prior to patient inhalation.
The right panel of the illustration below depicts the Staccato system during patient inhalation: (1) the heated substrate has reached peak temperature in less than one half second after the start of patient inhalation; (2) the thin drug film has been vaporized; and (3) the drug vapor has subsequently cooled and condensed into excipient-free drug aerosol particles that are being drawn into the patient’s lungs. The entire Staccato system actuation occurs in less than one second.
Four of our product candidates, ADASUVE, AZ-007, AZ-104, and AZ-002, use the same disposable, single-dose delivery device. The single dose delivery device consists of a metal substrate that is chemically heated through a battery-initiated reaction of energetic materials. In the current design, the heat package can be coated with up to 10 milligrams of API. The device is portable and easy to carry, with dimensions of
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approximately three inches in length, two inches in width, and one inch in thickness. The device weighs approximately one ounce. A diagram of the single dose delivery device is shown below:
AZ-003 and Staccato nicotine use a multiple dose delivery device consisting of a reusable controller and a disposable dose cartridge. We have designed the multiple dose delivery device to meet the specific needs of each product candidate. The AZ-003 dose cartridge currently contains 25 separate metal substrates, each coated with the API, which rapidly heat upon application of electric current from the controller. In the current design for AZ-003, 25 micrograms of drug compound are coated on each metal substrate. The device is portable and easy to carry, with dimensions of approximately five inches in length, two and one-half inches in width and one inch in thickness. The controller weighs approximately four ounces, and the dose cartridge weighs approximately one ounce. The Staccato nicotine dose cartridge design and reusable controller design are still in development.
We continue to undertake engineering and development efforts to improve commercial manufacturability of our single dose device.
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Our Pipeline
| Product Candidate |
API |
Target Indication |
Development Status |
Alexza Commercial Rights | ||||
| ADASUVE |
Loxapine | Agitation in adults with schizophrenia or bipolar disorder | NDA resubmitted and a scheduled PDUFA date of May 4, 2012. MAA accepted for assessment by the EMA on October 26, 2011. |
Worldwide, excluding territories licensed to Grupo Ferrer (Europe, Latin America, Russia, and the Commonwealth of Independent States countries) | ||||
| AZ-007 |
Zaleplon | Insomnia | Phase 1 completed | Worldwide | ||||
| Staccato |
||||||||
| Nicotine |
Nicotine | Smoking cessation | Pre-Phase 1 | Licensed to Cypress Bioscience, Inc. | ||||
| AZ-104 |
Loxapine (low-dose) | Migraine headache | Phase 2 (currently inactive) | Worldwide | ||||
| AZ-002 |
Alprazolam | Acute repetitive seizures and other possible CNS conditions | Phase 2 (currently inactive) | Worldwide | ||||
| AZ-003 |
Fentanyl | Acute pain | Phase 1 completed (currently inactive) |
Worldwide | ||||
AGITATION PROGRAM: ADASUVE (Staccato loxapine)
We are developing ADASUVE for the acute treatment of agitation in adults with schizophrenia or bipolar disorder. Episodes of agitation afflict many people suffering from major psychiatric disorders, including schizophrenia, which affects approximately 2.4 million adults in the United States, and bipolar disorder, which affects approximately 5.7 million adults in the United States. More than 90% of these patients will experience agitation in their lifetimes.
Agitation generally escalates over time with patients initially feeling uncomfortable, tense and restless, and as the agitation intensifies, their behavior appears more noticeable to others. From the healthcare professional’s perspective, agitation, if not treated quickly and effectively, may escalate unpredictably and poses a serious safety risk to staff and the patients themselves. While patients seek treatment at different points along this agitation continuum, once they present at a medical setting they generally need treatment urgently. We believe the therapeutic market for agitation is represented by the patients who present in the medical setting in need of treatment for an agitation episode.
Market Opportunity
Our primary market research indicates that approximately 50% of treated acute agitation episodes are treated in emergency settings. Another approximately 35% of the treated agitation episodes suffered by schizophrenic and bipolar disorder patients are treated in an inpatient setting (hospital and long-term residential settings), and approximately 15% are treated in a physician’s office. Our market research studies with caregivers of patients with schizophrenia and patients with bipolar disorder indicate that patients currently experience an average of 11 to 12 episodes of agitation each year.
Agitation episodes are currently most often treated with antipsychotics and/or benzodiazepines. These antipsychotic drugs are available in a variety of forms, including oral tablets, orally disintegrating tablets, oral liquids, and IM injections. Oral medications work relatively slowly, but are easy to administer, painless and are less threatening to patients. IM formulations provide relatively faster relief compared to the oral formulations,
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with an onset of effect in approved IM drugs ranging between 15 to 120 minutes in patients with schizophrenia and 30 to 90 minutes in patients with bipolar disorder. Although injections have a more rapid onset of effect than oral formulations, patients receiving an IM injection must be restrained or be in restraints, which can present risks to both patients and staff, including physical injuries that occur during the containment process. Other factors limiting the use of IM injections include mental and physical trauma to the patient that compromises the patient physician relationship, exposure to contaminated needles and needle-stick injuries, and effects on long-term compliance. Although the only approved medications for agitation are IM injections, the Joint Commission and the Centers for Medicare & Medicaid Service require the use of the least restrictive treatment alternative, including reducing or eliminating restraining patients, thereby putting the clinicians who treat these patients in the difficult position of choosing treatments, so as not to compromise patient safety goals. Currently, no product that is both non-invasive and rapidly-acting is available that help agitated patients in need of treatment.
ADASUVE is an anti-agitation therapeutic that combines our proprietary Staccato system with loxapine, a drug belonging to the class of compounds known generally as antipsychotics. Loxapine is currently approved in oral and injectable (IM only) formulations in the United States for the management of the manifestations of schizophrenia. The Staccato system used for ADASUVE is a hand-held, chemically-heated, single-dose inhaler that delivers a pure drug aerosol to the highly vascularized tissues of the deep lung.
As an easy-to-use, patient-controlled, and highly reliable therapeutic that provides acute relief, onset of effect was 10 minutes in two Phase 3 trials, we believe ADASUVE meets the key treatment attributes for acute agitation specified in the American Association for Emergency Psychiatry Expert Consensus Guidelines for the Treatment of Behavioral Emergencies for an “ideal anti-agitation treatment” including speed of onset, control of aggressive behavior, patient preference, preservation of the physician-patient relationship, and reliability of delivery. As agitation intensifies and patient cooperation decreases, the option for oral medications becomes less appropriate. We believe a substantial medical need in patients with agitation that may be addressed by ADASUVE, if approved, which in clinical trials began to control a patient’s agitation as early as 10 minutes post-dose and provided relief in a non-invasive manner. We believe that ADASUVE, if approved, has the potential to change the current treatment practices for the acute treatment of agitation meeting patient desires for comfort and control, as well as the clinician goals of rapid and reliably controlled medication delivery.
Development Status
The ADASUVE NDA we submitted to the FDA in December 2009 contained efficacy and safety data from more than 1,600 patients and subjects who have been studied in thirteen different clinical trials.
In October 2010, the FDA issued a CRL indicating that the NDA review cycle was complete and that the NDA was not ready for approval at that time. In August 2011 we resubmitted our NDA. In December 2011, a PDAC was held to review the ADASUVE NDA. In January 2012, we updated our REMS and submitted other amendments to the ADASUVE NDA to address topics discussed during the December PDAC meeting. In January 2012, the FDA notified Alexza that it had designated the January 2012 REMS submission as a major amendment to the ADASUVE NDA and exercised the FDA’s option to extend the PDUFA goal date 90 days from February 4, 2012 to May 4, 2012 to provide additional time to complete the review.
INSOMNIA PROGRAM: AZ-007 (Staccato zaleplon)
We are developing AZ-007 for the treatment of insomnia in patients who have difficulty falling asleep, including those patients with middle of the night awakening who have difficulty falling back asleep. Insomnia is the most prevalent sleep disorder, and we believe that it affects at least 15% to 20% of the United States population, with some estimates of up to 50% of Americans reporting difficulty getting a good night’s sleep at least a few nights a week. Insomnia can be due to a variety of causes, including depression, grief or stress, menopause, age, shift work, or environmental disruption. Whatever the cause of insomnia, it can take its toll on both the afflicted and the non-afflicted. Sleep disturbances have a major negative impact on public health and economic productivity. Costs for direct healthcare associated with insomnia are estimated to be approximately $14 billion to $15 billion each year.
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Market Opportunity
Insomnia is a prevalent disorder that drives almost $5 billion in worldwide sales of prescription medications each year. In a large survey conducted by the National Sleep Foundation in 2009, results showed that 64% of the respondents experienced a minimum of one symptom of insomnia at least a few nights a week, with 41% reporting this occurring every night or almost every night and 31% using some sort of sleep aid at least a few nights per week, 18% of whom use a medication sleep aid. Of those, respondents complained primarily of waking up feeling unrefreshed (45%), being wake a lot during the night (46%), having difficulty falling asleep (29%), and waking up too early and not being able to get back to sleep (30%). Also, sleepy Americans are creating a major public safety problem — drowsy driving. More than one-half of adults (54%) reported that they have driven at least once while drowsy in the past year, with almost a third (28%) reporting that they do so at least once per month, and 28% have nodded off or fallen asleep while driving. Of those who have driven drowsy, 38% use a sleep aid at least a few nights per week.
Although benzodiazepines have been the gold standard in treatment for sleep disorders for decades, issues with drug misuse and dependency are common and concerning. Other current treatments for insomnia include non-benzodiazepine GABA-A receptor agonists, which include Ambien, both immediate release and controlled-release tablets, Sonata, and Lunesta, which have less abuse potential and fewer side effects than classical benzodiazepines and can be used for longer term treatment. Patients and physicians surveyed suggest that current oral forms of these leading insomnia medications can take from 30-60 minutes to work, while promotions for insomnia medications cite 20-30 minutes. Compounds with a longer half-life keep patients asleep longer. Those compounds that are dosed in the middle of the night are also those that have residual side effects that can cause a “hangover” feeling the next day.
We believe the opportunity in insomnia is achieving a balance in treating patients so they can fall asleep quickly, whether at bedtime or in the middle of the night, while enabling them to function well the next day without a groggy feeling that can impact driving, employment or leisure activities. We believe there is a potentially significant clinical need for rapid and predictable onset of sleep in patients with insomnia, coupled with a predictable duration of sleep and rapid, clear awakening that can be satisfied with AZ-007.
Development Status
Clinical Studies
In April 2008, we announced positive results from a Phase 1 clinical trial of AZ-007. The AZ-007 Phase 1 clinical trial enrolled 40 healthy volunteers at a single U.S. clinical center. The purpose of this trial was to assess the safety, tolerability and pharmacokinetic parameters of a single dose of AZ-007. Using a double blind, randomized, dose-escalation trial design, 4 doses of zaleplon (ranging from 0.5 to 4.0 mg) were compared to placebo.
AZ-007 delivered an IV-like pharmacokinetic profile with a median time to peak venous concentration of 1.6 minutes. Zaleplon exposure was dose proportional across the 4 doses studied, as calculated by power analysis. Pharmacodynamics, measured as sedation assessed on a 100 mm visual-analog scale, showed onset of effect as early as 2 minutes after dosing with AZ-007.
The most common side effects, reported by at least 10% of the patients in any treatment group, were dizziness and somnolence. These side effects were generally mild to moderate in severity. These data indicated a rapid onset of effect, apparently directly related to the IV-like pharmacokinetics, and showed that AZ-007 was generally safe and well tolerated in this population of healthy volunteers.
In 2010, we initiated internal work to move AZ-007 to the current commercial production device, or CPD, and it is anticipated that the next clinical trial with AZ-007 would be initiated with the CPD format, if our resources allow. We do not intend to spend any external development resources on AZ-007 in the first half of 2012, but are continuing internal work on the technical product development of AZ-007.
Preclinical Studies
Zaleplon, the active pharmaceutical ingredient in AZ-007, has been approved for marketing in oral form. There are publicly available safety pharmacology, systemic toxicology, carcinogenicity and reproductive
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toxicology data we will be able to use for our regulatory filings. Therefore, our preclinical development testing has been primarily focused on assessing the local tolerability of inhaled zaleplon. Our two preclinical inhalation toxicology studies with zaleplon have indicated that it was generally well tolerated.
SMOKING CESSATION PROGRAM: Staccato nicotine
Staccato nicotine is designed to help smokers quit by addressing both the chemical and behavioral components of nicotine addiction by combining nicotine replacement via inhalation with a user-friendly drug delivery device. The Staccato technology may be capable of mimicking the pharmacokinetics of smoking cigarettes through the delivery of optimally-sized nicotine particles to the deep lung. Staccato nicotine may also satisfy some of the psychological aspects of smoking, such as hand-to-mouth movement and oral inhalation, and could allow smokers to self-administer and possibly titrate the dose to treat cravings. Importantly, the electronics embedded within the Staccato delivery system could allow for the programmed, over-time reduction in the overall daily dose of nicotine, and ultimately may lead to better management of nicotine cravings and eventual sustained smoking cessation.
On August 25, 2010, we licensed the worldwide rights for the Staccato nicotine technology to Cypress. Under the Cypress Agreement, Cypress has responsibility for preclinical, clinical and regulatory aspects of the development of Staccato nicotine, along with the commercialization of the product. In January 2011, Cypress was acquired by Royalty Pharma. We do not know what, if any, impact this will have on the partnership.
Our Strategy
Key elements of our strategy include:
| • | Focus on Acute and Intermittent Conditions. We focus our development and commercialization efforts on product candidates based on our Staccato system that are intended to address important unmet medical and patient needs in the treatment of acute and intermittent conditions in which rapid onset, ease of use, noninvasive administration and, in some cases, patient titration of dosage are required. |
| • | Establish Strategic Partnerships. We intend to strategically partner with pharmaceutical and other companies, such as our partnership with Grupo Ferrer, to provide development funding or to address markets that may require a larger sales force or greater marketing resources than we are able to provide, or specific expertise to maximize the value of some product candidates. We also intend to seek international distribution partners, such as Grupo Ferrer, for our product candidates. We may also enter into strategic partnerships with other pharmaceutical companies to combine our Staccato system with their proprietary compounds. |
| • | Retain and Control Product Manufacturing. We own all manufacturing rights to our product candidates, other than Staccato nicotine. We intend to internally complete the final manufacture and assembly of our product candidates and any future products, potentially enabling greater intellectual property protection and economic return from our future products. We also believe controlling the final manufacture and assembly reduces the risk of supply interruptions and allows more cost effective manufacturing. |
Licensing Collaborations
Grupo Ferrer Internacional, S.A.
In October 2011, we entered into a commercial partnership with Grupo Ferrer pursuant to the Ferrer Agreement to commercialize ADASUVE in Europe, Latin America, Russia and the Commonwealth of Independent States countries, or the Ferrer Territories.
Under the terms of the Ferrer Agreement, we received an upfront cash payment of $10 million in January 2012, $5 million of which was paid to the former Allegro stockholders. We are eligible to receive additional milestone payments contingent on individual country commercial sales initiation and cumulative net sales targets. We will be responsible for filing and obtaining a marketing authorization from the European Commission
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on the basis of the ADASUVE MAA submitted to the EMA. Grupo Ferrer will be responsible for satisfaction of all other regulatory and pricing reimbursement requirements to market and sell ADASUVE in the Ferrer Territories. Grupo Ferrer will have the exclusive rights to commercialize ADASUVE in the Ferrer Territories. We will supply ADASUVE to Grupo Ferrer for all of its commercial sales and will receive a specified per-unit transfer price.
Either party may terminate the Ferrer Agreement for the other party’s uncured material breach or bankruptcy. The Ferrer Agreement continues in effect on a country-by-country basis until the later of the last to expire patent covering ADASUVE in such country or 12 years after first commercial sale. The Ferrer Agreement is subject to earlier termination in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy or insolvency of either party.
In March 2012, we entered into an amendment to the Ferrer Agreement. Grupo Ferrer and Alexza agreed to eliminate a future potential milestone payment in exchange for Grupo Ferrer’s purchase of $3 million of our common stock. Grupo Ferrer agreed to purchase approximately 2.42 million shares of our common stock for $1.24 per share in March 2012. During 2012, up to an additional $8 million of our common stock may be purchased by Grupo Ferrer, upon a request by us and subject to acceptance by Grupo Ferrer, in exchange for the elimination of additional milestones at a price per share that will be a premium to the market price on the date of purchase.
Cypress Bioscience, Inc.
In August 2010 we entered into the Cypress Agreement with Cypress for Staccato nicotine. According to the terms of the Cypress Agreement, Cypress paid us a non-refundable upfront payment of $5 million to acquire the worldwide license for the Staccato nicotine technology.
Following the completion of certain preclinical and clinical milestones relating to the Staccato nicotine technology, if Cypress elects to continue the development of Staccato nicotine, Cypress will be obligated to pay us an additional technology transfer payment of $1 million. We have a carried interest of 50% prior to the technology transfer payment and 10% after the completion of certain development activities and receipt of the technology transfer payment, subject to adjustment in certain circumstances, in the net proceeds of any sale or license by Cypress of the Staccato nicotine assets and the carried interest will be subject to put and call rights in certain circumstances.
Cypress has the responsibility for preclinical, clinical and regulatory aspects of the development of Staccato nicotine, along with the commercialization of the product. Cypress paid us a total of $3.9 million in research and development funding for our efforts to execute a defined development plan for Cypress culminating with the delivery of clinical trial materials for a Phase 1 study with Staccato nicotine. In January 2011, Cypress was acquired by Royalty Pharma. We do not know what, if any, impact this will have on the partnership.
Additionally, we sublease approximately 2,500 square feet of our premises and provide certain administrative, facility and information technology support to Cypress for $11,000 per month, and the contract for the sublease and these services is on a month-to-month basis.
Research and Development
Research and development expenditures made to advance our product candidates and general research efforts during the last three years ended December 31, 2011, were as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Product candidate expenses |
25,686 | 26,059 | 31,896 | |||||||||
| General research |
2,576 | 7,469 | 7,882 | |||||||||
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| Total research and development |
$28,262 | $33,528 | $39,778 | |||||||||
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Manufacturing
We manufacture our product candidates with components supplied by qualified vendors. The drug product manufacturing portion of the process is completed at our current good manufacturing practices, or cGMP, facility in Mountain View, California. We believe that manufacturing our product candidates will potentially enable greater intellectual property protection and economies of scale and decrease the risk of supply interruptions.
For our single dose commercial product design, after inspection and qualification, we assemble the components of our product candidates and coat the exterior of the heat package with a thin film of API. We then place the plastic airway around the assembly and package the completed product in a pharmaceutical-grade foil pouch.
The controller for our multiple dose delivery design includes the battery power source for heating the individual metal substrates, a microprocessor that directs the electric current to the appropriate metal substrate at the appropriate time, and an icon-based liquid crystal display that shows pertinent information to the user, for example, the number of doses remaining in the dose cartridge and the controller status. We may need to develop modified versions of our devices for future product candidates.
We believe we have developed quality assurance and quality control systems appropriate to the design, manufacture, packaging, labeling and storage of our product candidates in compliance with applicable regulations. These systems include extensive requirements with respect to design, quality management, quality planning and organization, product design, manufacturing facilities, equipment, purchase and handling of components, production and process controls, packaging and labeling controls, device evaluation, distribution and record keeping.
We outsource the production of the components of our product candidates, including the printed circuit boards, the molded plastic airways and the heat packages used in the single dose version of our Staccato system device. We currently use single source suppliers for these components, as well as for the API used in each of our product candidates. We do not carry a significant inventory of these components, and establishing additional or replacement suppliers for any of these components may not be accomplished quickly, or at all, and could cause significant additional expense. Any supply interruption from our vendors would limit our ability to manufacture our product candidates and could delay clinical trials for, and regulatory approval of, our product candidates.
In 2007, we completed the construction of a cGMP compliant manufacturing facility located in Mountain View, California. In November 2007, we received a pharmaceutical manufacturing license from the California State Food and Drug Branch for this facility. We believe this manufacturing facility will have sufficient capacity to manufacture commercial scale batches of our ADASUVE product and manufacture materials for toxicology studies and clinical trial materials for future clinical trials. In January 2011, we renewed our pharmaceutical manufacturing license from the California State Food and Drug Branch for our Mountain View facility. This new license is valid until January 31, 2013.
In August 2010, we were subject to our first FDA Pre-Approval Inspection, or PAI. As a result of this inspection we received an FDA Form 483, which outlined ten observations. We submitted responses to these observations to the FDA within the specified response timeframe. On December 13, 2010, the FDA issued an Establishment Inspection Report that outlined the findings of the PAI.
In November and December 2011, we were subject to our second FDA PAI this time relating to our NDA resubmission for ADASUVE. At the close of the inspection, the FDA issued a Form FDA-483 containing inspectional observations.
Autoliv ASP, Inc.
In November 2007, we entered into a manufacturing and supply agreement, or the manufacture agreement, with Autoliv relating to the commercial supply of chemical heat packages that can be incorporated into our single dose Staccato device. Autoliv had developed these chemical heat packages for us pursuant to a development agreement executed in October 2005.
Autoliv has agreed to manufacture, assemble and test the chemical heat packages solely for us in conformance with our specifications. We will pay Autoliv a specified purchase price, which varies based on annual quantities ordered by us, per chemical heat package delivered. The manufacture agreement provides that
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during the term of the manufacture agreement, Autoliv will be our exclusive supplier of chemical heat packages. In addition, the manufacture agreement grants Autoliv the right to negotiate for the right to supply commercially any second generation chemical heat package, or a second generation product, and provides that we will pay Autoliv certain royalty payments if we manufacture second generation products ourselves or if we obtain second generation products from a third party manufacturer. Upon the expiration or termination of the manufacture agreement we will also be required, on an ongoing basis, to pay Autoliv certain royalty payments related to the manufacture of the chemical heat packages by us or third party manufacturers.
In June 2010 and February 2011, we entered into agreements to amend the terms of the manufacture agreement, or the amendments. Under the terms of the first of the amendments, we paid Autoliv $4 million and issued Autoliv a $4 million unsecured promissory note in return for a production line for the commercial manufacture of chemical heat packages. Each production line is comprised of two identical and self-sustaining “cells”, and the first such cell was completed, installed and qualified in connection with such amendment. Under the terms of the second of the amendments, the original $4 million note was cancelled and a new unsecured promissory note was issued with a reduced principal amount of $2.8 million, or the second note, and production on the second cell ceased. In the event that we request completion of the second cell of the first production line for the commercial manufacture of chemical heat packages, Autoliv will complete, install and fully qualify such second cell for a cost to us of $1.2 million and Autoliv will transfer ownership of such cell to us upon the payment in full of such $1.2 million and the second note.
The provisions of the amendments supersede (a) our obligation set forth in the manufacture agreement to reimburse Autoliv for certain expenses related to the equipment and tooling used in production and testing of the chemical heat packages in an amount of up to $12 million upon the earliest of December 31, 2011, 60 days after the termination of the manufacture agreement or 60 days after approval by the FDA of an NDA filed by us, and (b) the obligation of Autoliv to transfer possession of such equipment and tooling.
At our request, Autoliv will manufacture up to two additional production lines for the commercial manufacture of chemical heat packages at a cost not to exceed $2.4 million for each additional line. Pursuant to the amendments, the parties also agreed to revise the specified purchase price of chemical heat packages supplied by Autoliv, which varies based on annual quantities that we order.
The initial term of the manufacture agreement expires on December 31, 2012, at which time the manufacture agreement will automatically renew for successive five-year renewal terms unless we or Autoliv notify the other party no less than 36 months prior to the end of the initial term or the then-current renewal term that such party wishes to terminate the manufacture agreement.
Product Commercialization
In addition to our collaboration with Grupo Ferrer, we plan to enter into additional strategic partnerships with another company or companies to commercialize ADASUVE in territories other than the Ferrer Territories, and other product candidates in all geographic territories.
Government Regulation
The testing, manufacturing, labeling, advertising, promotion, distribution, export and marketing of our product candidates are subject to extensive regulation by governmental authorities in the United States and other countries. Our product candidates include drug compounds incorporated into our delivery device and are considered “combination products” in the United States. We have agreed with the FDA that our product candidates will be reviewed by the FDA’s Center for Drug Evaluation and Research. The FDA, under the Federal Food, Drug and Cosmetic Act, or FDCA, regulates pharmaceutical products in the United States. The steps required before a drug may be approved for marketing in the United States generally include:
| • | preclinical laboratory studies and animal tests; |
| • | the submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials commence; |
| • | adequate and well controlled human clinical trials to establish the safety and efficacy of the product; |
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| • | the submission to the FDA of an NDA; |
| • | satisfactory completion of an FDA inspection of the manufacturing facilities at which the product is made to assess compliance with cGMP. In addition, the FDA may inspect clinical trial sites that generated the data in support of the NDA; and |
| • | FDA review and approval of the NDA. |
The testing and approval process requires substantial time, effort and financial resources, and the receipt and timing of any approval is uncertain. Preclinical studies include laboratory evaluations of the product candidate, as well as animal studies to assess the potential safety and efficacy of the product candidate. The results of the preclinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of the IND, which must become effective before clinical trials may be commenced. The IND will become effective automatically 30 days after receipt by the FDA, unless the FDA raises concerns or questions about the conduct of the trials as outlined in the IND prior to that time. In that case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed.
Clinical trials typically begin with the administration of the product candidates to healthy volunteers or patients under the supervision of a qualified principal investigator. Further, each clinical trial must be reviewed and approved by an independent institutional review board, or IRB, at or servicing each institution at which the clinical trial will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution.
Clinical trials typically are conducted in three sequential phases prior to approval, but the phases may overlap. A fourth, or post-approval, phase may include additional clinical studies. These phases generally include the following:
| • | Phase 1. Phase 1 clinical trials involve the initial introduction of the drug into human subjects, frequently healthy volunteers. These studies are designed to determine the metabolism and pharmacologic actions of the drug in humans, the adverse effects associated with increasing doses and, if possible, to gain early evidence of effectiveness. In Phase 1 clinical trials, the drug is usually tested for safety, including adverse effects, dosage tolerance, absorption, distribution, metabolism, excretion and pharmacodynamics. |
| • | Phase 2. Phase 2 clinical trials usually involve studies in a limited patient population to (1) evaluate the efficacy of the drug for specific, targeted indications; (2) determine dosage tolerance and optimal dosage; and (3) identify possible adverse effects and safety risks. Although there are no statutory or regulatory definitions for Phase 2a and Phase 2b, Phase 2a is commonly used to describe a Phase 2 clinical trial designed to evaluate efficacy, adverse effects and safety risks and Phase 2b is commonly used to describe a subsequent Phase 2 clinical trial that also evaluates dosage tolerance and optimal dosage. |
| • | Phase 3. If a compound is found to be potentially effective and to have an acceptable safety profile in Phase 2 clinical trials, the clinical trial program will be expanded to further demonstrate clinical efficacy, optimal dosage and safety within an expanded patient population at geographically dispersed clinical trial sites. Phase 3 clinical trials usually include several hundred to several thousand patients. |
| • | Phase 4. Phase 4 clinical trials are studies required of, or agreed to by, a sponsor that are conducted after the FDA has approved a product for marketing. These studies are used to gain additional information from the treatment of patients in the intended therapeutic indication and to verify a clinical benefit in the case of drugs approved under accelerated approval regulations. If the FDA approves a product while a company has ongoing clinical trials that were not necessary for approval, a company may be able to use the data from these clinical trials to meet all or part of any Phase 4 clinical trial requirement. These clinical trials are often referred to as Phase 3/4 post-approval clinical trials. Failure to promptly conduct Phase 4 clinical trials could result in withdrawal of approval for products approved under accelerated approval regulations. |
In the case of products for the treatment of severe or life threatening diseases, the initial clinical trials are sometimes conducted in patients rather than in healthy volunteers. Since these patients are already afflicted with the target disease, it is possible that such clinical trials may provide evidence of efficacy traditionally obtained in
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Phase 2 clinical trials. These trials are referred to frequently as Phase 1/2 clinical trials. The FDA may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.
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. Generally, regulatory approval of a new drug by the FDA may follow one of three routes. The most traditional of these routes is the submission of a full NDA under Section 505(b)(1) of the FDCA. A second route, which is possible where an applicant chooses to rely in part on the FDA’s conclusion about the safety and effectiveness of previously approved drugs is to submit a more limited NDA described in Section 505(b)(2) of the FDCA. The final route is the submission of an Abbreviated New Drug Application for products that are shown to be therapeutically equivalent to previously approved drug products as permitted under Section 505(j) of the FDCA. We do not expect any of our product candidates to be submitted under Section 505(j). Both Section 505(b)(1) and Section 505(b)(2) applications are required by the FDA to contain full reports of investigations of safety and effectiveness. However, in contrast to a traditional NDA submitted pursuant to Section 505(b)(1) in which the applicant submits all of the data demonstrating safety and effectiveness, an application submitted pursuant to Section 505(b)(2) can rely upon findings by the FDA that the reference drug is safe and effective. As a consequence, the preclinical and clinical development programs leading to the submission of an NDA under Section 505(b)(2) may be less expensive to carry out and may be concluded in a shorter period of time than programs required for a Section 505(b)(1) application. In its review of any NDA submissions, however, the FDA has broad discretion to require an applicant to generate additional data related to safety and efficacy, and it is impossible to predict the number or nature of the studies that may be required before the FDA will grant approval. Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA changes its interpretation of Section 505(b)(2), this could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit.
To the extent that a Section 505(b)(2) applicant is relying on the FDA’s findings for an already-approved reference product, the applicant is required to certify to the FDA concerning any patents listed for the reference product in the FDA’s Orange Book publication. A certification that the new product will not infringe the reference product’s Orange Book-listed patents or that such patents are invalid is called a paragraph IV certification, and could be challenged in court by the patent owner or holder of the application of the reference product. This could delay the approval of any Section 505(b)(2) application we submit. In addition, any period of marketing exclusivity applicable to the reference product might delay approval of any Section 505(b)(2) application we submit. Any Section 505(b)(1) or Section 505(b)(2) application we submit for a drug product containing a previously approved API might be eligible for three years of marketing exclusivity, provided new clinical investigations that were conducted or sponsored by us are essential to the FDA’s approval of the application. Five years of marketing exclusivity is granted if the FDA approves an NDA for a new chemical entity. In addition, we can list in the FDA’s Orange Book publication any of our patents claiming the drug product, drug substance or that cover an approved method-of-use. In order for a generic applicant to rely on the FDA’s approval of any NDA we submit, such generic applicant must certify to any Orange Book listed patents and might be subject to any marketing exclusivity covering our approved drug product.
In our initial submission and our resubmission of the ADASUVE NDA we followed, and in future submissions for ADASUVE and our other product candidates we intend to follow the development pathway permitted under the FDCA that we believe will maximize the commercial opportunities for these product candidates. We are currently pursuing the Section 505(b)(2) application route for our product candidates. As such, we have and intend to continue to engage in discussions with the FDA to determine which, if any, portions of our development program can be modified, based on previous FDA findings of a drug’s safety and effectiveness.
Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured, whether ours or our third party manufacturers’, and will not approve the product unless the manufacturing facility complies with cGMP or, where applicable, the Quality System Regulation, or QSR. The FDA reviews all NDA’s submitted before it accepts them for filing and may request additional information rather than accept an NDA for
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filing. Once the NDA submission has been accepted for filing, the FDA begins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under the Prescription Drug User Fee Act, or PDUFA, the FDA has 10 months in which to complete its initial review of a standard NDA and respond to the applicant, and six months for a priority NDA. The FDA does not always meet the PDUFA goal dates for standard and priority NDAs. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may delay approval of an NDA if applicable regulatory criteria are not satisfied, require additional testing or information and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product. FDA approval of any NDA submitted by us will be at a time the FDA chooses. Also, if regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which such 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 or if problems occur after the product reaches the marketplace. In addition, the FDA may require post-marketing studies, referred to as Phase 4 clinical trials, to monitor the effect of approved products and may limit further marketing of the product based on the results of these post-marketing studies.
If we obtain regulatory approval for a product, that approval will be limited to those diseases and conditions for which the product is effective, as demonstrated through clinical trials and as specified in the approved labeling. Even if that regulatory approval is obtained, a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections by the FDA and, in our case, the State of California. Discovery of previously unknown problems with a medicine, device, manufacturer or facility may result in restrictions on the marketing or manufacturing of an approved product, including costly recalls or withdrawal of the product from the market. The FDA has broad post-market regulatory and enforcement powers, including the ability to suspend or delay issuance of approvals, seize or recall products, withdraw approvals, enjoin violations and institute criminal prosecution.
In addition to regulation by the FDA and certain state regulatory agencies, the United States Drug Enforcement Administration, or DEA, imposes various registration, recordkeeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical products under the Controlled Substances Act, or CSA. A principal factor in determining the particular requirements, if any, applicable to a product is its actual or potential abuse profile. The DEA regulates drug substances as Schedule I, II, III, IV or V substances, with Schedule I and II substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Alprazolam and zaleplon, the API in AZ-002 and AZ-007, respectively, are regulated as Schedule IV substances and fentanyl, the API in AZ-003, is regulated as a Schedule II substance. Each of these product candidates is subject to DEA regulations relating to manufacturing, storage, distribution and physician prescription procedures, and the DEA may regulate the amount of the scheduled substance available for clinical trials and commercial distribution. As a Schedule II substance, fentanyl is subject to additional controls, including quotas on the amount of product that can be manufactured and limitations on prescription refills. We have received necessary registrations from the DEA for the manufacture of AZ-002, AZ-003 and AZ-007. The DEA periodically inspects facilities for compliance with its rules and regulations. Failure to comply with current and future regulations of the DEA could lead to a variety of sanctions, including revocation, or denial of renewal, of DEA registrations, injunctions, or civil or criminal penalties, and could harm our business and financial condition.
The single dose design of our Staccato system uses what we refer to as “energetic materials” to generate the rapid heating necessary for vaporizing the drug while avoiding degradation. Manufacture of products containing these types of materials is controlled by the Bureau of Alcohol, Tobacco, Firearms and Explosives, or ATF, under 18 United States Code Chapter 40. Technically, the energetic materials used in our Staccato system are classified as “low explosives,” and we have been granted a license/permit by the ATF for the manufacture of such low explosives.
Additionally, due to inclusion of the energetic materials in our Staccato system, shipments of the single dose design of our Staccato system have been evaluated to determine if they are regulated by the Department of Transportation, or DOT, under Section 173.56, Title 49 of the United States Code of Federal Regulations. The single dose version of our Staccato device has been granted “Not Regulated as an Explosive” status by the DOT.
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We have received funding for one or more research projects from a funding agency of the United States government, and inventions conceived or first actually reduced to practice in performance of the research project, or subject inventions, are subject to the rights and limitations of certain federal statutes and various implementing regulations known generally and collectively as the “Bayh-Dole Requirements.” As a funding recipient, we are subject to certain reporting requirements for subject inventions, and certain limitations are placed on assignment of the invention rights. In addition, the federal government retains a non-exclusive, irrevocable, paid-up license to practice any subject invention and, in exceptional cases, the federal government may seek to take title to the invention.
We also will be subject to a variety of foreign regulations governing clinical trials and the marketing of any future products. Outside the United States, our ability to market a product depends upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. In any country, however, we will only be permitted to commercialize our products 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. The time 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.
Pharmaceutical Pricing and Reimbursement
In both domestic and foreign markets, our ability to commercialize successfully and attract strategic partners for our product candidates depends in significant part on the availability of adequate coverage and reimbursement from third-party payors, including, in the United States, governmental payors such as the Medicare and Medicaid programs, managed care organizations, and private health insurers. Third-party payors are increasingly challenging prices charged for medical products and services and examining their cost effectiveness, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost effectiveness of any future products. Even with studies, our product candidates may be considered less safe, less effective or less cost effective than existing products, and third-party payors therefore may not provide coverage and reimbursement for our product candidates, in whole or in part.
Political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental changes. There have been, and we expect there will continue to be, a number of legislative and regulatory proposals and enactments to change the healthcare system in ways that could significantly affect our business, such as the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 signed into law in March 2010. We anticipate that Congress, state legislatures and the private sector will continue to consider and may adopt healthcare policies intended to curb rising healthcare costs. These cost containment measures include:
| • | controls on government funded reimbursement for medical products and services; |
| • | controls on healthcare providers; |
| • | challenges to the pricing of medical products and services or limits or prohibitions on reimbursement for specific products and therapies through other means; |
| • | reform of drug importation laws; and |
| • | expansion of use of managed care systems in which healthcare providers contract to provide comprehensive healthcare for a fixed cost per person. |
We are unable to predict what additional legislation, regulations or policies, if any, relating to the healthcare industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation, regulations or policies would have on our business. Any cost containment measures, including those listed above, or other healthcare system reforms that are adopted could have a material adverse effect on our ability to operate profitably.
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Patents and Proprietary Rights
We actively seek to patent the technologies, inventions and improvements we consider important to the development of our business. In addition, we rely on trade secrets and contractual arrangements to protect our proprietary information. Some areas for which we seek patent protection include:
| • | the Staccato system and its components; |
| • | methods of using the Staccato system; |
| • | the aerosolized form of drug compounds produced by the Staccato system; and |
| • | methods of making and using the drug containing aerosols, including methods of administering the aerosols to a patient. |
As of February 24, 2012, we held 203 issued and allowed U.S. and international patents. Most of our patents are directed to compositions for delivery of an aerosol comprising drugs other than our primary product candidates described below, and cover the process for producing those aerosols using the Staccato system. As of February 24, 2012, we held 24 additional pending patent applications in the United States. As of February 24, 2012, we also held 21 pending corresponding foreign patent applications that will permit us to pursue additional patents outside of the United States. The claims in these various patents and patent applications are directed to various aspects of our drug delivery devices and their components, methods of using our devices, drug containing aerosol compositions and methods of making and using such compositions.
ADASUVE/AZ-104 (Staccato loxapine)
One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising loxapine and covers the process for producing such condensation aerosol using the Staccato system technology. This patent will not expire until 2022. Counterparts to this patent are pending in a number of foreign jurisdictions, including Europe. We also have three other U.S. patents directed to condensation aerosol compositions for delivery of loxapine, kits containing devices for forming such compositions and methods of administering such compositions.
AZ-007 (Staccato zaleplon)
One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising zaleplon and covers the process for producing such condensation aerosol using the Staccato system technology. This patent will not expire until 2022. Counterparts to this patent are pending in a number of foreign jurisdictions, including Europe. We also have three other U.S. patents directed to condensation aerosol compositions for delivery of zaleplon, kits containing devices for forming such compositions, and methods of administering such compositions.
AZ-002 (Staccato alprazolam)
One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising alprazolam and covers the process for producing such condensation aerosol using the Staccato system technology. This patent will not expire until 2022. Counterparts to this patent are pending in a number of foreign jurisdictions, including Europe. We also have three other U.S. patents directed to condensation aerosol compositions for delivery of alprazolam, kits containing devices for forming such compositions, and methods of administering such compositions.
AZ-003 (Staccato fentanyl)
One of our issued U.S. patents covers compositions for delivery of a condensation aerosol comprising fentanyl and covers the process for producing such condensation aerosol using the Staccato system technology. This patent will not expire until 2022. Counterparts to this patent are pending in a number of foreign jurisdictions, including Europe. We also have three other U.S. patents directed to condensation aerosol compositions for delivery of fentanyl, kits containing devices for forming such compositions, and methods of administering such compositions.
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Staccato nicotine
Two of our U.S. issued patents cover the apparatus and methods for producing condensation aerosol. One of these patents will not expire until 2026. Two of our U.S. patent applications cover compositions for delivery of a condensation aerosol comprising nicotine and nicotine formulations. One of our U.S. patent applications covers a method of treating nicotine craving by administering a condensation aerosol comprising nicotine.
Competition
The pharmaceutical and biotechnology industries are intensely competitive. Many pharmaceutical companies, biotechnology companies, public and private universities, government agencies and research organizations are actively engaged in research and development of products targeting the same markets as our product candidates. Many of these organizations have substantially greater financial, research, drug development, manufacturing and marketing resources than we have. Large pharmaceutical companies in particular have extensive experience in clinical testing and obtaining regulatory approvals for drugs. Our ability to compete successfully will depend largely on our ability to:
| • | develop products that are superior to other products in the market; |
| • | attract and retain qualified scientific, product development, manufacturing, and commercial personnel; |
| • | obtain patent and/or other proprietary protection covering our future products and technologies; |
| • | obtain required regulatory approvals; and |
| • | successfully collaborate with pharmaceutical and biotechnology companies in the development and commercialization of new products. |
We expect any future products we develop to compete on the basis of, among other things, product efficacy and safety, time to market, price, extent of adverse side effects experienced and convenience of treatment procedures. One or more of our competitors may develop products based upon the principles underlying our proprietary technologies earlier than we do, obtain approvals for such products from the FDA more rapidly than we do or develop alternative products or therapies that are safer, more effective and/or more cost effective than any future products developed by us. In addition, our ability to compete may be affected if insurers and other third-party payors encourage the use of generic products through other routes of administration.
Any future products developed by us would compete with a number of alternative drugs and therapies, including the following:
| • | ADASUVE would compete with the injectable form of loxapine and other antipsychotic drugs; |
| • | AZ-007 would compete with non-benzodiazepine GABA-A receptor agonists; |
| • | AZ-104 would compete with available triptan drugs and IV prochlorperazine; |
| • | AZ-003 would compete with injectable and other forms of fentanyl and various generic oxycodone, hydrocodone and morphine products; and |
| • | AZ-002 would compete with the oral tablet form of alprazolam and other benzodiazepines. |
Many of these existing drugs have substantial current sales and long histories of effective and safe use. As patent protection expires for these drugs, we will also compete with their generic versions. In addition to currently marketed drugs and their generic versions, we believe there are a number of drug candidates in clinical trials that, if approved in the future, would compete with any future products we may develop. In addition, after patent protection and marketing exclusivity expire for our products, we may face direct generic competition, or competition from sponsors relying to some extent on our approval by filing NDA’s under section 505(b)(2) of the FDCA.
Employees
As of March 1, 2012, we had 44 full time employees, 10 of whom held Ph.D. or M.D. degrees, nine of whom were engaged in full time research and development activities and 22 of whom were engaged in commercial manufacturing, supply chain and quality functions and seven part-time employees. None of our employees are represented by a labor union, and we consider our employee relations to be good.
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Corporate Information
We were incorporated in the state of Delaware on December 19, 2000 as FaxMed, Inc. In June 2001, we changed our name to Alexza Corporation and in December 2001 we became Alexza Molecular Delivery Corporation. In July 2005, we changed our name to Alexza Pharmaceuticals, Inc.
Available Information
Our website address is www.alexza.com; however, information found on, or that can be accessed through, our website is not incorporated by reference into this Annual Report. We file electronically with the Securities and Exchange Commission, or SEC, our Annual Report, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We make available free of charge on or through our website copies of these reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov. You may also read and copy any of our materials filed with the SEC at the SEC’s Public References Room at 100 F Street, NW, Washington, DC 20549. Information regarding the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Annual Report, before deciding whether to invest in shares of our common stock. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Relating to Our Business
Our management concluded that due to our need for additional capital, and the uncertainties surrounding our ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern.
Our audited financial statements for the fiscal year ended December 31, 2011 were prepared on a going concern basis in accordance with United States generally accepted accounting principles. The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. Our operating and capital plans for the next twelve months call for cash expenditure to exceed our cash, cash equivalents, marketable securities and working capital. Our management concluded that due to our need for additional capital, and the uncertainties surrounding our ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern. We may be forced to reduce our operating expenses, raise additional funds, principally through the additional sales of our securities or debt financings, or enter into an additional corporate partnership to meet our working capital needs. However, we cannot guarantee that we will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to us. If we are unable to raise sufficient additional capital or complete a strategic transaction, we may be unable to continue to fund our operations, develop our product candidates or realize value from our assets and discharge our liabilities in the normal course of business. These uncertainties raise substantial doubt about our ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock.
We have a history of net losses. We expect to continue to incur substantial and increasing net losses for the foreseeable future, and we may never achieve or maintain profitability.
We are not profitable and have incurred significant net losses in each year since our inception, including net losses of $40.5 million, $1.5 million, and $56.1 million for the years ended December 31, 2011, 2010 and 2009, respectively, and $351.7 million for the period from December 19, 2000 (inception) to December 31, 2011. As of December 31, 2011, we had a deficit accumulated during development stage of $306.6 million and a stockholders’ deficit of $9.7 million. We expect to continue to incur substantial net losses and negative cash flow for the foreseeable future. These losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.
Because of the numerous risks and uncertainties associated with pharmaceutical product development and commercialization, we are unable to accurately predict the timing or amount of future expenses or when, or if, we will be able to achieve or maintain profitability. Currently, we have no products approved for commercial sale, and to date we have not generated any product revenue. We have financed our operations primarily through the sale of equity securities, equipment financing, debt financing, collaboration and licensing agreements, and government grants. The size of our future net losses will depend, in part, on the rate of growth or contraction of our expenses and the level and rate of growth, if any, of our revenues. Revenues from strategic partnerships are
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uncertain because we may not enter into any additional strategic partnerships. If we are unable to develop and commercialize one or more of our product candidates or if sales revenue from any product candidate that receives marketing approval is insufficient, we will not achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.
We are a development stage company. Our success depends substantially on our lead product candidates. If we do not develop commercially successful products, we may be forced to cease operations.
You must evaluate us in light of the uncertainties and complexities affecting a development stage pharmaceutical company. We have not completed clinical development for any of our product candidates. In October 2010, we received a CRL from the FDA regarding our NDA for our ADASUVE product candidate. A CRL is issued by the FDA indicating that the NDA review cycle is complete and the application is not ready for approval in its present form. In December 2010, we completed an End-of-Review meeting with the FDA to discuss the issues outlined in the ADASUVE CRL. In April 2011, we completed a meeting with the FDA to discuss preliminary draft labeling and initial REMS program proposals. The FDA indicated that a complete review of the proposed REMS in conjunction with the full clinical review of the resubmitted NDA will be necessary to determine whether the REMS will be acceptable. In August 2011, we resubmitted the ADASUVE NDA, which was accepted for filing by the FDA as a complete, class 2 response to the FDA’s CRL. The FDA indicated a PDUFA goal date of February 4, 2012. In December 2011, a PDAC was held to review the ADASUVE NDA. In January 2012, we updated our REMS and submitted other amendments to the ADASUVE NDA to address topics discussed during the December PDAC meeting. In January 2012, the FDA notified us that it had designated the January 2012 REMS submission as a major amendment to the ADASUVE NDA and exercised the FDA’s option to extend the PDUFA goal date to provide additional time to complete the review, from February 4, 2012 to May 4, 2012. We may be unsuccessful in resolving the concerns raised in the CRL, our proposed REMS may not be acceptable to the FDA and we may never receive marketing approval for ADASUVE or any of our product candidates as a result of the issues raised in the CRL. In October 2011, we submitted our ADASUVE MAA to the EMA seeking an opinion from the EMA regarding the potential approval of ADASUVE and grant of marketing authorization for ADASUVE by the European Commission in the European Union. Marketing authorizations granted by the European Commission on the basis of the opinion issued by the EMA are valid in all of the European Union member states. In February 2012, we received the Day 80 Assessment Report from the EMA, which outlined major objections to our ADASUVE MAA. We may be unsuccessful in resolving the concerns raised in the Day 80 Assessment Report. Each of our other product candidates is at an earlier stage of development and may be affected by concerns expressed in the CRL and/or the Day 80 Assessment Report. Each of our product candidates will be unsuccessful if it:
| • | does not demonstrate acceptable quality, safety and efficacy in preclinical studies and clinical trials or otherwise does not meet applicable regulatory standards for approval; |
| • | does not offer therapeutic or other improvements over existing or future drugs used to treat the same or similar conditions; |
| • | is not capable of being produced in commercial quantities at an acceptable cost, or at all; or |
| • | is not accepted by patients, the medical community or third party payors. |
Our ability to generate product revenue in the future is dependent on the successful development and commercialization of our product candidates. We have not proven our ability to develop and commercialize products. Problems frequently encountered in connection with the development and utilization of new and unproven technologies and the competitive environment in which we operate might limit our ability to develop commercially successful products. We do not expect any of our current product candidates to be commercially available before 2013, if at all. If we are unable to make our product candidates commercially available, we will not generate product revenues, and we will not be successful.
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We will need substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.
We will need to raise additional capital to fund our operations, to develop our product candidates and to develop our manufacturing capabilities. Our future capital requirements will be substantial and will depend on many factors including:
| • | the cost and outcomes of regulatory proceedings, most importantly, the FDA review of the NDA for ADASUVE that we resubmitted in August 2011 and amended in January 2012, and the EMA review of the MAA for ADASUVE that we submitted in October 2011; |
| • | the scope, rate of progress, results and costs of our preclinical studies, clinical trials and other research and development activities, and our manufacturing development and commercial manufacturing activities; |
| • | the cost and timing of developing manufacturing capacity; |
| • | the cost and timing of developing sales and marketing capabilities prior to receipt of any regulatory approval of our product candidates; |
| • | revenues received from any existing or future products; |
| • | payments received under our collaboration with Cypress and Grupo Ferrer and any future strategic partnerships; |
| • | the availability of authorized shares of our common stock to issue to potential investors; |
| • | the filing, prosecution and enforcement of patent claims; and |
| • | the costs associated with commercializing our product candidates, if they receive regulatory approval. |
We believe that with current cash, cash equivalents and marketable securities, including receipt of the upfront payment from Grupo Ferrer, net of our $5 million payment to the former Allegro stockholders, net proceeds of approximately $20.4 million from our recently completed underwritten public offering, the March 2012 amendment of the Ferrer Agreement and our current expected cash usage, accounting for the February 2012 reduction in our workforce, we have sufficient capital resources to meet our anticipated cash needs, at our current cost levels, into the fourth quarter of 2012. In February 2012, we reduced our workforce by 29 employees or 38% of our workforce in an effort to preserve cash balances. Further, due to the FDA not approving ADASUVE for commercial marketing in October 2010, we have slowed the clinical development of AZ-007. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate, or to alter our operations. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently expect. The key assumptions underlying these estimates include:
| • | expenditures related to continued preclinical and clinical development of our product candidates during this period within budgeted levels; |
| • | no unexpected costs related to the development of our manufacturing capability; |
| • | no unexpected costs related to the FDA review of our ADASUVE NDA or the EMA review of our ADASUVE MAA; and |
| • | no growth in the number of our employees during this period. |
We may never be able to generate a sufficient amount of product revenue to cover our expenses. Until we do, we expect to finance our future cash needs through public or private equity offerings, debt financings, strategic partnerships or licensing arrangements. Any financing transaction may contain unfavorable terms. If we raise additional funds by issuing equity securities, our stockholders’ equity will be diluted and debt financing, if available, may involve restrictive covenants. If we raise additional funds through strategic partnerships, we may be required to relinquish rights to our product candidates or technologies, or to grant licenses on terms that are not favorable to us. In addition, in connection with our registered direct financing in May 2011, we agreed with the investors that, subject to certain exceptions, if we issue securities prior to the earlier of (i) the date on which we receive written approval from the FDA for our ADASUVE NDA or (ii) June 30, 2012, the investors in the
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offering have the right to purchase their pro rata share, based on their participation in the offering, of such securities. Complying with the terms of the foregoing rights and restrictions may make it more difficult to complete certain types of transactions and result in delays to our fundraising efforts.
The process for obtaining approval of an NDA is time consuming, subject to unanticipated delays and costs, and requires the commitment of substantial resources. We received a CRL for our NDA in October 2010.
In October 2010, we received a complete response letter, or CRL, from the FDA regarding our NDA. A CRL is issued by the FDA indicating that the NDA review cycle is complete and the application is not ready for approval in its present form. The CRL conveyed the FDA’s comments regarding certain issues with our NDA, including data from the three Phase 1 pulmonary safety studies with ADASUVE, suitability of stability studies and certain other CMC concerns, including matters related to the FDA’s inspection of our manufacturing facilities. In December 2010, we met with the FDA to address the concerns raised in the CRL. In April 2011, we completed a meeting with the FDA to discuss preliminary draft labeling and initial REMS program proposals. The FDA indicated that a complete review of the proposed REMS in conjunction with the full clinical review of the resubmitted NDA will be necessary to determine whether the REMS will be acceptable. We resubmitted our NDA in August 2011. We may be unsuccessful in resolving the issues raised by the FDA, our proposed REMS may not be acceptable to the FDA and we may never receive marketing approval for ADASUVE or any of our product candidates as a result of the issues raised in the CRL. In December 2011, a PDAC was held to review the ADASUVE NDA. In January 2012, we updated our REMS and submitted other amendments to the ADASUVE NDA to address topics discussed during the December PDAC meeting. In January 2012, the FDA notified Alexza that it had designated the January 2012 REMS submission as a major amendment to the ADASUVE NDA and exercised the FDA’s option to extend the PDUFA goal date to provide additional time to complete the review, from February 4, 2012 to May 4, 2012.
The FDA will conduct an in-depth review of our resubmission to determine whether to approve ADASUVE for commercial marketing for the indications we have proposed. If the FDA is not satisfied with the information we provide, the FDA may refuse to approve our NDA or may require us to perform additional studies or provide other information in order to secure approval. The FDA may delay, limit or refuse to approve our resubmitted NDA if we did not sufficiently address the issues raised in the CRL.
If the FDA determines that the clinical trials of ADASUVE that were submitted in support of our NDA were not conducted in full compliance with the applicable protocols for these studies, as well as with applicable regulations and standards, or if the FDA does not agree with our interpretation of the results of such studies, the FDA may reject the data that resulted from such studies. The rejection of data from clinical trials required to support our NDA for ADASUVE could negatively impact our ability to obtain marketing authorization for this product candidate and would have a material adverse effect on our business and financial condition.
In addition, our resubmitted NDA may not be approved, or approval may be delayed, as a result of changes in FDA policies for drug approval during the review period. For example, although many products have been approved by the FDA in recent years under Section 505(b)(2) of the FDCA, objections have been raised to the FDA’s interpretation of Section 505(b)(2). If challenges to the FDA’s interpretation of Section 505(b)(2) are successful, the FDA may be required to change its interpretation, which could delay or prevent the approval of an NDA. Any significant delay in the review or approval of our resubmitted NDA would have a material adverse effect on our business and financial condition.
On October 26, 2011, the EMA accepted the submission of our ADASUVE MAA for an opinion regarding the potential approval of ADASUVE prior to potential grant of marketing authorization by the European Commission. In February 2012, we received the Day 80 Assessment Report from the EMA regarding our MAA for ADASUVE. The Day 80 Assessment Report for ADASUVE outlines major objections pertaining to the extrapolation of the Phase 3 study population to the intended patient population, pulmonary safety in patients with active airways disease and recommendations to address this issue via the risk management plan, other aspects of the risk management plan, and the need to obtain an European Union Good Manufacturing Practices certificate for the Alexza manufacturing facility and commercial manufacturing process. We expect that specific questions will be posed by the EMA in the 120 Day CHMP List of Questions. Any significant delay in our
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response to the questions in the 120 Day CHMP List of Questions or in the review of approval of our application for marketing authorization following response to these questions would have a material adverse effect on our business and financial condition.
Unstable market conditions may have serious adverse consequences on our business.
The recent economic downturn and market instability has made the business climate more volatile and more costly. Our general business strategy may be adversely affected by unpredictable and unstable market conditions. If the current equity and credit markets deteriorate further, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. While we believe that with current cash, cash equivalents and marketable securities, including receipt of the upfront payment from Grupo Ferrer, net of our $5 million payment to the former Allegro stockholders, net proceeds of approximately $20.4 million from our recently completed underwritten public offering, the March 2012 amendment of the Ferrer Agreement and our current expected cash usage, accounting for the February 2012 reduction in our workforce, we have sufficient capital resources to meet our anticipated cash needs, at our current cost levels, into the fourth quarter of 2012, we may obtain additional financing on less than attractive rates or on terms that are excessively dilutive to existing stockholders. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our business, financial condition and stock price and could require us to delay or abandon clinical development plans or alter our operations. There is a risk that one or more of our current component manufacturers and partners may encounter difficulties during challenging economic times, which would directly affect our ability to attain our operating goals on schedule and on budget.
Unless our preclinical studies demonstrate the safety of our product candidates, we will not be able to commercialize our product candidates.
To obtain regulatory approval to market and sell any of our product candidates, we must satisfy the FDA and other regulatory authorities abroad, through extensive preclinical studies, that our product candidates are safe. Our Staccato system creates condensation aerosol from drug compounds, and there currently are no approved products that use a similar method of drug delivery. Companies developing other inhalation products have not defined or successfully completed the types of preclinical studies we believe will be required for submission to regulatory authorities as we seek approval to conduct our clinical trials. We may not have conducted or may not conduct in the future the types of preclinical testing ultimately required by regulatory authorities, or future preclinical tests may indicate that our product candidates are not safe for use in humans. Preclinical testing is expensive, can take many years and have an uncertain outcome. In addition, success in initial preclinical testing does not ensure that later preclinical testing will be successful.
We may experience numerous unforeseen events during, or as a result of, the preclinical testing process, which could delay or prevent our ability to develop or commercialize our product candidates, including:
| • | our preclinical testing may produce inconclusive or negative safety results, which may require us to conduct additional preclinical testing or to abandon product candidates that we believed to be promising; |
| • | our product candidates may have unfavorable pharmacology, toxicology or carcinogenicity; and |
| • | our product candidates may cause undesirable side effects. |
Any such events would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.
Failure or delay in commencing or completing clinical trials for our product candidates could harm our business.
We have not completed all the clinical trials necessary to support an application with the FDA or other regulatory authorities abroad for approval to market any of our product candidates other than what we believe to be adequate clinical trials to support the marketing approval for ADASUVE in the United States. Future clinical trials may be delayed or terminated as a result of many factors, including:
| • | insufficient financial resources to fund such trials; |
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| • | delays or failure in reaching agreement on acceptable clinical trial contracts or clinical trial protocols with prospective sites; |
| • | regulators or institutional review boards may not authorize us to commence a clinical trial; |
| • | regulators or institutional review boards may suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or concerns about patient safety; |
| • | we may suspend or terminate our clinical trials if we believe that they expose the participating patients to unacceptable health risks; |
| • | we may experience slower than expected patient enrollment or lack of a sufficient number of patients that meet the enrollment criteria for our clinical trials; |
| • | patients may not complete clinical trials due to safety issues, side effects, dissatisfaction with the product candidate, or other reasons; |
| • | we may have difficulty in maintaining contact with patients after treatment, preventing us from collecting the data required by our study protocol; |
| • | product candidates may demonstrate a lack of efficacy during clinical trials; |
| • | we may experience governmental or regulatory delays, failure to obtain regulatory approval or changes in regulatory requirements, policy and guidelines; and |
| • | we may experience delays in our ability to manufacture clinical trial materials in a timely manner as a result of ongoing process and design enhancements to our Staccato system. |
Any delay in commencing or completing clinical trials for our product candidates would delay commercialization of our product candidates and harm our business, financial condition and results of operations. It is possible that none of our product candidates will successfully complete clinical trials or receive regulatory approval, which would severely harm our business, financial condition and results of operations.
If our product candidates do not meet safety and efficacy endpoints in clinical trials, they will not receive regulatory approval, and we will be unable to market them.
We have not yet received regulatory approval from the FDA or any foreign regulatory authority to market any of our product candidates. The clinical development and regulatory approval process is extremely expensive and takes many years. The timing of any approval cannot be accurately predicted. If we fail to obtain regulatory approval for our product candidates, we will be unable to market and sell them and therefore we may never be profitable. In October 2010 the FDA issued a CRL regarding our NDA for ADASUVE. In December 2010, we met with the FDA to address the concerns raised in the CRL. We resubmitted our NDA in August 2011. In April 2011, we completed a meeting with the FDA to discuss preliminary draft labeling and initial REMS program proposals. The FDA indicated that a complete review of the proposed REMS in conjunction with the full clinical review of the resubmitted NDA will be necessary to determine whether the REMS will be acceptable In December 2011, a PDAC was held to review the ADASUVE NDA. In January 2012, we updated our REMS and submitted other amendments to the ADASUVE NDA to address topics discussed during the December PDAC meeting. In January 2012, the FDA notified Alexza that it had designated the January 2012 REMS submission as a major amendment to the ADASUVE NDA and exercised the FDA’s option to extend the PDUFA goal date to provide additional time to complete the review, from February 4, 2012 to May 4, 2012. We may be unsuccessful in resolving these issues, our proposed REMS may not be acceptable to the FDA and we may never receive marketing approval for ADASUVE or any of our product candidates as a result of the issues raised in the CRL.
In February 2012, we received the Day 80 Assessment Report from the EMA regarding our MAA for ADASUVE. The Day 80 Assessment Report for ADASUVE outlines major objections pertaining to the extrapolation of the Phase 3 study population to the intended patient population, pulmonary safety in patients with active airways disease and recommendations to address this issue via the risk management plan, other aspects of the risk management plan, and the need to obtain an European Union Good Manufacturing Practices certificate for the Alexza manufacturing facility and commercial manufacturing process. Specific questions will
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be posed by the EMA in the 120 Day CHMP List of Questions. We may be unsuccessful in responding to these questions in the 120 Day CHMP List of Questions or our responses may not be acceptable to the EMA and we may never receive marketing authorization from the European Commission for ADASUVE or any of our product candidates as a result of the issues raised in the Day 80 Assessment Report.
As part of the regulatory process, we must conduct clinical trials for each product candidate to demonstrate safety and efficacy to the satisfaction of the FDA and other regulatory authorities abroad. The number and design of clinical trials that will be required varies depending on the product candidate, the condition being evaluated, the trial results and regulations applicable to any particular product candidate. In June 2008, we announced that our Phase 2a proof-of-concept clinical trial of AZ-002 (Staccato alprazolam) did not meet either of its two primary endpoints. In September 2009, we announced that our Phase 2b clinical trial of AZ-104 (Staccato loxapine, low-dose) for the treatment of migraine did not meet its primary endpoint.
Prior clinical trial program designs and results are not necessarily predictive of future clinical trial designs or results. Initial results may not be confirmed upon full analysis of the detailed results of a trial. Product candidates in later stage clinical trials may fail to show the desired safety and efficacy despite having progressed through initial clinical trials with acceptable endpoints. In the CRL, the FDA raised concerns regarding the safety of ADASUVE based on data from three Phase 1 pulmonary safety studies. If we do not resolve these concerns to the satisfaction of the FDA, ADASUVE will not be approved for marketing.
If our product candidates fail to show a clinically significant benefit compared to placebo, they will not be approved for marketing.
The design of our clinical trials is based on many assumptions about the expected effect of our product candidates, and if those assumptions prove incorrect, the clinical trials may not produce statistically significant results. Our Staccato system is not similar to other approved drug delivery methods, and there is no precedent for the application of detailed regulatory requirements to our product candidates. We cannot assure you that the design of, or data collected from, the clinical trials of our product candidates will be sufficient to support the FDA and foreign regulatory approvals.
Regulatory authorities may not approve our product candidates even if they meet safety and efficacy endpoints in clinical trials.
The FDA and other foreign regulatory agencies, such as the EMA, can delay, limit or deny marketing approval for many reasons, including:
| • | a product candidate may not be considered safe or effective; |
| • | the manufacturing processes or facilities we have selected may not meet the applicable requirements; and |
| • | changes in their approval policies or adoption of new regulations may require additional work on our part. |
Part of the regulatory approval process includes compliance inspections of manufacturing facilities to ensure adherence to applicable regulations and guidelines. The regulatory agency may delay, limit or deny marketing approval of our other product candidates as a result of such inspections. In August 2010, the FDA conducted a Pre-Approval Inspection, or PAI, of our manufacturing facilities at our Mountain View, California headquarters. The CRL we received in October 2010 regarding our NDA for ADASUVE raised issues regarding our manufacturing processes that must be resolved before we will be allowed to market ADASUVE. In November and December 2012, the FDA completed its second PAI of our facility in Mountain View, California and issued a Form FDA483 containing inspectional observations. The FDA may not approve our manufacturing facility and practices and this would prevent us from being able to market ADASUVE.
Any delay in, or failure to receive or maintain, approval for any of our product candidates could prevent us from ever generating meaningful revenues or achieving profitability. The CRL we received in October 2010 conveyed the FDA’s comments regarding certain issues with our NDA, including Phase 1 pulmonary safety studies with ADASUVE, stability studies and matters related to the inspection of our manufacturing facilities. The Day 80 Assessment Report that we received from the EMA in February 2012 outlines major objections pertaining to the extrapolation of the Phase 3 study population to the intended patient population, pulmonary
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safety in patients with active airways disease and recommendations to address this issue via the risk management plan, other aspects of the risk management plan, and the need to obtain an European Union Good Manufacturing Practices certificate for the Alexza manufacturing facility and commercial manufacturing process. We may never receive marketing approval for ADASUVE or any of our product candidates as a result of the issues raised in the CRL and by the EMA.
Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies, including the FDA, or their advisors may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Regulatory agencies may change requirements for approval even after a clinical trial design has been approved. For example, ADASUVE and our other product candidates combine drug and device components in a manner that the FDA considers to meet the definition of a combination product under FDA regulations. The FDA exercises significant discretion over the regulation of combination products, including the discretion to require separate marketing applications for the drug and device components in a combination product. To date, our products are being regulated as drug products under the new drug application process administered by the FDA. The FDA could in the future require additional regulation of our products under the medical device provisions of the FDCA. Our systems are designed to comply with Quality Systems Regulation, or QSR, which sets forth the FDA’s current good manufacturing practice requirements for medical devices, and other applicable government regulations and corresponding foreign standards. If we fail to comply with these regulations, it could have a material adverse effect on our business and financial condition.
Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing studies. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates.
Our product candidates will remain subject to ongoing regulatory review even if they receive marketing approval in the United States or in other countries. If we fail to comply with continuing regulations, we could lose these approvals, and the sale of any future products could be suspended. If approval is denied or limited in a country, or if a country imposes post-marketing requirements, that decision could affect our ability to market ADASUVE in such countries.
Even if we receive regulatory approval to market a particular product candidate, the FDA or a foreign regulatory authority could condition approval on conducting additional costly post-approval studies or trials or could limit the scope of our approved labeling or could impose burdensome post-approval obligations, such as those required under a REMS. Moreover, the product may later cause adverse effects that limit or prevent its widespread use, force us to withdraw it from the market, cause the FDA or a foreign regulatory authority to impose additional obligations or impede or delay our ability to obtain regulatory approvals in additional countries. In addition, we will continue to be subject to FDA and foreign regulatory authority review and periodic inspections to ensure adherence to applicable regulations. After receiving marketing approval, the FDA and foreign regulatory authorities could impose extensive regulatory requirements on the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related to the product.
We have filed an MAA with the EMA for ADASUVE for the rapid control of agitation in adult patients with schizophrenia or bipolar disorder and plan to seek approval to market ADASUVE in other countries. In February 2012, we received the Day 80 Assessment Report from the EMA that outlined major objections to our ADASUVE MAA. Because of these and any other major objections that may be raised during the review procedure, we may not receive marketing authorization from the European Commission and would be unable to commercialize ADASUVE in the European Union. Alternatively, any marketing authorizations may be subject to conditions for approval or post-approval obligations. Such conditions or obligations may be costly and time consuming to fulfill and may affect our operations. For example, additional clinical data may be required to confirm the safety or efficacy profile of ADASUVE in the target patient population. In addition, marketing authorizations are subject to periodic reviews, which, if negative, could affect our ability to commercialize ADASUVE in the European Union.
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If we fail to comply with the regulatory requirements of the FDA and other applicable U.S. and foreign regulatory authorities, including the EMA, or previously unknown problems with any future products, suppliers or manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions, including:
| • | restrictions on the products, suppliers or manufacturing processes; |
| • | warning letters or untitled letters; |
| • | injunctions, consent decrees, or the imposition of civil or criminal penalties against us; |
| • | fines against us; |
| • | product seizures, detentions or import or export bans; |
| • | voluntary or mandatory product recalls and publicity requirements; |
| • | suspension or withdrawal of regulatory approvals; |
| • | suspension or termination of any clinical trials of the products; |
| • | total or partial suspension of production; |
| • | our partner, Grupo Ferrer, could terminate our arrangement to commercialize ADASUVE in the Ferrer Territories, which would delay the development and may increase the cost of developing and commercializing ADASUVE; |
| • | refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications; and |
| • | denial of permission to file an application or supplement in a jurisdiction. |
A REMS may impose regulatory burdens on our products or on healthcare providers that may make the marketing or use of our products commercially unattractive or impractical.
We expect that the FDA will impose a REMS on ADASUVE, and may impose a REMS on any other product candidates we may develop, as a condition of approval, or any time after approval if the FDA becomes aware of new safety information and determines that a REMS is necessary to ensure that the benefits of the drug outweigh the risks of the drug. A REMS may include various elements, such as distribution of a medication guide or a patient package insert; implementation of a communication plan to educate healthcare providers of the drug’s risks; imposition of limitations on who may prescribe or dispense the drug, including training and certification requirements; or other measures that the FDA deems necessary to assure the safe use of the drug. The FDA has a wide degree of discretion in deciding which elements are necessary, and it may impose elements that significantly burden our ability to market the product, or that burden healthcare providers to the extent that use of the product is severely curtailed.
For ADASUVE, the FDA recommended that the REMS contains measures to ensure that the product is only available in certified healthcare facilities that have ready access to albuterol and immediate access to advanced airway management capabilities. We may never reach agreement on terms that will both satisfy the FDA and permit marketing and use of ADASUVE in a commercially feasible manner. Even if we do reach agreement with the FDA about elements in a REMS for ADASUVE that permit commercially viable marketing, in the future the FDA could impose additional REMS elements that substantially burden or even eliminate that viability.
If we do not produce our commercial devices cost effectively, we will never be profitable.
Our Staccato system based product candidates contain electronic and other components in addition to the active pharmaceutical ingredients. As a result of the cost of developing and producing these components, the cost to produce our product candidates, and any approved products, will likely be higher per dose than the cost to produce intravenous or oral tablet products. This increased cost of goods may prevent us from ever selling any products at a profit. In October 2011, we committed to sell ADASUVE to Grupo Ferrer for a fixed transfer price. If we are unable to manufacture ADASUVE at a price lower than the fixed transfer price, we will incur losses on sales to Grupo Ferrer. Our future manufacturing costs per unit will be dependent on future demand of
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ADASUVE. If we do not generate sufficient demand, our manufacturing costs will exceed the Grupo Ferrer fixed transfer price. The development and production of our technology entail a number of technical challenges, including achieving adequate dependability, that may be expensive or time consuming to solve. Any delay in or failure to develop and manufacture any future products in a cost effective way could prevent us from generating any meaningful revenues and prevent us from becoming profitable.
We rely on third parties to conduct our preclinical studies and our clinical trials. If these third parties do not perform as contractually required or expected, we may not be able to obtain regulatory approval for our product candidates, or we may be delayed in doing so.
We do not have the ability to conduct preclinical studies or clinical trials independently for our product candidates. We must rely on third parties, such as contract research organizations, medical institutions, academic institutions, clinical investigators and contract laboratories, to conduct our preclinical studies and clinical trials. We are responsible for confirming that our preclinical studies are conducted in accordance with applicable regulations and that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. The FDA requires us to comply with regulations and standards, commonly referred to as good laboratory practices for conducting and recording the results of our preclinical studies and good clinical practices for conducting, monitoring, recording and reporting the results of clinical trials, to assure that data and reported results are accurate and that the clinical trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines, fail to comply with the FDA’s good clinical practice regulations, do not adhere to our clinical trial protocols or otherwise fail to generate reliable clinical data, we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated or may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the product candidate being tested in such trials.
Problems with the third parties that manufacture the active pharmaceutical ingredients in our product candidates may delay our clinical trials or subject us to liability.
We do not currently own or operate manufacturing facilities for clinical or commercial production of the active pharmaceutical ingredient, or API, used in any of our product candidates. We have no experience in drug manufacturing, and we lack the resources and the capability to manufacture any of the APIs used in our product candidates, on either a clinical or commercial scale. As a result, we rely on third parties to supply the API used in each of our product candidates. We expect to continue to depend on third parties to supply the API for our product candidates and any additional product candidates we develop in the foreseeable future.
An API manufacturer must meet high precision and quality standards for that API to meet regulatory specifications and comply with regulatory requirements. A contract manufacturer is subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure strict compliance with current good manufacturing practice, or cGMP, and other applicable government regulations and corresponding foreign standards. Additionally, a contract manufacturer must pass a pre-approval inspection by the FDA to ensure strict compliance with cGMP prior to the FDA’s approval of any product candidate for marketing. A contract manufacturer’s failure to conform with cGMP could result in the FDA’s refusal to approve or a delay in the FDA’s approval of a product candidate for marketing. We are ultimately responsible for confirming that the APIs used in our product candidates are manufactured in accordance with applicable regulations.
Our third party suppliers may not carry out their contractual obligations or meet our deadlines. In addition, the API they supply to us may not meet our specifications and quality policies and procedures. If we need to find alternative suppliers of the API used in any of our product candidates, we may not be able to contract for such supplies on acceptable terms, if at all. Any such failure to supply or delay caused by such contract manufacturers would have an adverse effect on our ability to continue clinical development of our product candidates or commercialize any future products.
If our third party drug suppliers fail to achieve and maintain high manufacturing standards in compliance with cGMP regulations, we could be subject to certain product liability claims in the event such failure to comply resulted in defective products that caused injury or harm.
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If we experience problems with the manufacturers of components of our product candidates, our development programs may be delayed or we may be subject to liability.
We outsource the manufacturing of the components of our Staccato system, including the printed circuit boards, the plastic airways, and the chemical heat packages to be used in our commercial single dose device. We have no experience in the manufacturing of components, other than our chemical heat packages, and we currently lack the resources and the capability to manufacture them, on either a clinical or commercial scale. As a result, we rely on third parties to supply these components. We expect to continue to depend on third parties to supply these components for our current product candidates and any devices based on the Staccato system we develop in the foreseeable future.
The third-party suppliers of the components of our Staccato system must meet high precision and quality standards for our finished devices to comply with regulatory requirements. A contract manufacturer is subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure that our finished devices remain in strict compliance with the QSR, which sets forth the FDA’s current good manufacturing practice requirements for medical devices, and other applicable government regulations and corresponding foreign standards. We are ultimately responsible for confirming that the components used in the Staccato system are manufactured in accordance with specifications, standards and procedures necessary to ensure that our finished devices comply with the QSR or other applicable regulations.
Our third party suppliers may not comply with their contractual obligations or meet our deadlines, or the components they supply to us may not meet our specifications and quality policies and procedures. If we need to find alternative suppliers of the components used in the Staccato system, we may not be able to contract for such components on acceptable terms, if at all. Any such failure to supply or delay caused by such contract manufacturers would have an adverse effect on our ability to continue clinical development of our product candidates or commercialize any future products.
In addition, the heat packages used in the single dose version of our Staccato system are manufactured using certain energetic, or highly combustible, materials that are used to generate the rapid heating necessary for vaporizing the drug compound while avoiding degradation. Manufacture of products containing energetic materials is regulated by the U.S. government. We have entered into a manufacture agreement with Autoliv for the manufacture of the heat packages in the commercial design of our single dose version of our Staccato system. If Autoliv fails to manufacture the heat packages to the necessary specifications, or does not carry out its contractual obligations to supply our heat packages to us, or if the FDA requires different manufacturing or quality standards than those set forth in our manufacture agreement, our clinical trials or commercialization efforts may be delayed, suspended or terminated while we seek additional suitable manufacturers of our heat packages, which may prevent us from commercializing our product candidates that utilize the single dose version of the Staccato system.
If we do not establish additional strategic partnerships, we will have to undertake development and commercialization efforts on our own, which would be costly and delay our ability to commercialize any future products.
A key element of our business strategy is our intent to selectively partner with pharmaceutical, biotechnology and other companies to obtain assistance for the development and potential commercialization of our product candidates. In December 2006, we entered into such a development relationship with Allegro and in December 2007 we entered into a strategic relationship with Endo Pharmaceuticals, Inc., or Endo, for the development of AZ-003, or the Endo license agreement. In January 2009, we mutually agreed with Endo to terminate the Endo license agreement. In June 2009, we amended the terms of our option agreement with Allegro, resulting in our acquisition of Allegro and the termination of the agreement in August 2009. In February 2010, we entered into a collaboration with Biovail Laboratories International SRL, or Biovail, for the commercialization of ADASUVE in the United States and Canada. In October 2010, Biovail gave us notice that it was terminating the collaboration and the collaboration terminated in January 2011. In August 2010, we entered into a license and development agreement with Cypress for Staccato nicotine. In October 2011, we entered into the Ferrer Agreement with Grupo Ferrer for the commercialization of ADASUVE in the Ferrer
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Territories. We intend to enter into additional strategic partnerships with third parties to develop and commercialize our product candidates. Other than Cypress and Grupo Ferrer, we do not currently have any strategic partnerships for any of our product candidates. We face significant competition in seeking appropriate strategic partners, and these strategic partnerships can be intricate and time consuming to negotiate and document. We may not be able to negotiate additional strategic partnerships on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any additional strategic partnerships because of the numerous risks and uncertainties associated with establishing strategic partnerships. If we are unable to negotiate additional strategic partnerships for our product candidates we may be forced to curtail the development of a particular candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization, reduce the scope of our sales or marketing activities or undertake development or commercialization activities at our own expense. In addition, we will bear all the risk related to the development of that product candidate. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we will not be able to bring our product candidates to market and generate product revenue.
If we enter into additional strategic partnerships, we may be required to relinquish important rights to and control over the development of our product candidates or otherwise be subject to terms unfavorable to us.
Our relationships with Cypress and Grupo Ferrer are, and any other strategic partnerships or collaborations with pharmaceutical or biotechnology companies we may establish will be, subject to a number of risks including:
| • | business combinations or significant changes in a strategic partner’s business strategy may adversely affect a strategic partner’s willingness or ability to complete its obligations under any arrangement; |
| • | we may not be able to control the amount and timing of resources that our strategic partners devote to the development or commercialization of product candidates; |
| • | strategic partners may delay clinical trials, provide insufficient funding, terminate a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new version of a product candidate for clinical testing; |
| • | strategic partners may not pursue further development and commercialization of products resulting from the strategic partnering arrangement or may elect to discontinue research and development programs; |
| • | strategic partners may not commit adequate resources to the marketing and distribution of any future products, limiting our potential revenues from these products; |
| • | disputes may arise between us and our strategic partners that result in the delay or termination of the research, development or commercialization of our product candidates or that result in costly litigation or arbitration that diverts management’s attention and consumes resources; |
| • | strategic partners may experience financial difficulties; |
| • | strategic partners may not properly maintain or defend our intellectual property rights or may use our proprietary information in a manner that could jeopardize or invalidate our proprietary information or expose us to potential litigation; |
| • | strategic partners could independently move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors; and |
| • | strategic partners could terminate the arrangement or allow it to expire, which would delay the development and may increase the cost of developing our product candidates. |
If we fail to gain market acceptance among physicians, patients, third-party payors and the medical community, we will not become profitable.
The Staccato system is a fundamentally new method of drug delivery. Any future product based on our Staccato system may not gain market acceptance among physicians, patients, third-party payors and the medical community. If these products do not achieve an adequate level of acceptance, we will not generate sufficient product revenues to become profitable. The degree of market acceptance of any of our product candidates, if approved for commercial sale, will depend on a number of factors, including:
| • | demonstration of efficacy and safety in clinical trials; |
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| • | the existence, prevalence and severity of any side effects; |
| • | potential or perceived advantages or disadvantages compared to alternative treatments; |
| • | perceptions about the relationship or similarity between our product candidates and the parent drug compound upon which each product candidate is based; |
| • | the timing of market entry relative to competitive treatments; |
| • | the ability to offer any future products for sale at competitive prices; |
| • | relative convenience, product dependability and ease of administration; |
| • | the strength of marketing and distribution support; |
| • | the sufficiency of coverage and reimbursement of our product candidates by governmental and other third-party payors; and |
| • | the product labeling, including the package insert, and the marketing restrictions required by the FDA or regulatory authorities in other countries. |
Our product candidates that we may develop may require expensive carcinogenicity tests.
We combine small molecule drugs with our Staccato system to create proprietary product candidates. Some of these drugs may not have previously undergone carcinogenicity testing that is now generally required for marketing approval. We may be required to perform carcinogenicity testing with product candidates incorporating drugs that have not undergone carcinogenicity testing or may be required to do additional carcinogenicity testing for drugs that have undergone such testing. Any carcinogenicity testing we are required to complete will increase the costs to develop a particular product candidate and may delay or halt the development of such product candidate.
If some or all of our patents expire, are invalidated or are unenforceable, or if some or all of our patent applications do not yield issued patents or yield patents with narrow claims, competitors may develop competing products using our or similar intellectual property and our business will suffer.
Our success will depend in part on our ability to obtain and maintain patent and trade secret protection for our technologies and product candidates both in the United States and other countries. We do not know whether any patents will issue from any of our pending or future patent applications. In addition, a third party may successfully circumvent our patents. Our rights under any issued patents may not provide us with sufficient protection against competitive products or otherwise cover commercially valuable products or processes.
The degree of protection for our proprietary technologies and product candidates is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:
| • | we might not have been the first to make the inventions covered by each of our pending patent applications and issued patents; |
| • | we might not have been the first to file patent applications for these inventions; |
| • | others may independently develop similar or alternative technologies or duplicate any of our technologies; |
| • | the claims of our issued patents may be narrower than as filed and not sufficiently broad to prevent third parties from circumventing them; |
| • | it is possible that none of our pending patent applications will result in issued patents; |
| • | we may not develop additional proprietary technologies or drug candidates that are patentable; |
| • | our patent applications or patents may be subject to interference, opposition or similar administrative proceedings; |
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| • | any patents issued to us or our potential strategic partners may not provide a basis for commercially viable products or may be challenged by third parties in the course of litigation or administrative proceedings such as reexaminations or interferences; and |
| • | the patents of others may have an adverse effect on our ability to do business. |
On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The United States Patent and Trademark Office is currently developing regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act will not become effective until one year or 18 months after its enactment. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.
Even if valid and enforceable patents cover our product candidates and technologies, the patents will provide protection only for a limited amount of time.
Our potential strategic partners’ ability to obtain patents is uncertain because, to date, some legal principles remain unresolved, there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States, and the specific content of patents and patent applications that are necessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Furthermore, the policies governing pharmaceutical and medical device patents outside the United States may be even more uncertain. Changes in either patent laws or interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.
Our current patents or any future patents that may be issued regarding our product candidates or methods of using them, can be challenged by our competitors who can argue that our patents are invalid and/or unenforceable. Third parties may challenge our rights to, or the scope or validity of, our patents. Patents also may not protect our product candidates if competitors devise ways of making these or similar product candidates without legally infringing our patents. The Federal Food, Drug and Cosmetic Act and the FDA regulations and policies provide incentives to manufacturers to challenge patent validity or create modified, non-infringing versions of a drug or device in order to facilitate the approval of generic substitutes. These same types of incentives encourage manufacturers to submit new drug applications that rely on literature and clinical data not prepared for or by the drug sponsor.
We also rely on trade secrets to protect our technology, especially where we do not believe that patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. The employees, consultants, contractors, outside scientific collaborators and other advisors of our company and our strategic partners may unintentionally or willfully disclose our confidential information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming and the outcome is unpredictable. Failure to protect or maintain trade secret protection could adversely affect our competitive business position.
Our research and development collaborators may have rights to publish data and other information in which we have rights. In addition, we sometimes engage individuals or entities to conduct research that may be relevant to our business. The ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated during the course of their research is subject to certain contractual limitations. These contractual provisions may be insufficient or inadequate to protect our trade secrets and may impair our patent rights. If we do not apply for patent protection prior to such publication or if we cannot otherwise maintain the confidentiality of our technology and other confidential information, then our ability to receive patent protection or protect our proprietary information may be jeopardized.
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Litigation or other proceedings or third party claims of intellectual property infringement could require us to spend time and money and could shut down some of our operations.
Our commercial success depends in part on not infringing patents and proprietary rights of third parties. Others have filed, and in the future are likely to file, patent applications covering products that are similar to our product candidates, as well as methods of making or using similar or identical products. If these patent applications result in issued patents and we wish to use the claimed technology, we would need to obtain a license from the third party. We may not be able to obtain these licenses at a reasonable cost, if at all.
In addition, administrative proceedings, such as interferences and reexaminations before the U.S. Patent and Trademark Office, could limit the scope of our patent rights. We may incur substantial costs and diversion of management and technical personnel as a result of our involvement in such proceedings. In particular, our patents and patent applications may be subject to interferences in which the priority of invention may be awarded to a third party. We do not know whether our patents and patent applications would be entitled to priority over patents or patent applications held by such a third party. Our issued patents may also be subject to reexamination proceedings. We do not know whether our patents would survive reexamination in light of new questions of patentability that may be raised following their issuance.
Third parties may assert that we are employing their proprietary technology or their proprietary products without authorization. In addition, third parties may already have or may obtain patents in the future and claim that use of our technologies or our products infringes these patents. We could incur substantial costs and diversion of management and technical personnel in defending our self against any of these claims. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief, which could effectively block our ability to further develop, commercialize and sell any future products and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products. In the event we cannot develop alternative methods or products, we may be effectively blocked from developing, commercializing or selling any future products. Defense of any lawsuit or failure to obtain any of these licenses would be expensive and could prevent us from commercializing any future products.
We review from time to time publicly available information concerning the technological development efforts of other companies in our industry. If we determine that these efforts violate our intellectual property or other rights, we intend to take appropriate action, which could include litigation. Any action we take could result in substantial costs and diversion of management and technical personnel in enforcing our patents or other intellectual property rights against others. Furthermore, the outcome of any action we take to protect our rights may not be resolved in our favor.
Competition in the pharmaceutical industry is intense. If our competitors are able to develop and market products that are more effective, safer or less costly than any future products that we may develop, our commercial opportunity will be reduced or eliminated.
We face competition from established as well as emerging pharmaceutical and biotechnology companies, academic institutions, government agencies and private and public research institutions. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects or are less expensive than any future products that we may develop and commercialize. In addition, significant delays in the development of our product candidates could allow our competitors to bring products to market before us and impair our ability to commercialize our product candidates.
We anticipate that, if approved, ADASUVE would compete with other available antipsychotic drugs for the treatment of agitation, such as intramuscular formulations, which are approved for the treatment of agitation, oral tablets and oral solutions, which are not approved for the treatment of agitation.
We anticipate that, if approved, AZ-007 would compete with non-benzodiazepine GABA-A receptor agonists. We are aware of more than 13 approved generic versions of zolpidem, or zaleplon, oral tablets, as well as at least one
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insomnia product, a version of zolpidem intended to treat middle of the night awakening, that is under review by the FDA. Additionally, we are aware of one product in Phase 3 development for the treatment of insomnia.
We anticipate that, if approved, AZ-104 would compete with currently marketed triptan drugs and with other migraine headache treatments. In addition, we are aware of at least one new migraine product under review by the FDA, which is an inhaled formulation, and at least four new product candidates in late-phase development for the treatment of migraines.
We anticipate that, if approved, AZ-003 would compete with some of the available forms of fentanyl, including injectable fentanyl, oral transmucosal fentanyl formulations and ionophoretic transdermal delivery of fentanyl. We are also aware of two fentanyl products approved by regulatory agencies in the United States or abroad, and at least 4 products in Phase 3 clinical trial development for acute pain. In addition, if approved, AZ-003 would compete with various generic opioid drugs, such as oxycodone, hydrocodone and morphine, or combination products including one or more of such drugs.
We anticipate that, if approved, AZ-002 would compete with the oral tablet form of alprazolam and possibly IV and oral forms of other benzodiazepines.
Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Established pharmaceutical companies may invest heavily to discover quickly and develop novel compounds or drug delivery technology that could make our product candidates obsolete. Smaller or early stage companies may also prove to be significant competitors, particularly through strategic partnerships with large and established companies. In addition, these third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or discovering, developing and commercializing products before we do. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition will suffer.
If we are unable to establish sales and marketing capabilities or enter into additional agreements with third parties to market and sell our product candidates, we may be unable to generate significant product revenue.
We do not have an internal sales organization and we have no experience in the sales and distribution of pharmaceutical products. There are risks involved with establishing our own sales capabilities and increasing our marketing capabilities, as well as entering into arrangements with third parties to perform these services. Developing an internal sales force is expensive and time consuming and could delay any product launch. On the other hand, if we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues are likely to be lower than if we market and sell any products that we develop ourselves.
We may establish our own specialty sales force and/or engage additional pharmaceutical or other healthcare companies with an existing sales and marketing organization and distribution systems to sell, market and distribute any future products. We are currently seeking partners for the development and commercialization of ADASUVE in addition to the commercial partnership we entered into with Grupo Ferrer. We also intend to seek international distribution partners in addition to Grupo Ferrer for our product candidates. We may not be able to establish a specialty sales force or establish sales and distribution relationships on acceptable terms. Factors that may inhibit our efforts to commercialize any future products without strategic partners or licensees include:
| • | our inability to recruit and retain adequate numbers of effective sales and marketing personnel; |
| • | the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products; |
| • | the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and |
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| • | unforeseen costs and expenses associated with creating an independent sales and marketing organization. |
Because the establishment of sales and marketing capabilities depends on the progress towards commercialization of our product candidates and because of the numerous risks and uncertainties involved with establishing our own sales and marketing capabilities, we are unable to predict when, if ever, we will establish our own sales and marketing capabilities. If we are not able to partner with additional third parties and are unsuccessful in recruiting sales and marketing personnel or in building a sales and marketing infrastructure, we will have difficulty commercializing our product candidates, which would adversely affect our business and financial condition.
If we lose our key personnel or are unable to attract and retain additional personnel, we may be unable to develop or commercialize our product candidates.
We are highly dependent on our President and Chief Executive Officer, Thomas B. King, the loss of whose services might adversely impact the achievement of our objectives. In addition, recruiting and retaining qualified clinical, scientific and engineering personnel to manage clinical trials of our product candidates and to perform future research and development work will be critical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced management and clinical, scientific and engineering personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. In addition, we do not have employment agreements with any of our employees, and they could leave our employment at will. We have change of control agreements with our executive officers and vice presidents that provide for certain benefits upon termination or a change in role or responsibility in connection with a change of control of our company. We do not maintain life insurance policies on any employees. Failure to attract and retain personnel would prevent us from developing and commercializing our product candidates.
If plaintiffs bring product liability lawsuits against us, we may incur substantial liabilities and may be required to limit commercialization of the product candidates that we may develop.
We face an inherent risk of product liability as a result of the clinical testing of our product candidates in clinical trials and will face an even greater risk if we commercialize any products. We may be held liable if any product we develop causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. Regardless of merit or eventual outcome, liability claims may result in decreased demand for any product candidates or products that we may develop, injury to our reputation, withdrawal of clinical trials, costs to defend litigation, substantial monetary awards to clinical trial participants or patients, loss of revenue and the inability to commercialize any products that we develop. We have product liability insurance that covers our clinical trials up to a $10 million aggregate annual limit. We intend to expand product liability insurance coverage to include the sale of commercial products if we obtain marketing approval for ADASUVE or any other products that we may develop. However, this insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or delay the commercialization of our product candidates. If we are sued for any injury caused by any future products, our liability could exceed our total assets.
Healthcare law and policy changes, based on recently enacted legislation, may have an adverse effect on us.
Healthcare costs have risen significantly over the past decade. In March 2010, President Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or, collectively, the Healthcare Reform Act. This law substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions that are expected to impact our business and operations, including provisions governing enrollment in federal healthcare programs, reimbursement and discount programs and fraud and abuse prevention and control, which will impact existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program. We anticipate that if we obtain approval for our
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product candidates, some of our revenue and the revenue from our collaborators may be derived from U.S. government healthcare programs, including Medicare. Additionally, in 2009, the Department of Defense implemented a program pursuant to the National Defense Authorization Act for Fiscal Year 2008 that requires rebates, based on Federal statutory pricing, from manufacturers of innovator drugs and biologics. Furthermore, the Healthcare Reform Act imposes a non-deductible fee treated as an excise tax on pharmaceutical manufacturers or importers who sell “branded prescription drugs,” which includes innovator drugs and biologics (excluding generics, over-the-counter drugs, and certain orphan drugs) to U.S. government programs. We expect that the Healthcare Reform Act and other healthcare reform measures that may be adopted in the future could have an adverse effect on our industry generally and our ability to successfully commercialize our product candidates or could limit or eliminate our spending on development projects.
In addition to this legislation, there will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payors to keep these costs down while expanding individual healthcare benefits. Certain of these changes could impose limitations on the prices we will be able to charge for any product candidates that are approved or the amounts of reimbursement available for these products from governmental agencies or third-party payors, or may increase the tax obligations on life sciences companies such as ours. While it is too early to predict specifically what effect the Health Reform Act and its implementation or any future legislation or policies will have on our business, we believe that healthcare reform may have an adverse effect on our business and financial condition.
Our product candidates AZ-002, AZ-003 and AZ-007 contain drug substances that are regulated by the U.S. Drug Enforcement Administration. Failure to comply with applicable regulations and requirements could harm our business.
The Controlled Substances Act imposes various registration, recordkeeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical products. A principal factor in determining the particular requirements, if any, applicable to a product is its actual or potential abuse profile. The U.S. Drug Enforcement Administration, or DEA, regulates chemical compounds as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Alprazolam, the API in AZ-002, is regulated as a Schedule IV substance, fentanyl, the API in AZ-003, is regulated as a Schedule II substance, and zaleplon, the API in AZ-007, is regulated as a Schedule IV substance. Each of these product candidates is subject to DEA regulations relating to manufacture, storage, distribution and physician prescription procedures, and the DEA may regulate the amount of the scheduled substance that would be available for clinical trials and commercial distribution. As a Schedule II substance, fentanyl is subject to more stringent controls, including quotas on the amount of product that can be manufactured as well as a prohibition on the refilling of prescriptions without a new prescription from the physician. The DEA periodically inspects facilities for compliance with its rules and regulations. Failure to comply with current and future regulations of the DEA could lead to a variety of sanctions, including revocation, or denial of renewal, of DEA registrations, injunctions, or civil or criminal penalties and could harm our business, financial condition and results of operations.
The single dose version of our Staccato system contains materials that are regulated by the U.S. government, and failure to comply with applicable regulations could harm our business.
The single dose version of our Staccato system uses energetic materials to generate the rapid heating necessary for vaporizing the drug, while avoiding degradation. Manufacture of products containing energetic materials is controlled by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, or ATF. Technically, the energetic materials used in our Staccato system are classified as “low explosives,” and the ATF has granted us a license/permit for the manufacture of such low explosives. Additionally, due to inclusion of the energetic materials in our Staccato system, the U.S. Department of Transportation, or DOT, might regulate shipments of the single dose version of our Staccato system. However, the DOT has granted the single dose version of our Staccato system “Not Regulated as an Explosive” status. Failure to comply with the current and future regulations of the ATF or DOT could subject us to future liabilities and could harm our business, financial
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condition and results of operations. Furthermore, these regulations could restrict our ability to expand our facilities or construct new facilities or could require us to incur other significant expenses in order to maintain compliance.
We use hazardous chemicals and highly combustible materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.
Our research and development processes involve the controlled use of hazardous materials, including chemicals. We also use energetic materials in the manufacture of the chemical heat packages that are used in our single dose devices. Our operations produce hazardous waste. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use of these materials and our liability may exceed our total assets. Compliance with environmental and other laws and regulations may be expensive, and current or future regulations may impair our research, development or production efforts.
Certain of our suppliers are working with these types of hazardous and energetic materials in connection with our component manufacturing agreements. In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these hazardous and energetic materials. Further, under certain circumstances, we have agreed to indemnify our suppliers against damages and other liabilities arising out of development activities or products produced in connection with these agreements.
We will need to implement additional finance and accounting systems, procedures and controls in the future as we grow and to satisfy new reporting requirements.
The laws and regulations affecting public companies, including the current provisions of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and rules enacted and proposed by the SEC and by The NASDAQ Global Market, will result in increased costs to us as we continue to undertake efforts to comply with rules and respond to the requirements applicable to public companies. The rules make it more difficult and costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage as compared to the polices previously available to public companies. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.
As a public company, we need to comply with Sarbanes-Oxley and the related rules and regulations of the SEC, including expanded disclosure, accelerated reporting requirements and more complex accounting rules. Compliance with Section 404 of Sarbanes-Oxley and other requirements will continue to increase our costs and require additional management resources. We have been upgrading our finance and accounting systems, procedures and controls and will need to continue to implement additional finance and accounting systems, procedures and controls as we grow to satisfy new reporting requirements. We currently do not have an internal audit group. In addition, we may need to hire additional legal and accounting staff with appropriate experience and technical knowledge, and we cannot assure you that if additional staffing is necessary that we will be able to do so in a timely fashion.
Our business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that could adversely affect our business and financial results.
We are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight Board, the SEC and The NASDAQ Global Market, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. The Dodd-Frank Act
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contains significant corporate governance and executive compensation-related provisions, some of which the Securities and Exchange Commission, or SEC, has recently implemented by adopting additional rules and regulations in areas such as the compensation of executives (“say-on-pay”). We cannot assure you that we are or will be in compliance with all potentially applicable regulations. If we fail to comply with the Sarbanes Oxley Act of 2002, the Dodd-Frank Act and associated SEC rules, or any other regulations, we could be subject to a range of consequences, including restrictions on our ability to sell equity securities or otherwise raise capital funds, the de-listing of our common stock from The NASDAQ Global Market, suspension or termination of our clinical trials, failure to obtain approval to market ADASUVE, restrictions on future products or our manufacturing processes, significant fines, or other sanctions or litigation. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities.
Our workforce reduction in February 2012 and any future workforce and expense reductions may have an adverse impact on our internal programs and may divert management attention.
In February 2012, we conducted a strategic reduction in our workforce of approximately 38% of our employees in order to preserve our capital resources and to manage our operating expenses. This reduction in our workforce may limit our ability to complete all of our corporate objectives. We may be required to implement further workforce and expense reductions in the future. Further workforce and expense reductions could result in reduced progress on our internal programs. In addition, employees, whether or not directly affected by a reduction, may seek future employment with our business partners or our competitors. Although our employees are required to sign a confidentiality agreement at the time of hire, the confidential nature of certain proprietary information may not be maintained in the course of any such future employment. In addition, the implementation of expense reduction programs may result in the diversion of efforts of our executive management team and other key employees, which could adversely affect our business. In addition, the workforce reduction may make retaining and motivating the remaining workforce more difficult, causing us to lose the services of employees that we rely upon.
We could be adversely affected by violations of applicable anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010.
Anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010, generally prohibit directly or indirectly giving, offering, or promising anything of value to improperly induce the recipient to act, or refrain from acting, in a manner that would confer a commercial advantage. The anti-bribery provisions of the U.S. Foreign Corrupt Practices Act generally prohibit directly or indirectly giving, offering or promising an inducement to a public official (broadly interpreted) to corruptly influence the official’s actions in order to obtain a commercial advantage. The recently enacted U.K. Bribery Act of 2010 prohibits both domestic and international bribery, as well as bribery in both the private and public sectors. In addition, an organization that “fails to prevent bribery” by anyone associated with the organization may be charged under the U.K. Bribery Act unless the organization can establish the defense of having implemented “adequate procedures” to prevent bribery. If we receive approval to market ADASUVE, we plan to adopt and implement policies and procedures to ensure that those involved in the marketing, sale, and distribution of our products are both aware of these legal requirements and committed to complying therewith. However, we cannot assure that these policies and procedures will protect us from potentially illegal acts committed by individual employees or agents. If we were found to be liable for anti-bribery law violations, we could be subject to criminal or civil penalties or other sanctions that could have a material adverse effect on our business and financial condition.
If ADASUVE is approved for marketing, we will be subject to significant ongoing regulatory obligations and oversight, which may result in significant additional expense and limit our ability to commercialize our products.
If ADASUVE or any of our other product candidates are approved for marketing, we will be subject to significant ongoing regulatory obligations, such as safety reporting requirements, periodic and annual reporting requirements, and additional post-marketing obligations, including regulatory oversight of the promotion and marketing of our products. In addition, the manufacture, labeling, packaging, distribution, import, export, adverse
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event reporting, storage, advertising, promotion and recordkeeping for any of our product candidates that may be approved by the FDA or foreign regulatory authorities will be subject to extensive and ongoing regulatory requirements. If we receive regulatory approvals to sell our products, the FDA and foreign regulatory authorities may impose significant restrictions on the indicated uses or marketing of our products, or impose requirements for burdensome post-approval study commitments. The terms of any product approval, including labeling, may be more restrictive than we desire and could affect the commercial potential of the product. If we become aware of previously unknown problems with any of our products in the United States or overseas or at our contract manufacturers’ facilities, a regulatory agency may impose labeling changes or restrictions on our products, our strategic collaborators, our manufacturers or on us. In such an instance, we could experience a significant drop in the sales of the affected products, our product revenues and reputation in the marketplace may suffer, and we could become the target of lawsuits.
The FDA and other governmental authorities also actively enforce regulations prohibiting off-label promotion, and the government has levied large civil and criminal fines against companies for alleged improper promotion. The government has also required companies to enter into complex corporate integrity agreements and/or non-prosecution agreements that impose significant reporting and other burdens on the affected companies.
If we are approved for marketing, we will also be subject to regulation by regional, national, state and local agencies, including the DEA, the Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and Human Services and other regulatory bodies, as well as governmental authorities in those foreign countries in which we may in the future commercialize our products. The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act, the Social Security Act, and other federal and state statutes and regulations govern to varying degrees the research, development, manufacturing and commercial activities relating to prescription pharmaceutical products, including preclinical testing, approval, production, labeling, sale, distribution, import, export, post-market surveillance, advertising, dissemination of information, promotion, marketing, and pricing to government purchasers and government healthcare programs. Any manufacturing, licensing, or commercialization partners we have or may in the future have, including Grupo Ferrer, will be subject to many of the same requirements.
The Federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical companies on one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common manufacturer business arrangements and activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Many pharmaceutical and other healthcare companies have been investigated and have reached substantial financial settlements with the federal government under these laws for a variety of alleged marketing activities, including providing free product to customers with the expectation that the customers would bill federal programs for the product; providing consulting fees, grants, free travel, and other benefits to physicians to induce them to prescribe the company’s products; and inflating prices reported to private price publication services, which are used to set drug payment rates under government healthcare programs. We intend to comply with the exemptions and safe harbors whenever possible, but our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.
The Federal False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Although we will not directly file claims, companies have been prosecuted for causing false claims to be submitted because of the marketing of their products for unapproved, and thus non-reimbursable, uses. Pharmaceutical and other healthcare companies have also been prosecuted on other legal theories of Medicare and Medicaid fraud.
The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in
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several states, apply regardless of the payor. Several states now require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and to report gifts and payments to individual physicians in the states. Other states prohibit providing meals to prescribers or other marketing-related activities. In addition, California, Connecticut, Nevada, and Massachusetts require pharmaceutical companies to implement compliance programs or marketing codes. Currently, several additional states are considering similar proposals.
Compliance with various federal and state laws is difficult and time consuming, and companies that violate them may face substantial penalties. The potential sanctions include civil monetary penalties, exclusion of a company’s products from reimbursement under government programs, criminal fines and imprisonment. Because of the breadth of these laws and the lack of extensive legal guidance in the form of regulations or court decisions, it is possible that some of our business activities could be subject to challenge under one or more of these laws if any of our product candidates are approved for marketing. Such a challenge could have a material adverse effect on our business and financial condition.
The number and complexity of both federal and state laws continues to increase, and additional governmental resources are being added to enforce these laws and to prosecute companies and individuals who are believed to be violating them. In particular, the Federal Anti-Kickback Statute and the Federal False Claims Act include a number of provisions aimed at strengthening the government’s ability to pursue anti-kickback and false claims cases against pharmaceutical manufacturers and other healthcare entities, including substantially increased funding for healthcare fraud enforcement activities, enhanced investigative powers, amendments to the False Claims Act that make it easier for the government and whistleblowers to pursue cases for alleged kickback and false claim violations. While it is too early to predict what effect these changes will have on our business, we anticipate that government scrutiny of pharmaceutical sales and marketing practices will continue for the foreseeable future and subject us to the risk of government investigations and enforcement actions if any of our product candidates are approved for marketing. Responding to a government investigation or enforcement action would be expensive and time-consuming, and could have a material adverse effect on our business and financial condition.
If we or any of our partners fail to comply with applicable federal, state, local, or foreign regulatory requirements, we or they could be subject to a range of regulatory actions that could affect our or our partners’ ability to commercialize our products if any of our products are approved for marketing and could harm or prevent sales of the affected products, or could substantially increase the costs and expenses of commercializing and marketing our products if any of our products are approved for marketing. Any threatened or actual government enforcement action could also generate adverse publicity and require that we devote substantial resources that could otherwise be used in other aspects of our business.
Our facilities are located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could damage our facilities and equipment, which could cause us to curtail or cease operations.
Our facilities are located in the San Francisco Bay Area near known earthquake fault zones and, therefore, are vulnerable to damage from earthquakes. We are also vulnerable to damage from other types of disasters, such as power loss, fire, floods and similar events. If any disaster were to occur, our ability to operate our business could be seriously impaired. We currently may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions, and we do not plan to purchase additional insurance to cover such losses due to the cost of obtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business, financial condition and results of operations.
Risks Relating to Owning Our Common Stock
Our stock price has been and may continue to be extremely volatile.
Our common stock price has experienced large fluctuations. In addition, the trading prices of life science and biotechnology company stocks in general have experienced extreme price fluctuations in recent years. The valuations of many life science companies without consistent product revenues and earnings are extraordinarily
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high based on conventional valuation standards, such as price to revenue ratios. These trading prices and valuations may not be sustained. Any negative change in the public’s perception of the prospects of life science or biotechnology companies could depress our stock price regardless of our results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our performance. Market fluctuations, as well as general political and economic conditions such as terrorism, military conflict, recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to various factors, including:
| • | actual or anticipated regulatory approvals or non-approvals of our product candidates or competing products; |
| • | actual or anticipated cash depletion of our financial resources |
| • | actual or anticipated results and timing of our clinical trials; |
| • | changes in laws or regulations applicable to our product candidates; |
| • | changes in the expected or actual timing of our development programs, including delays or cancellations of clinical trials for our product candidates; |
| • | period to period fluctuations in our operating results; |
| • | announcements of new technological innovations or new products by us or our competitors; |
| • | changes in financial estimates or recommendations by securities analysts; |
| • | sales results for ADASUVE, if it is approved for marketing; |
| • | our ability to manufacture our product candidates at a cost effective price, if approved for marketing; |
| • | conditions or trends in the life science and biotechnology industries; |
| • | changes in the market valuations of other life science or biotechnology companies; |
| • | developments in domestic and international governmental policy or regulations; |
| • | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
| • | additions or departures of key personnel; |
| • | disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; |
| • | sales of our common stock (or other securities) by us; and |
| • | sales and distributions of our common stock by our stockholders. |
In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities. If a stockholder files a securities class action suit against us, we would incur substantial legal fees, and our management’s attention and resources would be diverted from operating our business in order to respond to the litigation.
If we sell shares of our common stock in future financings, existing common stockholders will experience immediate dilution and, as a result, our stock price may go down.
We will need to raise additional capital to fund our operations, to develop our product candidates and to develop our manufacturing capabilities. We may obtain such financing through the sale of our equity securities from time to time. As a result, our existing common stockholders will experience immediate dilution upon any such issuance. For example, in August 2009 we issued 10,000,000 shares of our common stock and warrants to purchase an additional 5,000,000 shares of our common stock in connection with the closing of our acquisition of all of the equity of Allegro, in October 2009 we issued 8,107,012 shares of our common stock and warrants to purchase an additional 7,296,312 shares of our common stock in a private placement, in May 2010 we issued a
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warrant to purchase 376,394 shares of our common stock in connection with a secured term debt financing, in August 2010 we issued 6,685,183 shares of our common stock and warrants to purchase up to an additional 3,342,589 shares of our common stock in a registered direct offering and in May 2011 we issued 11,927,034 shares of our common stock and warrants to purchase up to an additional 4,174,457 shares of our common stock in a registered direct offering. In February 2012 we issued 44,000,000 shares of our common stock and warrants to purchase up to an additional 44,000,000 shares of our common stock in an underwritten public offering. In May 2010, we entered into a common stock purchase agreement with Azimuth that provides that, upon the terms and subject to the conditions set forth therein, Azimuth is committed to purchase up to 8,936,550 shares of our common stock at times and in amounts determined by us. If we enter into other financing transactions in which we issue equity securities in the future, our existing common stockholders will experience immediate dilution upon any such issuance.
If we fail to regain compliance with the listing requirements of The NASDAQ Global Market, we may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.
Our common stock is currently listed on The NASDAQ Global Market. To maintain the listing of our common stock on The NASDAQ Global Market, we are required to meet certain listing requirements, including, among others, either: (i) a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $5 million and stockholders’ equity of at least $10 million; or (ii) a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $15 million and a total market value of listed securities of at least $50 million. On January 31, 2012, we received a notice from The NASDAQ Stock Market indicating that our common stock had not met the $1.00 per share minimum closing bid price requirement for 30 consecutive business days and that, if we were unable to demonstrate compliance with this requirement during the applicable grace periods, our common stock would be delisted after that time. In accordance with the NASDAQ Marketplace Rules, we have been provided an initial compliance period of 180 calendar days, or until July 30, 2012, to regain compliance with the minimum closing bid price requirement. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for a minimum of 10 consecutive business days prior to July 30, 2012. If we do not regain compliance by July 30, 2012, we may be eligible for an additional grace period if we satisfy certain conditions, including applying to transfer the listing of our common stock to The NASDAQ Capital Market and satisfying the listing standards for The NASDAQ Capital Market, with the exception of the minimum closing bid price requirement. If The NASDAQ Stock Market staff determines that we would not be able to cure the minimum closing bid price deficiency, or if we are otherwise not eligible for such additional compliance period, The NASDAQ Stock Market will provide notice that our common stock will be subject to delisting. We would have the right to appeal a determination to delist our common stock, and the common stock would remain listed on The NASDAQ Global Market until the completion of the appeal process.
The closing bid price of our common stock on The NASDAQ Global Market was $0.64 on March 1, 2012, and has been below $1.00 each trading day since December 7, 2011. As a result, we may be subject to a delisting of our common stock from The NASDAQ Global Market if we do not regain compliance with the minimum closing bid price requirement. We may seek stockholder approval to effect a reverse stock split for this purpose. However, a reverse stock split may not prevent the common stock from dropping back down below The NASDAQ Global Market minimum closing bid price requirement in the future. It is also possible that we would otherwise fail to satisfy another NASDAQ Global Market requirement for continued listing of our common stock. As of March 1, 2012, the total market value of our publicly held shares of our common stock (excluding shares held by our executive officers, directors and 10% or more stockholders) was $71.8 million and the total market value of our listed securities was $74.3 million. As of December 31, 2011, we had stockholders’ deficit of $9.7 million.
There can be no assurance that we will be successful in maintaining our listing of our common stock on The NASDAQ Global Market, or, if transferred, on The NASDAQ Capital Market, and could be subject to delisting. This could impair the liquidity and market price of our common stock. In addition, the delisting of our common stock from a national exchange could materially adversely affect our access to capital markets, and any limitation on market liquidity or reduction in the price of our common stock as a result of that delisting could adversely affect our ability to raise capital on terms acceptable to us, or at all.
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| Item 1B. | Unresolved Staff Comments |
None.
| Item 2. | Properties |
We lease two buildings with an aggregate of 106,894 square feet of manufacturing, office, and laboratory facilities in Mountain View, California, which we began to occupy in the fourth quarter of 2007. We currently sublease 19,334 square feet, 20,956 square feet and 2,500 square feet, reducing the space we occupy to 64,104 square feet. In February 2012, effective March 30, 2012, we terminated the lease for one of the buildings, totaling 41,290 square feet, and concurrently cancelled the two subleases associated with this building, consisting of 19,334 and 20,956 square feet, respectively. The lease for the other building expires on March 31, 2018, and we have two options to extend the lease for five years each. Our sublease for 2,500 square feet is on a month-to-month basis.
| Item 3. | Legal Proceedings |
None.
| Item 4. | Mine Safety Disclosures |
None.
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
| Item 5A. | Quarterly Stock Price Information and Registered Stockholders |
Our common stock trades on The NASDAQ Global Market under the symbol “ALXA.” The following table sets forth, for the periods indicated, the high and low sales prices of our common stock.
| 2011 |
High | Low | ||||||
| First Quarter |
$ | 1.80 | $ | 1.15 | ||||
| Second Quarter |
1.91 | 1.34 | ||||||
| Third Quarter |
1.88 | 1.03 | ||||||
| Fourth Quarter |
1.48 | 0.51 | ||||||
| 2010 |
High | Low | ||||||
| First Quarter |
$ | 2.96 | $ | 2.30 | ||||
| Second Quarter |
3.92 | 2.65 | ||||||
| Third Quarter |
3.64 | 2.42 | ||||||
| Fourth Quarter |
3.26 | 0.86 | ||||||
As of December 31, 2011, there were 168 holders of record of our common stock. We have not paid cash dividends on our common stock since our inception, and we do not anticipate paying any in the foreseeable future.
Recent Sales of Unregistered Securities
None.
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Performance Graph
The following graph compares the cumulative 5-year total return provided to stockholders of Alexza Pharmaceuticals, Inc.'s common stock relative to the cumulative total returns of the NASDAQ Composite index and the NASDAQ Biotechnology index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on December 31, 2006 and its relative performance is tracked through December 31, 2011.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Alexza Pharmaceuticals, Inc., the NASDAQ Composite Index, and the NASDAQ Biotechnology Index
| * | $100 invested on 12/31/06 in stock or index, including reinvestment of dividends. |
Fiscal year ending December 31.
| 12/06 | 12/07 | 12/08 | 12/09 | 12/10 | 12/11 | |||||||||||||||||||
|
Alexza Pharmaceuticals, Inc. |
100.00 | 71.03 | 27.83 | 21.07 | 10.97 | 7.29 | ||||||||||||||||||
|
NASDAQ Composite |
100.00 | 110.26 | 65.65 | 95.19 | 112.10 | 110.81 | ||||||||||||||||||
|
NASDAQ Biotechnology |
100.00 | 102.53 | 96.57 | 110.05 | 117.19 | 124.54 | ||||||||||||||||||
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
| Item 5B. Use | of Proceeds from the Sale of Registered Securities |
None.
| Item 5C. Treasury | Stock |
None.
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| Item 6. Selected | Financial Data |
| Year Ended December 31, | Period
From December 19, 2000 (Inception) to December 31, 2011 |
|||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||||
| Consolidated Statement of Operations Data: |
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| Revenue |
$ | 5,660 | $ | 42,876 | $ | 9,514 | $ | 486 | $ | — | $ | 65,481 | ||||||||||||
| Operating expenses: |
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| Research and development |
28,262 | 33,528 | 39,778 | 61,565 | 45,645 | 306,251 | ||||||||||||||||||
| General and administrative |
11,766 | 14,000 | 15,406 | 17,641 | 14,888 | 103,876 | ||||||||||||||||||
| Restructuring charges |
— | — | 2,037 | — | — | 2,037 | ||||||||||||||||||
| Acquired in-process research and development |
— | — | — | — | — | 3,916 | ||||||||||||||||||
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| Total operating expenses |
40,028 | 47,528 | 57,221 | 79,206 | 60,533 | 416,080 | ||||||||||||||||||
| Loss from operations |
(34,368 | ) | (4,652 | ) | (47,707 | ) | (78,720 | ) | (60,533 | ) | (350,599 | ) | ||||||||||||
| Change in fair value of contingent consideration liability |
(4,000 | ) | 4,838 | (7,983 | ) | — | — | (7,145 | ) | |||||||||||||||
| Interest income/(expense) and other income/(expense), net |
(2,163 | ) | (1,667 | ) | (375 | ) | 1,679 | 4,623 | 6,020 | |||||||||||||||
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|
|
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| Net loss |
(40,531 | ) | (1,481 | ) | (56,065 | ) | (77,041 | ) | (55,910 | ) | (351,724 | ) | ||||||||||||
| Consideration paid in excess of carrying value of the noncontrolling interest in Symphony Allegro, Inc. |
— | — | (61,566 | ) | — | — | (61,566 | ) | ||||||||||||||||
| Loss attributed to noncontrolling interest in Symphony Allegro, Inc. |
— | — | 13,987 | 18,591 | 10,791 | 45,089 | ||||||||||||||||||
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|
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| Net loss attributable to Alexza common stockholders |
$ | (40,531 | ) | $ | (1,481 | ) | $ | (103,644 | ) | $ | (58,450 | ) | $ | (45,119 | ) | $ | (368,201 | ) | ||||||
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| Basic and diluted net loss per share attributable to Alexza common stockholders |
$ | (0.60 | ) | $ | (0.03 | ) | $ | (2.68 | ) | $ | (1.81 | ) | $ | (1.58 | ) | |||||||||
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| Shares used to compute basic and diluted net loss per share attributable to Alexza common stockholders |
67,867 | 55,421 | 38,609 | 32,297 | 28,605 | |||||||||||||||||||
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| December 31, | ||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Consolidated Balance Sheet Data: |
||||||||||||||||||||
| Cash, cash equivalents and marketable securities |
$ | 16,903 | $ | 41,449 | $ | 19,916 | $ | 37,556 | $ | 69,391 | ||||||||||
| Investments held by Symphony Allegro, Inc. |
— | — | — | 21,318 | 39,449 | |||||||||||||||
| Working capital (deficit) |
(7,396 | ) | 8,031 | (3,830 | ) | 42,771 | 106,092 | |||||||||||||
| Total assets |
48,605 | 68,482 | 46,174 | 84,635 | 149,125 | |||||||||||||||
| Noncurrent portion of financing obligations |
— | — | — | 2,515 | 6,317 | |||||||||||||||
| Deficit accumulated during development stage |
(306,635 | ) | (266,104 | ) | (264,623 | ) | (222,545 | ) | (164,095 | ) | ||||||||||
| Total stockholders’ equity (deficit) |
(9,692 | ) | 12,290 | (7,126 | ) | 39,054 | 99,943 | |||||||||||||
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| Item 7. Management’s | Discussion and Analysis of Financial Condition and Results of Operations |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based upon current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Overview
We are a pharmaceutical company focused on the research, development, and commercialization of novel proprietary products for the acute treatment of central nervous system conditions. All of our product candidates are based on our proprietary technology, the Staccato system. The Staccato system vaporizes an excipient-free drug to form a condensation aerosol that, when inhaled, allows for rapid systemic drug delivery. Because of the particle size of the aerosol, the drug is quickly absorbed through the deep lung into the bloodstream, providing speed of therapeutic onset that is comparable to intravenous, or IV, administration but with greater ease, patient comfort and convenience
In early 2010, we conducted a thorough review of our product pipeline, evaluating current and potential new Staccato-based product candidates. This review yielded three categories of Staccato-based product candidates: (1) product candidates where we believe we can add value through internal development, (2) product candidates where we have developed the product idea, but where a development partner is required, and (3) product candidates based on new ideas, primarily focused on new chemical entities, where the Staccato technology can facilitate better or more effective delivery. In July 2010, we announced that, in addition to AdasuveTM (Staccato loxapine), or ADASUVE, AZ-007 (Staccato zaleplon) and Staccato nicotine would remain in active development. Active development on the remainder of our development pipeline is suspended. We are continuing to seek partners to support development and commercialization of our product candidates.
We believe that, based on our cash, cash equivalents and marketable securities balance at December 31, 2011, the subsequent receipt of the upfront payment from Grupo Ferrer Internacional, S.A., or Grupo Ferrer, pursuant to our Collaboration, License and Supply Agreement, or the Ferrer Agreement, with Grupo Ferrer executed in October 2011, net of our $5 million payment to the former stockholders of Symphony Allegro, Inc., or Allegro, net proceeds of approximately $20.4 million from our recently completed underwritten public offering, the March 2012 amendment of the Ferrer Agreement and our current expected cash usage, accounting for the February 2012 reductions in our workforce, we have sufficient capital resources to meet our anticipated cash needs, at our current cost levels, into the fourth quarter of 2012. We are unable to assert that our financial position is sufficient to fund operations beyond that date, and as a result, there is substantial doubt about our ability to continue as a going concern. We may not be able to raise sufficient capital on acceptable terms, or at all, to continue development of ADASUVE or our other programs or to continue operations and we may not be able to execute any strategic transaction.
Lead product candidate update
Our lead product candidate is ADASUVE, which is being developed for the acute treatment of agitation in adults with schizophrenia or bipolar disorder. In December 2009, we submitted a New Drug Application, or NDA, for ADASUVE with the U.S. Food and Drug Administration, or the FDA. In October 2010, we received a Complete Response Letter, or CRL, from the FDA regarding our NDA for ADASUVE. In August 2011, we resubmitted the ADASUVE NDA, which was accepted for filing by the FDA as a complete, class 2 response to the FDA’s CRL. The FDA indicated a Prescription Drug User Fee Act, or PDUFA, goal date for the ADASUVE NDA of February 4, 2012. In December 2012, the ADASUVE NDA was reviewed by the Psychopharmacologic Drugs Advisory Committee, or PDAC, and at the end of the meeting, the PDAC voted to recommend that ADASUVE be approved for use as a single dose in 24 hours when used with the FDA recommended Risk Evaluation and Mitigation Strategy, or REMS, for the treatment for agitation in patients with schizophrenia or biopolar mania. The vote on this question was 9/8/1 (yes/no/abstain). In a notice received from the FDA in January 2012, the PDUFA goal date for the ADASUVE NDA was extended 90 days from February 4, 2012 to May 4, 2012.
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A CRL is issued by the FDA indicating that an NDA review cycle is complete and the application is not ready for approval in its present form. In the CRL, the FDA stated that its primary clinical safety concern was related to data from the three Phase 1 pulmonary safety studies with ADASUVE. This concern was primarily based on observed, dose-related post-dose decreases in forced expiratory volume in one second, or FEV1, a standard measure of lung function, in healthy subjects and in subjects with asthma or chronic obstructive pulmonary disease, or COPD. The FDA also noted that decreases in FEV1 were recorded in subjects who were administered device-only, placebo versions of ADASUVE. In the information package submitted to the FDA in response to the CRL and in preparation for the End-of-Review meeting, we presented evidence that we believe demonstrates the placebo device is safe, including a blinded expert review of the flow-volume loops data from the healthy subject study as further evidence that there appears to be no consistent pattern suggestive of airway obstruction in these subjects. We also provided an analysis that we believe shows that there is no meaningful temporal relationship between placebo administration and decreases in FEV1. We believe this evidence and analysis confirm that the changes seen were likely background events in the population studied, where the repeated and extensive pulmonary function testing may have contributed to some of the observations. Additionally, we believe we showed that the aerosol characterization does not indicate a basis for concern. We reiterated these arguments in our NDA resubmission.
In December 2011, the ADASUVE NDA was the subject of a PDAC meeting. At the end of the meeting, the PDAC voted to recommend that ADASUVE be approved for use as a single dose in 24 hours when used with the FDA recommended REMS for the treatment for agitation in patients with schizophrenia or bipolar mania. The vote on this question was 9/8/1 (yes/no/abstain).
The FDA takes an advisory committee’s advice into consideration as part of its review of an NDA, but is not bound by an advisory committee's recommendations. After reviewing and discussing the ADASUVE data and the FDA proposed REMS, the committee voted on the following additional questions:
| • | Does the committee conclude that ADASUVE (loxapine) inhalation powder has been shown to be effective as a treatment for agitation in patients with schizophrenia or bipolar mania? The resulting vote was: 17/1/0 (yes/no/abstain). |
| • | Does the committee conclude that ADASUVE (loxapine) inhalation powder has been shown to be acceptably safe for use as a treatment for agitation in patients with schizophrenia or bipolar mania: |
a. When used in conjunction with the REMS proposed by the sponsor? The resulting vote was: 1/17/0 (yes/no/abstain).
b. When used in conjunction with the REMS proposed by the FDA? The resulting vote was: 5/12/1 (yes/no/abstain).
| • | Does the committee conclude that ADASUVE (loxapine) inhalation powder would be acceptably safe for use as a single dose in 24 hours as a treatment for agitation in patients with schizophrenia or bipolar mania when used in conjunction with the REMS proposed by FDA? The resulting vote was: 11/5/2 (yes/no/abstain). |
In October 2010, we were notified that ADASUVE was eligible for submission to the EMA for an opinion regarding the potential approval of ADASUVE through the centralized marketing authorization procedure. Marketing authorization granted by the European Commission on the basis of the opinion issued by the EMA are valid in all of the European Union member states. In November 2010, we received notification of the Rapporteur/Co-Rapporteur appointments for ADASUVE. In May 2011, we conducted a meeting with the Rapporteur and, in July 2011, we conducted a meeting with the Co-Rapporteur. We also have been notified that ADASUVE is acceptable for submission as a trade name and have completed work on the Pediatric Investigation Plan for the MAA submission. On October 26, 2011, the EMA accepted the submission of our ADASUVE MAA. In February 2012, we received the Day 80 Assessment Report from the EMA regarding our MAA for ADASUVE. The Day 80 Assessment Report for ADASUVE outlines major objections pertaining to the extrapolation of the Phase 3 study population to the intended patient population, pulmonary safety in patients with active airways disease and recommendations to address this issue via the risk management plan, other aspects of the risk management plan, and the need to obtain an European Union Good Manufacturing Practices certificate for the
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Alexza manufacturing facility and commercial manufacturing process. We expect that specific questions will be posed by the EMA in the 120 Day Committee for Medicinal Products for Human Use, or CHMP, List of Questions.
In October 2011, we entered into a commercial partnership with Grupo Ferrer pursuant to the Ferrer Agreement to commercialize ADASUVE in Europe, Latin America, Russia and the Commonwealth of Independent States countries, or the Ferrer Territories. Under the terms of the Ferrer Agreement, we received an up front cash payment of $10 million, $5 million of which was paid to the former Symphony Allegro stock holders, or the Allegro Investors. We are eligible to receive additional milestone payments contingent on individual country commercial sales initiation and cumulative net sales targets. We will be responsible for filing and obtaining marketing authorization from the European Commission on the basis of the ADASUVE Marketing Authorization Application, or MAA, submitted to the European Medicines Agency, or EMA. Grupo Ferrer will be responsible for satisfaction of all other regulatory and pricing reimbursement requirements to market and sell ADASUVE in the Ferrer Territories. Grupo Ferrer will have the exclusive rights to commercialize ADASUVE in the Ferrer Territories. We will supply ADASUVE to Grupo Ferrer for all of its commercial sales, and will receive a specified per-unit transfer price. Either party may terminate the Ferrer Agreement for the other party’s uncured material breach or bankruptcy. The Ferrer Agreement continues in effect on a country-by-country basis until the later of the last to expire patent covering ADASUVE in such country or 12 years after first commercial sale. The Ferrer Agreement is subject to earlier termination in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy or insolvency of either party.
In March 2012, we entered into an amendment to the Ferrer Agreement. Grupo Ferrer and Alexza agreed to eliminate a future potential milestone payment in exchange for Grupo Ferrer’s purchase of $3 million of our common stock. Grupo Ferrer agreed to purchase approximately 2.42 million shares of our common stock for $1.24 per share in March 2012. During 2012, up to an additional $8 million of our common stock may be purchased by Grupo Ferrer, upon a request by us and subject to acceptance by Grupo Ferrer, in exchange for the elimination of additional milestones at a price per share that will be a premium to the market price on the date of purchase.
Financing update
On February 23, 2012, we issued an aggregate of 44,000,000 shares of our common stock and warrants to purchase up to an additional 44,000,000 shares of our common stock in an underwritten public offering. Net proceeds from the offering were approximately $20.4 million, after deducting offering expenses. The warrants are exercisable beginning February 24, 2013 at $0.50 per share and will expire on February 23, 2017. The shares of common stock and warrants were sold pursuant to a shelf registration statement declared effective by the SEC on May 20, 2010. We agreed to customary obligations, including indemnification.
In May 2011, we issued an aggregate of 11,927,034 shares of our common stock and warrants to purchase up to an additional 4,174,457 shares of our common stock in a registered direct offering. Net proceeds from the offering were approximately $15.9 million, after deducting offering expenses. The warrants are exercisable at $1.755 per share, and will expire on May 6, 2016. The securities were sold pursuant to a shelf registration statement declared effective by the SEC on May 20, 2010. We agreed to customary obligations regarding registration, including indemnification and maintenance of the registration statement. Further, if we propose to issue securities prior to the earlier of (i) the date on which we receive written approval from the FDA for our NDA for ADASUVE or (ii) June 30, 2012, the investors in the offering, subject to certain exceptions, have the right to purchase their pro rata share, based on their participation in the offering, of such securities. The foregoing rights and restrictions may affect our ability to consummate certain types of offerings of our securities in the future.
In August 2010, we completed a registered direct offering of our common stock and warrants. We sold a total of 6,685,183 units, each unit consisting of (i) one share of common stock and (ii) one warrant to purchase 0.5 of a share of common stock, at a purchase price of $2.70 per unit. The warrants are exercisable at $3.30 per share and expire five years from the date of issuance. Net proceeds from the offering were approximately $16.4 million, after deducting placement agents’ commissions and offering expenses. The securities were sold pursuant to a shelf registration statement declared effective by the Securities and Exchange Commission on May 20, 2010.
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In May 2010, we entered into a Loan and Security Agreement, or Loan Agreement, with Hercules Technology Growth Capital, Inc., or Hercules. Under the terms of the Loan Agreement, we have borrowed $15,000,000 at an interest rate of the higher of (i) 10.75% or (ii) 6.5% plus the prime rate as reported in the Wall Street Journal, with a maximum interest rate of 14%, and issued to Hercules a secured term promissory note evidencing the loan. We made interest only payments through February 2011, following which the loan will be repaid in 33 equal monthly installments. The Loan Agreement limits both the seniority and amount of future debt we may incur. We may be required to repay the loan in the event of a change in control. In conjunction with the loan, we issued to Hercules a five-year warrant to purchase 376,394 shares of our common stock at a price of $2.69 per share. The warrant is immediately exercisable and expires five years from the effective date. We estimated the fair value of this warrant as of the issuance date to be $921,000 which was recorded as a debt discount to the loan and consequently a reduction to the carrying value of the loan. The fair value of the warrant was calculated using the Black-Scholes option valuation model, and was based on the contractual term of the warrant of five years, a risk-free interest rate of 2.31%, expected volatility of 84% and 0% expected dividend yield. We also recorded fees paid to Hercules as a debt discount which further reduced the carrying value of the loan. The debt discount is being amortized to interest expense.
Other than those licensed to Grupo Ferrer for our ADASUVE product and Cypress Biosciences, Inc., or Cypress, for our Staccato nicotine product candidate, we have retained all rights to our product candidates and the Staccato system. We intend to capitalize on our internal resources to develop certain product candidates and to identify routes to utilize external resources to develop and commercialize other product candidates.
We were incorporated December 19, 2000. We have funded our operations primarily through the sale of equity securities, equipment financings, debt financings and government grants. We have generated $65.5 million in revenues from inception through December 31, 2011, primarily through license and development agreements and to a lesser extent United States Small Business Innovation Research grants and drug compound feasibility studies. Prior to 2007, we recognized governmental grant revenue and drug compound feasibility revenue. However, we expect no grant revenue or drug compound feasibility screening revenue in 2012. We do not expect any material product revenue until at least 2013.
We have incurred significant losses since our inception. As of December 31, 2011, our deficit accumulated during development stage was $306.6 million and total stockholders’ deficit was $9.7 million. We recognized net losses of $40.5 million, $1.5 million and $56.1 million in 2011, 2010 and 2009, respectively, and $351.7 million in the period from December 19, 2000 (Inception) to December 31, 2011. In January 2009, we consolidated our operations to primarily focus our efforts on the continued rapid development of ADASUVE. In February 2012, we reduced our workforce by 29, or 38% of our employees, and as a result, we expect our operating expenses to decrease in the first half of 2012. If our ADASUVE NDA is approved, we expect our operating expenses to increase in the second half of 2012 to support the commercialization of ADASUVE.
The process of conducting preclinical studies and clinical trials necessary to obtain FDA approval is costly and time consuming. We consider the development of our product candidates to be crucial to our long term success. If we do not complete development of our product candidates and obtain regulatory approval to market one or more of these product candidates, we may be forced to cease operations. The probability of success for each product candidate may be impacted by numerous factors, including preclinical data, clinical data, competition, device development, manufacturing capability, regulatory approval and commercial viability. Our strategy is to focus our resources on ADASUVE. In addition, we plan to seek additional commercial partners for the worldwide development and commercialization for all of our product candidates. If in the future we enter into additional partnerships, third parties could have control over preclinical development or clinical trials for some of our product candidates. Accordingly, the progress of such product candidate would not be under our control. We cannot forecast with any degree of certainty which of our product candidates, if any, will be subject to any future partnerships or how such arrangements would affect our development plans or capital requirements.
As a result of the uncertainties discussed above, the uncertainty associated with clinical trial enrollments, and the risks inherent in the development process, we are unable to determine the duration and completion costs of the current or future clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development timelines, probability of success and development costs vary widely. While we are currently focused on developing our
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product candidates, we anticipate that we and our partners, will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, as well as an ongoing assessment as to the product candidate’s commercial potential. We do not expect any of our current product candidates to be commercially available before 2013, if at all.
Critical Accounting Estimates and Judgments
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to development costs. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making assumptions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 3 of the notes to consolidated financial statements, we believe the following accounting policies are critical to the process of making significant estimates and judgments in preparation of our financial statements.
Preclinical Study and Clinical Trial Accruals
We estimate our preclinical study and clinical trial expenses based on our estimates of the services received pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Preclinical study and clinical trial expenses include the following:
| • | fees paid to contract research organizations in connection with preclinical studies; |
| • | fees paid to contract research organizations and other clinical sites in connection with clinical trials; and |
| • | fees paid to contract manufacturers in connection with the production of components and drug materials for preclinical studies and clinical trials. |
We record accruals for these preclinical study and clinical trial costs based upon the estimated amount of work completed. All such costs are charged to research and development expenses based on these estimates. Costs related to patient enrollment in clinical trials are accrued as patients are entered in the trial. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence and discussions with research institutions and clinical research organizations. However, if we have incomplete or inaccurate information, we may underestimate or overestimate activity levels associated with various preclinical studies and clinical trials at a given point in time. In this event, we could record significant research and development expenses in future periods when the actual activity level becomes known. To date, we have not made any material adjustments to our estimates of preclinical study and clinical trial costs. We make good faith estimates which we believe to be accurate, but the actual costs and timing of clinical trials are highly uncertain, subject to risk and may change depending upon a number of factors, including our clinical development plan.
Share-Based Compensation
We currently use the Black-Scholes option pricing model to determine the fair value of stock options and purchase rights issued under our 2005 Employee Stock Purchase Plan. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends.
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The estimated fair value of restricted stock unit awards is calculated based on the market price of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting of the restricted stock unit. Our current estimate assumes no dividends will be paid prior to the vesting of the restricted stock unit.
We estimate the expected term of options based on the historical term periods of options that have been granted but are no longer outstanding and the estimated terms of outstanding options. We estimate the volatility of our stock based on our actual historical volatility since our initial public offering. We base the risk-free interest rate that we use in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model.
We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. All share-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.
If factors change and we employ different assumptions for estimating share-based compensation expense in future periods or if we decide to use a different valuation model, the expenses in future periods may differ significantly from what we have recorded in the current period and could materially affect our operating loss, net loss and net loss per share.
Contingent Consideration Liability
In August 2009, we completed our purchase of all of the outstanding equity of Symphony Allegro, and in exchange we: (i) issued to the Allegro Investors 10 million shares of our common stock; (ii) issued to the Allegro Investors 5-year warrants to purchase five million shares of our common stock with an exercise price of $2.26 per share; and (iii) will pay to the Allegro Investors certain percentages of cash payments that may be generated from future partnering transactions pertaining to ADASUVE/AZ-104 (Staccato loxapine) or AZ-002 (Staccato alprazolam).
We estimate the fair value of the liability associated with the contingent cash payments to the Allegro Investors, or contingent consideration liability, on a quarterly basis using a probability-weighted discounted cash flow model. We derive multiple cash flow scenarios for each of the product candidates subject to the cash payments and apply a probability to each of the scenarios. These probability and risk adjusted weighted average cash flows are then discounted utilizing our estimated weighted average cost of capital, or WACC. Our WACC considers our cash position, competition, risk of substitute products, and risk associated with the financing of the development projects. We determined the discount rate to be 18% and applied this rate to the probability adjusted cash flow scenarios.
We record any changes in the fair value of the contingent consideration liability in earnings in the period of the change. Certain events including, but not limited to, clinical trial results, FDA approval or non-approval of our submissions, the timing and terms of any strategic partnership agreement, the commercial success of ADASUVE, AZ-104 or AZ-002 and the discount rate assumption could have a material impact on the fair value of the contingent consideration liability, and as a result, our results of operations and financial position.
Revenue Recognition
We recognize revenue in accordance with the SEC Staff Accounting Bulletin, SAB, No. 101, Revenue Recognition in Financial Statements, as amended by Staff Accounting Bulletin No. 104, Revision of Topic 13. In determining the accounting for collaboration agreements, we determine whether an arrangement involves multiple revenue-generating deliverables that should be accounted for as a single unit of accounting or divided into separate units of accounting for revenue recognition purposes and, if this division is required, how the arrangement consideration should be allocated among the separate units of accounting. If the arrangement represents a single unit of accounting, the revenue recognition policy and the performance obligation period must be determined, if not already contractually defined, for the entire arrangement. If the arrangement represents separate units of accounting, a revenue recognition policy must be determined for each unit.
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For collaborations entered into prior to January 1, 2011 we followed the guidelines of Accounting Standards Codification, or ASC, 605-25 Revenue Recognition Multiple-Element Arrangement. For collaboration agreements entered into or significantly modified on or subsequent to January 1, 2011, we followed the guidelines of Accounting Standards Update, or ASU, 2009-13, as described in “Recently Adopted Accounting Standards” below.
Revenues for non-refundable upfront license fee payments, where we continue to have obligations, will be recognized as performance occurs and obligations are completed.
Recently Adopted Accounting Standards
In October 2009, the Financial Accounting Standards Board, or FASB, published ASU 2009-13, which amends the criteria to identify separate units of accounting within ASC 605-25. The revised guidance eliminates the residual method of allocation, and instead requires companies to use the relative selling price method when allocating revenue in a multiple deliverable arrangement. When applying the relative selling price method, the selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists, otherwise using third-party evidence of selling price. If neither vendor specific objective evidence nor third-party evidence of selling price exists for a deliverable, companies shall use their best estimate of the selling price for that deliverable when applying the relative selling price method. The adoption of ASU 2009-13 only affects multiple deliverable arrangements entered into, or materially modified, after January 1, 2011. The prospective adoption of ASU 2009-13 did not have an impact on our financial position, results of operations or cash flows.
Recently Issued Accounting Standards
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-15 requires the presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We will adopt these disclosure requirements in the first quarter of 2012.
On May 12, 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 is the result of joint efforts by the FASB and the International Accounting Standards Board to develop a single, converged fair value framework. There are few differences between ASU 2011-04 and its international counterpart, IFRS 13. ASU 2011-04 is largely consistent with existing fair value measurement principles in U.S. GAAP; however it expands ASC 820’s existing disclosure requirements for fair value measurements and makes other amendments. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. We do not expect the provisions of ASU 2011-04 to have a material effect on our financial position, results of operations or cash flows.
Results of Operations
Comparison of Years Ended December 31, 2011, 2010 and 2009
Revenue. We had $5.7 million, $42.9 million and $9.5 million of revenues in 2011, 2010 and 2009, respectively. Revenues in 2009 consisted of revenues related to our license and development agreement, or Endo license agreement, with Endo Pharmaceuticals, Inc. In February 2010 we entered into a license and development agreement with Biovail Laboratories International SRL, or Biovail, in which we received an upfront payment of $40 million. In October 2010, Biovail gave notification of its intention to terminate the collaboration, at which time we recognized the upfront payment as revenues as we had fulfilled our obligations under the collaboration. In 2010, we also recognized $2.6 million from our license and development agreement, or the Cypress Agreement, with Cypress and $244,000 of grant revenues from the U.S. government’s Qualified Therapeutic Development Program. In 2011, the Cypress Agreement contributed $5.0 million of revenues and we earned $625,000 under the Ferrer Agreement. In 2012, we expect revenues from the Cypress Agreement to decrease from 2011 and we expect revenues from the Ferrer Agreement to increase. However the amount of the increase will be dependent upon the timing of the achievement of certain milestones, if at all.
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Operating Expenses
Research and Development Expenses. Research and development expenses consist of costs associated with research activities, as well as costs associated with our product development efforts, conducting preclinical studies and clinical trials and manufacturing development efforts. All research and development costs, including those funded by third parties, are expensed as incurred. Research and development expenses include:
| • | external research and development expenses incurred under agreements with third party contract research organizations and investigational sites where a substantial portion of our preclinical studies and all of our clinical trials are conducted; |
| • | third party supplier, consultant and employee related expenses, which include salary and benefits; and |
| • | facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies. |
The table below sets forth our research and development expenses for 2011, 2010 and 2009 broken out between product candidate and general research expenses based on our internal records and estimated allocations of employee time and related expenses:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Product candidate expenses |
25,686 | 26,059 | 31,896 | |||||||||
| General research |
2,576 | 7,469 | 7,882 | |||||||||
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| Total research and development |
$ | 28,262 | $ | 33,528 | $ | 39,778 | ||||||
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Research and development expenses were $28.3 million, $33.5 million and $39.8 million in years ended December 31, 2011, 2010 and 2009, respectively. In January 2009, we restructured our operations, including an approximate 33% reduction in our workforce, to focus our efforts on the continued rapid development of our ADASUVE product candidate.
The 2009 restructuring of our operations resulted in a decrease in both product candidate and general research expenses as work wound down or halted for our non-ADASUVE product candidates. In July 2010, we announced that we moved AZ-007 into active development. However, due to the FDA not approving ADASUVE for commercial marketing in October 2010, we have deferred certain ADASUVE commercialization and manufacturing efforts and slowed the development of AZ-007, eliminating all external AZ-007 development costs. In 2011, we also reduced our general research efforts to focus our efforts on the ADASUVE NDA resubmission and approval and to conserve our resources. We continued our development obligations under the Cypress Agreement for Staccato nicotine. In February 2012, we reduced our workforce by 38%, and as a result we expect our research and development expenses to decrease in the first half of 2012. If our ADASUVE NDA is approved, we expect our operating expenses to increase in the second half of 2012 to support the commercialization of ADASUVE.
General and Administrative Expenses. General and administrative expenses were $11.8 million, $14.0 million, and $15.4 million for the years ended December 31, 2011, 2010 and 2009, respectively. General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, accounting, business development, legal and human resources functions. Other general and administrative expenses include facility and information technology costs not otherwise included in research and development expenses, patent related costs and professional fees for legal, consulting and accounting services.
The decreases in general and administrative expenses were primarily due to decreased headcount expenses as a result of our restructuring in January 2009 and our efforts to reduce third party costs to conserve our cash resources. As a result of our February 2012 restructuring, we expect our general and administrative expenses to decrease in the first half of 2012. If our ADASUVE NDA is approved, we expect our operating expenses to increase in the second half of 2012 to support the commercialization of ADASUVE.
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Restructuring Charges. In January 2009, we restructured our operations to focus our efforts on the continued rapid development of our ADASUVE product candidate. The restructuring included a workforce reduction of 50 employees, representing approximately 33% of our total workforce and was completed in the second quarter of 2009. We incurred restructuring expenses related to employee severance and other termination benefits of $2.0 million, including a non-cash charge related to modifications to share-based awards of $56,000. The restructuring was completed in 2009.
Interest and Other Income, Net. Interest and other income, net, primarily represents income earned on our cash, cash equivalents, marketable securities balances, and prior to August 26, 2009, marketable securities held by Symphony Allegro. Interest and other income, net was $26,000, $(35,000) and $92,000 for the years ended December 31, 2011, 2010 and 2009, respectively. The 2010 income was impacted by a loss on retirements of fixed assets of $79,000. We expect to continue to earn low interest income returns on our cash, cash equivalent and marketable securities balances.
Interest Expense. Interest expense represents interest on our equipment loans and financing obligations and was $2.2 million $1.6 million and $467,000 in the years ended December 31, 2011, 2010 and 2009, respectively. The increase in 2011 was primarily due to a full year’s interest expense from the Hercules note issued in May 2010 and the interest from the note issued to Autoliv ASP, Inc. or Autoliv. The increase in 2010 as compared to 2009 was primarily due to the interest incurred on the Hercules note.
Change in the Fair Value of Contingent Consideration Liability. In connection with our acquisition of all of the outstanding equity of Symphony Allegro, we are obligated to pay the Allegro Investors certain percentages of cash payments that may be generated from future partnering transactions for AZ-002, ADASUVE and/or AZ-104. We measure the fair value of this contingent consideration liability at each balance sheet date. Any changes in the fair value of this contingent consideration liability will be recognized in earnings in the period of the change. Certain events including, but not limited to, clinical trial results, FDA approval or non-approval of our submissions, the timing and terms of strategic partnerships, the commercial success of AZ-002, ADASUVE and/or AZ-104 and the discount rate assumption could have a material impact on the fair value of the contingent liability, and as a result, our results of operations.
In October 2011, we entered into the Ferrer Agreement. As a result of this agreement, we revised upwards the probabilities, amounts and timing of certain cash flows for the ADASUVE product candidate. We recognized a non-operating loss of $4.0 million to reflect the increase in the contingent consideration liability during the year ended December 31, 2011.
In October 2010, we received a CRL from the FDA for our ADASUVE NDA submitted in December 2009 and held a meeting with the FDA in December 2010 to address the issues outlined in the CRL. As a result of the CRL and the meeting with the FDA, we reduced the weighted-average expected cash flows for milestone payments and product royalties, and the timing of those cash flows, for ADASUVE. The reduction of the expected cash flows and timing of these cash flows resulted in a reduction in the net present value of estimated future payments to Symphony Allegro. We recognized a gain of $4.8 million to reflect the reduction in the contingent consideration liability during the year ended December 31, 2010.
In 2009, we announced preliminary results from our Phase 2b clinical trial of AZ-104, where AZ-104 did not meet the primary endpoint of the study. This change resulted in a decrease in the expected cash flow resulting in a decrease in the contingent consideration liability. In the fourth quarter of 2009, we modified our assumptions regarding the probability of certain cash flow outcomes to reflect the negotiations with Biovail to partner ADASUVE as well as the filing of our NDA. The reduction in these uncertainties resulted in an increase in probability of certain cash flows resulting in an increase in the contingent consideration liability. These items combined resulted in our incurring a loss on the change in fair value of the contingent consideration liability of $8.0 million during the year ended December 31, 2009.
Loss Attributed to Noncontrolling Interest in Symphony Allegro. Prior to our purchase of Symphony Allegro on August 26, 2009, we consolidated Symphony Allegro’s financial condition and results of operations. Accordingly, we deducted the losses attributable to the noncontrolling interest from our net loss in the consolidated statement of operations, and we reduced the noncontrolling interest holders’ ownership interest in Symphony Allegro in the consolidated balance sheet by the loss attributed to the noncontrolling interests in Symphony Allegro.
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Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private placements and public offerings of equity securities, revenues primarily from a licensing agreement and government grants, and payments from Symphony Allegro. We have received additional funding from financing obligations, interest earned on investments, as described below, and funds received upon exercises of stock options and exercises of purchase rights under our 2005 Employee Stock Purchase Plan. As of December 31, 2011, we had $16.9 million in cash, cash equivalents and marketable securities. Our cash and marketable security balances are held in a variety of interest bearing instruments, including obligations of United States government agencies, high credit rating corporate borrowers and money market accounts. Cash in excess of immediate requirements is invested with regard to liquidity, capital preservation and yield.
Net cash provided by (used in) operating activities was $(34.4) million, $8.6 million and $(53.1) million in 2011, 2010 and 2009, respectively. The net cash provided by or used in each of these periods primarily reflects net loss for these periods, offset in part by depreciation, non-cash share-based compensation, the change in fair value of the contingent consideration liability, loss attributed to noncontrolling interests, and non-cash changes in operating assets and liabilities. In 2011, the Ferrer Agreement resulted in increases to other receivables and deferred revenues. The other liabilities change was related to the amortization of our deferred rent liability, which is a result of the straight line method of recognizing our facility rent expense and the recognition of tenant improvement reimbursements from the landlord as a deferred rent liability. In 2010, the deferred revenue balance resulted from upfront fees paid by Cypress as required by the Cypress Agreement. The decrease in other receivables in 2010 was a result of the collection of fees paid to the FDA upon our submission of our NDA in 2009. Our designation as a small business resulted in our exclusion from such fees and the amount was refunded in 2010. In 2009, the decrease in deferred revenue was related to the mutual termination of the Endo license agreement, at which time we recognized the remaining $9.5 million of deferred revenue. The decreases in accounts payable of $2.2 million in 2009 and accrued clinical trial expense and other accrued liabilities of $2.7 million was due to the decreased activity in our operations.
Net cash provided by (used in) investing activities was $25.1 million, $(30.6) million and $20.1 million in 2011, 2010 and 2009, respectively. Investing activities consist primarily of purchases and maturities of marketable securities and capital purchases. During 2011 and 2009 we had maturities, net of purchases, of marketable securities of $25.6 million and $4.9 million, respectively. During 2010 we purchased $21.5 million of marketable securities, net of maturities. Maturities of marketable securities held by Symphony Allegro were $16.4 million in 2009. Purchases of property and equipment were $0.5 million, $9.2 million and $1.2 million in 2011, 2010 and 2009, respectively. In 2010, the purchases primarily consisted of manufacturing equipment as we prepared for the expected commercialization of ADASUVE.
Net cash provided by financing activities was $10.6 million, $22.3 million and $20.4 million in 2011, 2010 and 2009, respectively. Financing activities consist primarily of proceeds from the sale of our common stock and warrants to purchase common stock, purchase of a noncontrolling interest, equipment financing arrangements and financing obligations. In 2011, 2010 and 2009, we received net proceeds from the issuance of common stock and warrants to purchase common stock of $16.1 million, $17.0 million and $19.7 million, respectively. In 2009 we had proceeds from the purchase of the noncontrolling interest in Symphony Allegro of $4.9 million. In 2011 and 2009, payments on debt were $5.6 million and $4.1 million, respectively. In 2010, we had proceeds from debt borrowings, net of payments, of $12.7 million,
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We believe that with current cash, cash equivalents and marketable securities, including the upfront payment from Grupo Ferrer, net of our $5 million payment to the former Allegro stockholders, net proceeds of approximately $20.4 million from our recently completed underwritten public offering, the March 2012 amendment of the Ferrer Agreement and our current expected cash usage, accounting for the February 2012 reductions in our workforce, we have sufficient capital resources to meet our anticipated cash needs, at our current cost levels, into the fourth quarter of 2012. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate or to alter our operations. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available financial resources sooner than we currently expect. The key assumptions underlying these estimates include:
| • | expenditures related to continued preclinical and clinical development of our lead product candidates during this period within budgeted levels; |
| • | no unexpected costs related to the development of our manufacturing capability; |
| • | no unexpected costs related to the FDA review of our ADASUVE NDA or EMA review of our ADASUVE MAA; and |
| • | no growth in the number of our employees during this period. |
Our forecast of the period of time that our financial resources will be adequate to support operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in “Risk Factors.” In light of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we enter into additional strategic partnerships with third parties to participate in development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future funding requirements will depend on many factors, including:
| • | the cost, timing and outcomes of regulatory approvals or non-approvals; |
| • | the scope, rate of progress, results and costs of our preclinical studies, clinical trials and other research and development activities; |
| • | the terms and timing of any additional distribution, strategic partnership or licensing agreements that we may establish; |
| • | the number and characteristics of product candidates that we pursue; |
| • | the cost and timing of establishing manufacturing, marketing and sales capabilities; |
| • | the cost of establishing clinical and commercial supplies of our product candidates; |
| • | the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and |
| • | the extent to which we acquire or invest in businesses, products or technologies, although we currently have no commitments or agreements relating to any of these types of transactions. |
We will need to raise additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all (see Note 2 to the Notes to the Consolidated Financial Statements). If we are unable to raise additional funds when needed, we may not be able to continue development of our product candidates or we could be required to delay, scale back or eliminate some or all of our development programs, or reduce our efforts to build our commercial manufacturing capacity, and other operations. We may seek to raise additional funds through public or private financing, strategic partnerships or other arrangements. Any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Certain restrictions imposed on us in connection with our May 2011 stock and warrant issuance, as well as applicable listing standards, may affect our ability to consummate certain types of offerings of our securities in the future. Our recent underwritten public offering involved the sale of 44,000,000 shares of our common stock and warrants to purchase an additional 44,000,000 shares of our common stock. Given the limited
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number of additional authorized shares of our common stock, after taking into account this offering, we may not be able to raise significant proceeds through the sale of our equity securities. If we raise funds through additional collaborative or licensing arrangements, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Our failure to raise capital when needed may harm our business, financial condition, results of operations, and prospects.
Contractual Obligations
We lease two buildings with an aggregate of 106,894 square feet of manufacturing, office and laboratory facilities in Mountain View, California, which we began to occupy in the fourth quarter of 2007. We currently have subleases covering 19,334 square feet, 20,956 square feet and 2,500 square feet of these facilities, reducing the space we occupy to 64,104 square feet. In February 2012, effective March 30, 2012, we terminated the lease for one of the buildings, totaling 41,290 square feet, and concurrently terminated the two subleases associated with this building, consisting of 19,334 and 20,956 square feet, respectively. The lease for the other building expires on March 31, 2018, and we have two options to extend the lease for five years each. Our sublease for 2,500 square feet is on a month-to-month basis. We believe that the Mountain View facility is sufficient for our office, manufacturing and laboratory needs for at least the next three years.
On May 4, 2010, we entered into the Loan with Hercules. Under the terms of the Loan Agreement, we borrowed $15,000,000 at an interest rate equal to the higher of (i) 10.75% or (ii) 6.5% plus the prime rate as reported in the Wall Street Journal, with a maximum interest rate of 14%, and issued to Hercules a secured term promissory note evidencing the loan. We made interest only payments through January 2011 and beginning in February 2011 the loan began to be repaid in 33 equal monthly installments.
On November 2, 2007, we entered into a manufacturing and supply agreement, or the manufacture agreement, with Autoliv relating to the commercial supply of chemical heat packages that can be incorporated into our Staccato device. Autoliv had developed these chemical heat packages for us pursuant to a development agreement between Autoliv and us executed in October 2005.
In June 2010 and February 2011, we entered into agreements to amend the terms of the manufacture agreement, or the amendments. Under the terms of the first of the amendments, we paid Autoliv $4 million and issued Autoliv a $4 million unsecured promissory note in return for a production line for the commercial manufacture of chemical heat packages. Each production line is comprised of two identical and self-sustaining “cells,” and the first such cell was completed, installed and qualified in connection with such amendment. Under the terms of the second of the amendments, the original $4 million note was cancelled and a new unsecured promissory note was issued with a reduced principal amount of $2.8 million, or the second note, and production on the second cell ceased. The second note is payable in 48 equal monthly installments of $68,000. In the event that we request completion of the second cell of the first production line for the commercial manufacture of chemical heat packages, Autoliv will complete, install and fully qualify such second cell for a cost to us of $1.2 million and Autoliv will transfer ownership of such cell to us upon the payment in full of such $1.2 million and the second note. At our request, Autoliv will manufacture up to two additional production lines for the commercial manufacture of chemical heat packages at a cost not to exceed $2,400,000 for each additional line.
We will pay Autoliv a specified purchase price, which varies based on annual quantities ordered by us, per chemical heat package delivered. The initial term of the manufacture agreement expires on December 31, 2012, at which time the manufacture agreement will automatically renew for successive five-year renewal terms unless we or Autoliv notify the other party no less than 36 months prior to the end of the initial term or the then-current renewal term that such party wishes to terminate the manufacture agreement.
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Our recurring losses from operations and our need for additional capital raise substantial doubt about our ability to continue as a going concern, and as a result, we have classified all of our financing obligations as current. If this substantial doubt is removed in future periods, we will reclassify these financing obligations between current and non-current. Our scheduled future minimum contractual payments, net of sublease income, including interest at December 31, 2011, are as follows (in thousands):
| Payments Due by Period | ||||||||||||||||||||
| Total | Less Than 1 Year |
1-3 Years | 3-5 Years | Thereafter | ||||||||||||||||
| Operating lease obligations |
29,362 | 4,232 | 9,272 | 9,582 | 6,276 | |||||||||||||||
| Term note obligations |
14,079 | 7,140 | 6,939 | — | — | |||||||||||||||
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| $ | 43,441 | $ | 11,372 | $ | 16,211 | $ | 9,582 | $ | 6,276 | |||||||||||
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As part of our purchase of all of the outstanding equity of Symphony Allegro in August 2009, we agreed to pay to the Allegro Investors certain percentages of cash payments that may be generated from future partnering transactions pertaining to ADASUVE/AZ-104 (Staccato loxapine) or AZ-002 (Staccato alprazolam). In January 2012, we made a payment to the Allegro Investors of $5 million as a result of the $10 million upfront payment we received from Grupo Ferrer
Off-Balance Sheet Arrangements
None.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Our exposure to market risk is confined to our cash, cash equivalents, which have maturities of less than three months, and marketable securities. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and marketable securities in a variety of securities of high credit quality. As of December 31, 2011, we had cash, cash equivalents and marketable securities of $16.9 million. The securities in our investment portfolio are not leveraged, are classified as available for sale and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that an increase in market rates would have a material negative impact on the realized value of our investment portfolio. We actively monitor changes in interest rates. We perform quarterly reviews of our investment portfolio and believe we have no exposure related to: mortgage and other asset backed securities, European sovereign debt, or auction rate securities.
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Item 8. Financial Statements and Supplementary Data
ALEXZA PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| 66 | ||||
| Consolidated Balance Sheets as of December 31, 2011 and 2010 |
67 | |||
| 68 | ||||
| 69 | ||||
| 80 | ||||
| 81 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Alexza Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Alexza Pharmaceuticals, Inc. (a development stage company) (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2011 and for the period from December 19, 2000 (inception) to December 31, 2011. These consolidated financial statements are the responsibility of the Company’s 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alexza Pharmaceuticals, Inc. (a development stage company) at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011 and for the period from December 19, 2000 (inception) to December 31, 2011, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company’s recurring losses from operations, its deficit in working capital, stockholders’ deficit, and its need for additional capital raise substantial doubt about its ability to continue as a going concern. Management’s plans as to these matters are described in Note 2. The 2011 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Alexza Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2012 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP |
| Ernst & Young LLP |
Redwood Shores, California
March 12, 2012
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ALEXZA PHARMACEUTICALS, INC
(a development stage company)
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| (In thousands, except share and per share amounts) |
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| ASSETS |
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| Current assets: |
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| Cash and cash equivalents |
$ | 14,902 | $ | 13,671 | ||||
| Marketable securities |
2,001 | 27,778 | ||||||
| Receivables |
10,000 | — | ||||||
| Prepaid expenses and other current assets |
649 | 965 | ||||||
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| Total current assets |
27,552 | 42,414 | ||||||
| Property and equipment, net |
20,425 | 24,361 | ||||||
| Restricted cash |
400 | 400 | ||||||
| Other assets |
228 | 1,307 | ||||||
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| Total assets |
$ | 48,605 | $ | 68,482 | ||||
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| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
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| Current liabilities: |
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| Accounts payable |
$ | 3,603 | $ | 2,781 | ||||
| Accrued clinical trial liabilities |
134 | 216 | ||||||
| Other accrued liabilities |
2,872 | 3,158 | ||||||
| Current portion of contingent consideration liability |
12,300 | 5,300 | ||||||
| Financing obligations |
12,280 | 18,597 | ||||||
| Current portion of deferred revenues |
3,759 | 4,331 | ||||||
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| Total current liabilities |
34,948 | 34,383 | ||||||
| Deferred rent |
12,274 | 14,609 | ||||||
| Noncurrent portion of deferred revenues |
6,875 | — | ||||||
| Noncurrent portion of contingent consideration liability |
4,200 | 7,200 | ||||||
| Commitments (See Note 8) |
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| Stockholders’ equity (deficit): |
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| Preferred stock, $0.0001 par value, 5,000,000 shares authorized at December 31, 2011 and 2010; no shares issued and outstanding at December 31, 2011 or 2010 |
— | — | ||||||
| Common stock, $0.0001 par value; 200,000,000 and 100,000,000 shares authorized at December 31, 2011 and 2010, respectively; 72,136,338 and 59,766,328 shares issued and outstanding at December 31, 2011 and 2010, respectively |
7 | 6 | ||||||
| Additional paid-in capital |
296,936 | 278,386 | ||||||
| Other comprehensive income (loss) |
— | 2 | ||||||
| Deficit accumulated during development stage |
(306,635 | ) | (266,104 | ) | ||||
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| Total stockholders’ equity (deficit) |
(9,692 | ) | 12,290 | |||||
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| Total liabilities and stockholders’ equity (deficit) |
$ | 48,605 | $ | 68,482 | ||||
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See accompanying notes.
67
Table of Contents
ALEXZA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | Period from December 19, 2000 (Inception) to December 31, |
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| 2011 | 2010 | 2009 | 2011 | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| Revenue |
$ | 5,660 | $ | 42,876 | $ | 9,514 | $ | 65,481 | ||||||||
| Operating expenses: |
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| Research and development |
28,262 | 33,528 | 39,778 | 306,251 | ||||||||||||
| General and administrative |
11,766 | 14,000 | 15,406 | 103,876 | ||||||||||||
| Restructuring charges |
— | — | 2,037 | 2,037 | ||||||||||||
| Acquired in-process research and development |
— | — | — | 3,916 | ||||||||||||
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| Total operating expenses |
40,028 | 47,528 | 57,221 | 416,080 | ||||||||||||
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| Loss from operations |
(34,368 | ) | (4,652 | ) | (47,707 | ) | (350,599 | ) | ||||||||
| Change in fair value of contingent consideration liability |
(4,000 | ) | 4,838 | (7,983 | ) | (7,145 | ) | |||||||||
| Interest and other income/expense, net |
26 | (35 | ) | 92 | 13,889 | |||||||||||
| Interest expense |
(2,189 | ) | (1,632 | ) | (467 | ) | (7,869 | ) | ||||||||
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| Net loss |
(40,531 | ) | (1,481 | ) | (56,065 | ) | (351,724 | ) | ||||||||
| Consideration paid in excess of carrying value of the noncontrolling interest in Symphony Allegro, Inc. |
— | — | (61,566 | ) | (61,566 | ) | ||||||||||
| Loss attributed to noncontrolling interest in Symphony Allegro, Inc. |
— | — | 13,987 | 45,089 | ||||||||||||
| Net loss attributable to Alexza common stockholders |
$ | (40,531 | ) | $ | (1,481 | ) | $ | (103,644 | ) | $ | (368,201 | ) | ||||
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| Net loss per share attributable to Alexza common stockholders |
$ | (0.60 | ) | $ | (0.03 | ) | $ | (2.68 | ) | |||||||
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| Shares used to compute net loss per share attributable to Alexza common stockholders |
67,867 | 55,421 | 38,609 | |||||||||||||
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See accompanying notes.
68
Table of Contents
ALEXZA PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
| Alexza Pharmaceuticals, Inc. Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock |
Preferred Stock | Common Stock | Additional Paid-in Capital |
Stockholder Note Receivable |
Deferred Stock Compensation |
Other Comprehensive (Loss) Income |
Deficit Accumulated During the Development Stage |
Noncontrolling Interest in Symphony Allegro, Inc. |
Total Stockholders’ Equity (Deficit) |
|||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock to founders at $0.22 per share in December 2000 in exchange for technology and cash of $8 |
— | $ | — | — | $ | — | 454,536 | $ | — | $ | 100 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 100 | |||||||||||||||||||||||||||||
| Issuance of Series A preferred stock for cash at $0.40 per share in July 2001, net of issuance costs of $9 |
2,500,000 | 991 | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of Series A1 preferred stock at $1.55 per share in December 2001, in connection with merger |
1,610,250 | 2,496 | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of Series B preferred stock for cash at $1.40 per share in December 2001, net of issuance costs of $71 |
6,441,000 | 8,946 | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with merger at $1.10 per share in December 2001 |
— | — | — | — | 868,922 | — | 956 | — | — | — | — | — | 956 | |||||||||||||||||||||||||||||||||||||||
| Warrants assumed in merger transaction |
— | — | — | — | — | — | 10 | — | — | — | — | — | 10 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash at $0.22 per share upon exercise of options in December 2001 |
— | — | — | — | 9,090 | — | 2 | — | — | — | — | — | 2 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to consultant stock options |
— | — | — | — | — | — | 3 | — | — | — | — | — | 3 | |||||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | (5,652 | ) | — | (5,652 | ) | |||||||||||||||||||||||||||||||||||||
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| Balance at December 31, 2001 (carried forward) |
10,551,250 | $ | 12,433 | — | $ | — | 1,332,548 | $ | — | $ | 1,071 | $ | — | $ | — | $ | — | $ | (5,652 | ) | $ | — | $ | (4,581 | ) | |||||||||||||||||||||||||||
See accompanying notes.
69
Table of Contents
| Alexza Pharmaceuticals, Inc. Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock |
Preferred Stock | Common Stock | Additional Paid-in Capital |
Stockholder Note Receivable |
Deferred Stock Compensation |
Other Comprehensive (Loss) Income |
Deficit Accumulated During the Development Stage |
Noncontrolling Interest in Symphony Allegro, Inc. |
Total Stockholders’ Equity (Deficit) |
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| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2001 (brought forward) |
10,551,250 | $ | 12,433 | — | $ | — | 1,332,548 | $ | — | $ | 1,071 | $ | — | $ | — | $ | — | $ | (5,652 | ) | $ | — | $ | (4,581 | ) | |||||||||||||||||||||||||||
| Issuance of common stock for cash at $0.22 per share upon exercise of options in February 2002 |
— | — | — | — | 10,606 | — | 3 | — | — | — | — | — | 3 | |||||||||||||||||||||||||||||||||||||||
| Issuance of warrants to purchase Series B preferred stock in March 2002, in connection with equipment financing loan |
— | 27 | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash at $0.22 per share upon exercise of options in July 2002 |
— | — | — | — | 2,180 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock to stockholder at $0.99 per share in exchange for promissory note in July 2002 |
— | — | — | — | 53,156 | — | 53 | (53 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Issuance of Series C preferred stock for cash at $1.56 per share in September 2002, net of issuance costs of $108 |
28,870,005 | 44,892 | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock for cash at $1.05 per share in October 2002 |
— | — | — | — | (2,634 | ) | — | (3 | ) | — | — | — | — | — | (3 | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash at $1.05 per share for services upon exercise of warrants in December 2002 |
— | — | — | — | 9,368 | — | 10 | — | — | — | — | — | 10 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to consultant stock options |
— | — | — | — | — | — | 10 | — | — | — | — | — | 10 | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on investments |
— | — | — | — | — | — | — | — | — | 51 | — | — | 51 | |||||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | (8,163 | ) | — | (8,163 | ) | |||||||||||||||||||||||||||||||||||||
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| Balance at December 31, 2002 (carried forward) |
39,421,255 | $ | 57,352 | — | $ | — | 1,405,224 | $ | — | $ | 1,144 | $ | (53 | ) | $ | — | $ | 51 | $ | (13,815 | ) | $ | — | $ | (12,673 | ) | ||||||||||||||||||||||||||
See accompanying notes.
70
Table of Contents
| Alexza Pharmaceuticals, Inc. Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock |
Preferred Stock | Common Stock | Additional Paid-in Capital |
Stockholder Note Receivable |
Deferred Stock Compensation |
Other Comprehensive (Loss) Income |
Deficit Accumulated During the Development Stage |
Noncontrolling Interest in Symphony Allegro, Inc. |
Total Stockholders’ Equity (Deficit) |
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| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2002 (brought forward) |
39,421,255 | $ | 57,352 | — | $ | — | 1,405,224 | $ | — | $ | 1,144 | $ | (53 | ) | $ | — | $ | 51 | $ | (13,815 | ) | $ | — | $ | (12,673 | ) | ||||||||||||||||||||||||||
| Issuance of common stock for cash at $0.22, $0.99 and $1.10 per share upon exercise of options |
— | — | — | — | 74,903 | — | 47 | — | — | — | — | — | 47 | |||||||||||||||||||||||||||||||||||||||
| Issuance of warrants to purchase Series C preferred stock in connection with equipment financing loan in January 2003 |
— | 35 | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of warrants to purchase Series C preferred stock in connection with equipment financing loan in September 2003 |
— | 27 | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock for cash at $1.05 per share in January 2003 |
— | — | — | — | (1,172 | ) | — | (1 | ) | — | — | — | — | — | (1 | ) | ||||||||||||||||||||||||||||||||||||
| Repurchase of common stock for cash at $0.22 per share in November 2003 |
— | — | — | — | (14,772 | ) | — | (3 | ) | — | — | — | — | — | (3 | ) | ||||||||||||||||||||||||||||||||||||
| Compensation expense related to consultant stock options |
— | — | — | — | — | — | 31 | — | — | — | — | — | 31 | |||||||||||||||||||||||||||||||||||||||
| Deferred stock compensation expense related to modification of consultant stock option |
— | — | — | — | — | — | 1 | — | (1 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Unrealized loss on investments |
— | — | — | — | — | — | — | — | — | (55 | ) | — | — | (55 | ) | |||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | (14,328 | ) | — | (14,328 | ) | |||||||||||||||||||||||||||||||||||||
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| Balance at December 31, 2003 (carried forward) |
39,421,255 | $ | 57,414 | — | $ | — | 1,464,183 | $ | — | $ | 1,219 | $ | (53 | ) | $ | (1 | ) | $ | (4 | ) | $ | (28,143 | ) | $ | — | $ | (26,982 | ) | ||||||||||||||||||||||||
See accompanying notes.
71
Table of Contents
| Alexza Pharmaceuticals, Inc. Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock |
Preferred Stock | Common Stock | Additional Paid-in Capital |
Stockholder Note Receivable |
Deferred Stock Compensation |
Other Comprehensive (Loss) Income |
Deficit Accumulated During the Development Stage |
Noncontrolling Interest in Symphony Allegro, Inc. |
Total Stockholders’ Equity (Deficit) |
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| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2003 (brought forward) |
39,421,255 | $ | 57,414 | — | $ | — | 1,464,183 | $ | — | $ | 1,219 | $ | (53 | ) | $ | (1 | ) | $ | (4 | ) | $ | (28,143 | ) | $ | — | $ | (26,982 | ) | ||||||||||||||||||||||||
| Cancellation of unvested common stock at $0.99 per share in March 2004 |
— | — | — | — | (24,365 | ) | — | (24 | ) | 24 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repayment of vested portion of stockholder note receivable for cash |
— | — | — | — | — | — | — | 29 | — | — | — | — | 29 | |||||||||||||||||||||||||||||||||||||||
| Issuance of warrants to purchase Series C preferred stock in connection with equipment financing loan in April 2004 |
— | 20 | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash at $0.22, $0.99 and $1.10 per share upon exercise of options |
— | — | — | — | 100,192 | — | 72 | — | — | — | — | — | 72 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock for cash at $1.05 per share in September 2004 |
— | — | — | — | (404 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Issuance of Series D preferred stock at $1.29 per share in November and December 2004, net of issuance costs of $2,239 |
40,435,448 | 49,760 | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of warrants to purchase common stock in connection with Series D financing in November 2004 |
— | — | — | — | — | — | 91 | — | — | — | — | — | 91 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to consultant stock options |
— | — | — | — | — | — | 40 | — | — | — | — | — | 40 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to employee stock option modifications |
— | — | — | — | — | — | 19 | — | — | — | — | — | 19 | |||||||||||||||||||||||||||||||||||||||
| Amortization of deferred stock compensation |
— | — | — | — | — | — | — | — | 1 | — | — | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Unrealized loss on investments |
— | — | — | — | — | — | — | — | — | (41 | ) | — | — | (41 | ) | |||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | (16,625 | ) | — | (16,625 | ) | |||||||||||||||||||||||||||||||||||||
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| Balance at December 31, 2004 (carried forward) |
79,856,703 | $ | 107,194 | — | $ | — | 1,539,606 | $ | — | $ | 1,417 | $ | — | $ | — | $ | (45 | ) | $ | (44,768 | ) | $ | — | $ | (43,396 | ) | ||||||||||||||||||||||||||
See accompanying notes.
72
Table of Contents
| Alexza Pharmaceuticals, Inc. Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock |
Preferred Stock | Common Stock | Additional Paid-in Capital |
Stockholder Note Receivable |
Deferred Stock Compensation |
Other Comprehensive (Loss) Income |
Deficit Accumulated During the Development Stage |
Noncontrolling Interest in Symphony Allegro, Inc. |
Total Stockholders’ Equity (Deficit) |
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| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2004 (brought forward) |
79,856,703 | $ | 107,194 | — | $ | — | 1,539,606 | $ | — | $ | 1,417 | $ | — | $ | — | $ | (45 | ) | $ | (44,768 | ) | $ | — | $ | (43,396 | ) | ||||||||||||||||||||||||||
| Issuance of common stock upon exercise of options $0.22, $0.99, $1.10, per share |
— | — | — | — | 380,508 | — | 357 | — | — | — | — | — | 357 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to consultant stock options |
— | — | — | — | — | — | 195 | — | — | — | — | — | 195 | |||||||||||||||||||||||||||||||||||||||
| Deferred stock compensation, net of $4 reversal in connection with employee terminations |
— | — | — | — | — | — | 3,329 | — | (3,329 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Amortization of deferred stock compensation, |
— | — | — | — | — | — | — | — | 404 | — | — | — | 404 | |||||||||||||||||||||||||||||||||||||||
| Variable compensation expense |
— | — | — | — | — | — | 442 | — | — | — | — | — | 442 | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on investments |
— | — | — | — | — | — | — | — | — | 15 | — | — | 15 | |||||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | (32,402 | ) | — | (32,402 | ) | |||||||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||||
| Balance at December 31, 2005 (carried forward) |
79,856,703 | $ | 107,194 | — | $ | — | 1,920,114 | $ | — | $ | 5,740 | $ | — | $ | (2,925 | ) | $ | (30 | ) | $ | (77,170 | ) | $ | — | $ | (74,385 | ) | |||||||||||||||||||||||||
See accompanying notes.
73
Table of Contents
| Alexza Pharmaceuticals, Inc. Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock |
Preferred Stock | Common Stock | Additional Paid-in Capital |
Stockholder Note Receivable |
Deferred Stock Compensation |
Other Comprehensive (Loss) Income |
Deficit Accumulated During the Development Stage |
Noncontrolling Interest in Symphony Allegro, Inc. |
Total Stockholders’ Equity (Deficit) |
|||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2005 (brought forward) |
79,856,703 | $ | 107,194 | — | $ | — | 1,920,114 | $ | — | $ | 5,740 | $ | — | $ | (2,925 | ) | $ | (30 | ) | $ | (77,170 | ) | $ | — | $ | (74,385 | ) | |||||||||||||||||||||||||
| Issuance of common stock for cash and shares upon exercise of options at a weighted average price of $1.28 per share |
— | — | — | — | 159,446 | — | 195 | — | — | — | — | — | 195 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash under the Company’s Employee Stock Purchase Plan |
— | — | — | — | 131,682 | — | 896 | — | — | — | — | — | 896 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for shares upon exercise of warrant |
— | — | — | — | 85,359 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash, net of offering costs of $2,156 |
— | — | — | — | 6,325,000 | 1 | 44,901 | — | — | — | — | — | 44,902 | |||||||||||||||||||||||||||||||||||||||
| Conversion of convertible preferred stock into common stock |
(79,856,703 | ) | (107,194 | ) | — | — | 15,197,712 | 1 | 107,193 | — | — | — | — | — | 107,194 | |||||||||||||||||||||||||||||||||||||
| Purchase of non controlling interest by Symphony Allegro, Inc, preferred shareholders |
— | — | — | — | — | — | — | — | — | — | — | 36,463 | 36,463 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to consultant stock options |
— | — | — | — | — | — | 145 | — | — | — | — | — | 145 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to fair value of employee share based awards issued after January 1, 2006 |
— | — | — | — | — | — | 1,601 | — | — | — | — | — | 1,601 | |||||||||||||||||||||||||||||||||||||||
| Amortization of deferred stock compensation |
— | — | — | — | — | — | — | — | 727 | — | — | — | 727 | |||||||||||||||||||||||||||||||||||||||
| Reversal of deferred stock compensation in connection with employee terminations |
— | — | — | — | — | — | (495 | ) | — | 495 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Variable compensation expense |
— | — | — | — | — | — | (442 | ) | — | — | — | — | — | (442 | ) | |||||||||||||||||||||||||||||||||||||
| Issuance of warrant to Symphony Allegro Holdings LLC |
— | — | — | — | — | 10,708 | — | — | — | — | — | 10,708 | ||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on investments |
— | — | — | — | — | — | — | — | — | 39 | — | — | 39 | |||||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | (41,806 | ) | (1,720 | ) | (43,526 | ) | ||||||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||||
| Balance at December 31, 2006 (carried forward) |
— | $ | — | — | $ | — | 23,819,319 | $ | 2 | $ | 170,442 | $ | — | $ | (1,703 | ) | $ | 9 | $ | (118,976 | ) | $ | 34,743 | $ | 84,517 | |||||||||||||||||||||||||||
See accompanying notes.
74
Table of Contents
| Alexza Pharmaceuticals, Inc. Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock |
Preferred Stock | Common Stock | Additional Paid-In Capital |
Stockholder Note Receivable |
Deferred Stock Compensation |
Other Comprehensive (Loss) Income |
Deficit Accumulated During the Development Stage |
Noncontrolling Interest In Symphony Allegro, Inc. |
Total Stockholders’ Equity (Deficit) |
|||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2006 (brought forward) |
— | $ | — | — | $ | — | 23,819,319 | $ | 2 | $ | 170,442 | $ | — | $ | (1,703 | ) | $ | 9 | $ | (118,976 | ) | $ | 34,743 | $ | 84,517 | |||||||||||||||||||||||||||
| Issuance of common stock for cash and shares upon exercise of options at a weighted average price of $1.28 per share |
— | — | — | — | 204,423 | — | 432 | — | — | — | — | — | 432 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash under the Company’s Employee Stock Purchase Plan |
— | — | — | — | 205,870 | — | 1,405 | — | — | — | — | — | 1,405 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units |
— | — | — | — | 8,245 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash, net of offering costs of $4,743 |
— | — | — | — | 6,900,000 | 1 | 65,981 | — | — | — | — | — | 65,982 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to consultant stock options |
— | — | — | — | — | — | 75 | — | — | — | — | — | 75 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to fair value of employee share based awards issued after January 1, 2006 |
— | — | — | — | — | — | 2,733 | — | — | — | — | — | 2,733 | |||||||||||||||||||||||||||||||||||||||
| Amortization of deferred stock compensation |
— | — | — | — | — | — | — | — | 577 | — | — | — | 577 | |||||||||||||||||||||||||||||||||||||||
| Reversal of deferred stock compensation in connection with employee terminations |
— | — | — | — | — | — | (387 | ) | — | 387 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Unrealized gain on investments |
— | — | — | — | — | — | — | — | — | 132 | — | — | 132 | |||||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | (45,119 | ) | (10,791 | ) | (55,910 | ) | ||||||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||||
| Balance at December 31, 2007 (carried forward) |
— | $ | — | — | $ | — | 31,137,857 | $ | 3 | $ | 240,681 | $ | — | $ | (739 | ) | $ | 141 | $ | (164,095 | ) | $ | 23,952 | $ | 99,943 | |||||||||||||||||||||||||||
See accompanying notes.
75
Table of Contents
| Alexza Pharmaceuticals, Inc. Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock |
Preferred Stock | Common Stock | Additional Paid-In Capital |
Stockholder Note Receivable |
Deferred Stock Compensation |
Other Comprehensive (Loss) Income |
Deficit Accumulated During the Development Stage |
Noncontrolling Interest In Symphony Allegro, Inc. |
Total Stockholders’ Equity (Deficit) |
|||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2007 (brought forward) |
— | $ | — | — | $ | — | 31,137,857 | $ | 3 | $ | 240,681 | $ | — | $ | (739 | ) | $ | 141 | $ | (164,095 | ) | $ | 23,952 | $ | 99,943 | |||||||||||||||||||||||||||
| Issuance of common stock and common stock warrant for cash |
— | — | — | — | 1,250,000 | — | 9,840 | — | — | — | — | — | 9,840 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash upon exercise of options at a weighted average price of $1.55 per share |
— | — | — | — | 104,428 | — | 161 | — | — | — | — | — | 161 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash under the Company’s Employee Stock Purchase Plan |
— | — | — | — | 305,146 | — | 1,172 | — | — | — | — | — | 1,172 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units |
— | — | — | — | 23,443 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to consultant stock options |
— | — | — | — | — | — | 22 | — | — | — | — | — | 22 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to fair value of employee share based awards issued after January 1, 2006 |
— | — | — | — | — | — | 4,633 | — | — | — | — | — | 4,633 | |||||||||||||||||||||||||||||||||||||||
| Amortization of deferred stock compensation |
— | — | — | — | — | — | — | — | 437 | — | — | — | 437 | |||||||||||||||||||||||||||||||||||||||
| Reversal of deferred stock compensation in connection with employee terminations |
— | — | — | — | — | — | (83 | ) | — | 83 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Unrealized loss on investments |
— | — | — | — | — | — | — | — | — | (113 | ) | — | — | (113 | ) | |||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | (58,450 | ) | (18,591 | ) | (77,041 | ) | ||||||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||||
| Balance at December 31, 2008 (carried forward) |
— | $ | — | — | $ | — | 32,820,874 | $ | 3 | $ | 256,426 | $ | — | $ | (219 | ) | $ | 28 | $ | (222,545 | ) | $ | 5,361 | $ | 39,054 | |||||||||||||||||||||||||||
See accompanying notes.
76
Table of Contents
| Alexza Pharmaceuticals, Inc. Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock |
Preferred Stock | Common Stock | Additional Paid-In Capital |
Stockholder Note Receivable |
Deferred Stock Compensation |
Other Comprehensive (Loss) Income |
Deficit Accumulated During the Development Stage |
Noncontrolling Interest In Symphony Allegro, Inc. |
Total Stockholders’ Equity (Deficit) |
|||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2008 (brought forward) |
— | $ | — | — | $ | — | 32,820,874 | $ | 3 | $ | 256,426 | $ | — | $ | (219 | ) | $ | 28 | $ | (222,545 | ) | $ | 5,361 | $ | 39,054 | |||||||||||||||||||||||||||
| Issuance of common stock |
— | — | — | — | 135,041 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock and common stock warrants for cash |
— | — | — | — | 8,107,012 | 1 | 18,989 | — | — | — | — | — | 18,990 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock and common stock warrants for the purchase of noncontrolling interest in Symphony Allegro, Inc. |
— | — | — | — | 10,000,000 | 1 | 36,084 | — | — | — | — | — | 36,085 | |||||||||||||||||||||||||||||||||||||||
| Deemed dividend for purchase of noncontrolling interest in Symphony Allegro, Inc. |
— | — | — | — | — | — | (61,566 | ) | — | — | — | — | 8,626 | (52,940 | ) | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash upon exercise of options at a weighted average price of $1.20 per share |
— | — | — | — | 69,708 | — | 84 | — | — | — | — | — | 84 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash under the Company’s Employee Stock Purchase Plan |
— | — | — | — | 439,252 | — | 599 | — | — | — | — | — | 599 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units |
— | — | — | — | 839,469 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to consultant stock options |
— | — | — | — | — | — | 53 | — | — | — | — | — | 53 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to fair value of employee share based awards issued after January 1, 2006 |
— | — | — | — | — | — | 6,860 | — | — | — | — | — | 6,860 | |||||||||||||||||||||||||||||||||||||||
| Amortization of deferred stock compensation |
— | — | — | — | — | — | — | — | 183 | — | — | — | 183 | |||||||||||||||||||||||||||||||||||||||
| Reversal of deferred stock compensation in connection with employee terminations |
— | — | — | — | — | — | (36 | ) | — | 36 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Unrealized loss on investments |
— | — | — | — | — | — | — | — | — | (29 | ) | — | — | (29 | ) | |||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | (42,078 | ) | (13,987 | ) | (56,065 | ) | ||||||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||||
| Balance at December 31, 2009 (carried forward) |
— | $ | — | — | $ | — | 52,411,356 | $ | 5 | $ | 257,493 | $ | — | $ | — | $ | (1 | ) | $ | (264,623 | ) | $ | — | $ | (7,126 | ) | ||||||||||||||||||||||||||
77
Table of Contents
| Alexza Pharmaceuticals, Inc. Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock |
Preferred Stock | Common Stock | Additional Paid in Capital |
Stockholder Note Receivable |
Deferred Stock Compensation |
Other Comprehensive (Loss) Income |
Deficit Accumulated During the Development Stage |
Noncontrolling Interest in Symphony Allegro, Inc. |
Total Stockholders’ (Deficit) Equity |
|||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share balances) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2009 (brought forward) |
— | $ | — | — | $ | — | 52,411,356 | $ | 5 | $ | 257,493 | $ | — | $ | — | $ | (1 | ) | $ | (264,623 | ) | $ | — | $ | (7,126 | ) | ||||||||||||||||||||||||||
| Issuance of common stock and common stock warrants |
— | — | — | — | 6,685,183 | 1 | 16,351 | — | — | — | — | — | 16,352 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock warrants |
— | — | — | — | — | — | 921 | — | — | — | — | — | 921 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash upon exercise of options at a weighted average price of $1.87 per share |
— | — | — | — | 114,278 | — | 215 | — | — | — | — | — | 215 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash under the Company’s Employee Stock Purchase Plan |
— | — | — | — | 406,207 | — | 482 | — | — | — | — | — | 482 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units |
— | — | — | — | 149,304 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to consultant stock options |
— | — | — | — | — | — | 28 | — | — | — | — | — | 28 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to fair value of employee share based awards issued after January 1, 2006 |
— | — | — | — | — | — | 2,896 | — | — | — | — | — | 2,896 | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on investments |
— | — | — | — | — | — | — | — | — | 3 | — | — | 3 | |||||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | (1,481 | ) | — | (1,481 | ) | |||||||||||||||||||||||||||||||||||||
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|||||||||||||||||||||||||||
| Balance at December 31, 2010 (carried forward) |
— | $ | — | — | $ | — | 59,766,328 | $ | 6 | $ | 278,386 | $ | — | $ | — | $ | 2 | $ | (266,104 | ) | $ | — | $ | 12,290 | ||||||||||||||||||||||||||||
See accompanying notes.
78
Table of Contents
| Alexza Pharmaceuticals, Inc. Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock |
Preferred Stock | Common Stock | Additional Paid in Capital |
Stockholder Note Receivable |
Deferred Stock Compensation |
Other Comprehensive (Loss) Income |
Deficit Accumulated During the Development Stage |
Noncontrolling Interest in Symphony Allegro, Inc. |
Total Stockholders’ (Deficit) Equity |
|||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share balances) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2010 (brought forward) |
— | — | — | — | 59,766,328 | 6 | 278,386 | — | — | 2 | (266,104 | ) | — | 12,290 | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock and common stock warrants for cash |
— | — | — | — | 11,927,034 | 1 | 15,940 | — | — | — | — | — | 15,941 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash upon exercise of options at a weighted average price of $1.87 per share |
— | — | — | — | 975 | — | 2 | — | — | — | — | — | 2 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash under the Company’s Employee Stock Purchase Plan |
— | — | — | — | 249,977 | — | 202 | — | — | — | — | — | 202 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units |
— | — | — | — | 192,024 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to consultant stock options |
— | — | — | — | — | — | 17 | — | — | — | — | — | 17 | |||||||||||||||||||||||||||||||||||||||
| Compensation expense related to fair value of employee share based awards issued after January 1, 2006 |
— | — | — | — | — | — | 2,389 | — | — | — | — | — | 2,389 | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on investments |
— | — | — | — | — | — | — | — | — | (2 | ) | — | — | (2 | ) | |||||||||||||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | — | — | — | (40,531 | ) | — | (40,531 | ) | |||||||||||||||||||||||||||||||||||||
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| Balance at December 31, 2011 |
— | $ | — | — | $ | — | 72,136,338 | $ | 7 | $ | 296,936 | $ | — | $ | — | $ | — | $ | (306,635 | ) | $ | — | $ | (9,692 | ) | |||||||||||||||||||||||||||
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See accompanying notes.
79
Table of Contents
ALEXZA PHARMACEUTICALS, INC
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | Period from December 19, 2000 (Inception) to December 31, 2011 |
|||||||||||||||
| 2011 | 2010 | 2009 | ||||||||||||||
| (In thousands) | ||||||||||||||||
| Cash flows from operating activities: |
||||||||||||||||
| Net loss |
$ | (40,531 | ) | $ | (1,481 | ) | $ | (56,065 | ) | $ | (351,724 | ) | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||||||||||
| Share-based compensation expense |
2,406 | 2,924 | 7,096 | 24,265 | ||||||||||||
| Change in fair value of contingent consideration liability |
4,000 | (4,838 | ) | 7,983 | 7,145 | |||||||||||
| Extinguishment of officer note receivable |
— | — | — | 2,300 | ||||||||||||
| Issuance of common stock for intellectual property |
— | — | — | 92 | ||||||||||||
| Charge for acquired in-process research and development |
— | — | — | 3,916 | ||||||||||||
| Amortization of assembled workforce |
— | — | — | 222 | ||||||||||||
| Amortization of debt discount and deferred interest |
602 | 299 | 29 | 1,292 | ||||||||||||
| Amortization of discount on available-for-sale securities |
204 | 180 | 126 | (217 | ) | |||||||||||
| Write-off of other asset |
— | 2,800 | — | 2,800 | ||||||||||||
| Depreciation |
4,432 | 4,557 | 4,850 | 30,598 | ||||||||||||
| Loss on disposal of property and equipment |
— | 79 | 43 | 205 | ||||||||||||
| Changes in operating assets and liabilities: |
||||||||||||||||
| Other receivables |
(10,000 | ) | 1,406 | (1,406 | ) | (10,000 | ) | |||||||||
| Prepaid expenses and other current assets |
316 | (161 | ) | 326 | (643 | ) | ||||||||||
| Other assets |
(147 | ) | (71 | ) | — | (2,843 | ) | |||||||||
| Accounts payable |
822 | 76 | (2,223 | ) | 3,474 | |||||||||||
| Accrued clinical trial expense and other accrued liabilities |
(498 | ) | (410 | ) | (2,715 | ) | (824 | ) | ||||||||
| Deferred revenues |
6,303 | 4,331 | (9,514 | ) | 10,634 | |||||||||||
| Other liabilities |
(2,335 | ) | (1,099 | ) | (1,678 | ) | 15,664 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net cash provided by (used in) operating activities |
(34,426 | ) | 8,592 | (53,148 | ) | (263,644 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cash flows from investing activities: |
||||||||||||||||
| Purchase of available-for-sale securities |
(28,465 | ) | (63,434 | ) | (13,259 | ) | (430,071 | ) | ||||||||
| Maturities of available-for-sale securities |
54,036 | 41,945 | 18,158 | 428,288 | ||||||||||||
| Purchase of available-for-sale securities held by Symphony Allegro, Inc. |
— | — | — | (49,975 | ) | |||||||||||
| Maturities of available-for-sale securities held by Symphony Allegro, Inc. |
— | — | 16,436 | 45,093 | ||||||||||||
| Decrease (increase) in restricted cash |
— | — | — | (400 | ) | |||||||||||
| Purchases of property and equipment |
(496 | ) | (9,178 | ) | (1,189 | ) | (51,020 | ) | ||||||||
| Proceeds from disposal of property and equipment |
— | 29 | — | 57 | ||||||||||||
| Cash paid for merger |
— | — | — | (250 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net cash provided by (used in) investing activities |
25,075 | (30,638 | ) | 20,146 | (58,278 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cash flows from financing activities: |
||||||||||||||||
| Proceeds from issuance of common stock, common stock warrants and exercise of stock options and stock purchase rights |
16,145 | 17,049 | 19,673 | 178,352 | ||||||||||||
| Repurchase of common stock |
— | — | — | (8 | ) | |||||||||||
| Proceeds from issuance of convertible preferred stock |
— | — | — | 104,681 | ||||||||||||
| Proceeds from repayment of stockholder note receivable |
— | — | — | 29 | ||||||||||||
| Proceeds received from purchase of the noncontrolling interest in Symphony Allegro, Inc. |
— | — | 4,882 | 4,882 | ||||||||||||
| Proceeds from purchase of non controlling interest by preferred shareholders in Symphony Allegro, Inc., net of fees |
— | — | — | 47,171 | ||||||||||||
| Payment of contingent payment to Symphony Allegro Holdings, LLC |
— | (7,500 | ) | — | (7,500 | ) | ||||||||||
| Proceeds from term loans |
— | 14,806 | — | 33,738 | ||||||||||||
| Payments of term loans |
(5,563 | ) | (2,088 | ) | (4,139 | ) | (24,521 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net cash provided by financing activities |
10,582 | 22,267 | 20,416 | 336,824 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) in cash and cash equivalents |
1,231 | 221 | (12,586 | ) | 14,902 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cash and cash equivalents at beginning of period |
13,671 | 13,450 | 26,036 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cash and cash equivalents at end of period |
$ | 14,902 | $ | 13,671 | $ | 13,450 | $ | 14,902 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Supplemental disclosures of cash flow information |
||||||||||||||||
| Cash paid for interest |
$ | 1,631 | $ | 1,080 | $ | 467 | $ | 5,363 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Non cash investing and financing activities: |
||||||||||||||||
| Conversion of convertible preferred stock to common stock |
$ | — | $ | — | $ | — | $ | 107,194 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Issuance of shares and warrants, net of warrant cancellation in conjunction with Symphony Allegro purchase |
$ | — | $ | — | $ | 36,085 | $ | 36,085 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Issuance of contingent consideration liability |
$ | — | $ | — | $ | 16,855 | $ | 16,855 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Issuance of warrants in conjunction with establishment of Symphony Allegro |
$ | — | $ | — | $ | — | $ | 10,708 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Issuance of warrants in conjunction with debt issuance |
$ | — | $ | 921 | $ | — | $ | 921 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Reversal of Note Payable to Autoliv |
$ | 1,200 | $ | — | $ | — | $ | 1,200 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
See accompanying notes.
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ALEXZA PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Basis of Presentation
Business
Alexza Pharmaceuticals, Inc. (“Alexza” or the “Company”), was incorporated in the state of Delaware on December 19, 2000 as FaxMed, Inc. In June 2001, the Company changed its name to Alexza Corporation and in December 2001 became Alexza Molecular Delivery Corporation. In July 2005, the Company changed its name to Alexza Pharmaceuticals, Inc.
The Company is a pharmaceutical development company focused on the research, development, and commercialization of novel proprietary products for the acute treatment of central nervous system conditions. The Company’s primary activities since incorporation have been establishing its offices, recruiting personnel, conducting research and development, conducting preclinical studies and clinical trials, performing business and financial planning, and raising capital. Accordingly, the Company is considered to be in the development stage and operates in one business segment. The Company’s facilities and employees are currently located in the United States.
Basis of Consolidation
The consolidated financial statements include the accounts of Alexza and its wholly-owned subsidiaries. On August 26, 2009, Alexza acquired all of the outstanding equity of Symphony Allegro, Inc. (“Allegro”) (see Note 9). Prior to August 26, 2009, Alexza consolidated the financial results of Allegro, as Allegro was deemed a variable interest entity and Alexza was deemed the primary beneficiary. All significant intercompany balances and transactions have been eliminated.
Authorized Shares
On July 28, 2011, the Company filed a Certificate of Amendment to the Company’s Restated Certificate of Incorporation to increase the total number of authorized shares from 105,000,000 to 205,000,000 and to increase the total number of authorized shares of common stock from 100,000,000 to 200,000,000.
Registered Direct Equity Issuances
In August 2010, the Company issued an aggregate of 6,685,183 shares of its common stock and warrants to purchase up to an additional 3,342,589 shares of its common stock in a registered direct offering. These securities were sold as units with each unit consisting of (i) one share of common stock and (ii) a warrant to purchase 0.5 of a share of common stock, at a purchase price of $2.70 per unit. Net proceeds from the offering were approximately $16.4 million, after deducting placement agents’ commissions and offering expenses. The warrants are exercisable at $3.30 per share and expire five years after August 10, 2010. The securities were sold pursuant to a shelf registration statement declared effective by the Securities and Exchange Commission on May 20, 2010. The Company agreed to customary obligations regarding registration, including indemnification and maintenance of the registration statement.
On May 6, 2011, the Company issued an aggregate of 11,927,034 shares of its common stock and warrants to purchase up to an additional 4,174,457 shares of its common stock in a registered direct offering. Net proceeds from the offering were approximately $15.9 million, after deducting offering expenses. The warrants are exercisable at $1.755 per share and will expire on May 6, 2016. The securities were sold pursuant to a shelf registration statement declared effective by the SEC on May 20, 2010. The Company agreed to customary obligations regarding registration, including indemnification and maintenance of the registration statement. Further, if the Company proposes to issue securities prior to the earlier of (a) the date on which it receives written approval from the U.S. Food and Drug Administration (“FDA”) for its New Drug Application (“NDA”) for Adasuve™ (“ADASUVE,” “Staccato loxapine” or “AZ-004”). or (b) June 30, 2012, the investors in the offering, subject to certain exceptions, have the right to purchase their pro rata share, based on their participation in the
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offering, of such securities. In addition, the Company agreed to not issue shares pursuant to its equity financing facility with Azimuth Opportunity, Ltd. (“Azimuth”), described below, or any similar facilities, or enter into variable rate transactions, until the earlier of (i) 30 days after the approval of the NDA for ADASUVE or (ii) June 30, 2012.
Unregistered Direct Equity Issuance
On October 5, 2009, the Company issued an aggregate of 8,107,012 shares of its common stock and warrants to purchase up to an additional 7,296,312 shares of its common stock in a private placement. These securities were sold as units with each unit consisting of one share of common stock and a warrant to purchase 0.9 shares of common stock at a purchase price of $2.4325 per unit. The net proceeds, after deducting the payment of a placement agent fee and other offering expenses, were approximately $19.0 million and are classified as equity in the consolidated balance sheets. The warrants are cash or net exercisable for a period of seven years from October 5, 2009 and have an exercise price of $2.77 per share.
The Company granted to the investors certain registration rights related to the shares of common stock sold in the private placement and the shares of common stock underlying the warrants. The Company filed with the SEC a registration statement covering the resale of these shares, and the SEC declared such registration statement effective on October 27, 2009. The Company also agreed to other customary obligations regarding registration, including indemnification and maintenance of the registration statement. If the Company does not maintain an effective registration statement, it will be subject to liquidated damages of 2% for each 30 day period the registration statement is not effective. The Company believes the risk of payment of the liquidated damages to be remote.
Equity Financing Facility
On May 26, 2010, the Company obtained a committed equity financing facility under which the Company may sell up to 8,936,550 shares of its common stock to Azimuth Opportunity, Ltd. (“Azimuth”) over a 24-month period pursuant to the terms of a Common Stock Purchase Agreement (the “Purchase Agreement”). The Company is not obligated to utilize any of the facility.
The Company will determine, at its sole discretion, the timing, the dollar amount and the price per share of each draw under this facility, subject to certain conditions. When and if the Company elects to use the facility by delivery of a draw down notice to Azimuth, the Company will issue shares to Azimuth at a discount of between 5.00% and 6.75% to the volume weighted average price of the Company’s common stock over a preceding period of trading days (a “Draw Down Period”). The Purchase Agreement also provides that from time to time, at the Company’s sole discretion, it may grant Azimuth the right to purchase additional shares of the Company’s common stock during each Draw Down Period for an amount of shares specified by the Company based on the trading price of its common stock. Upon Azimuth’s exercise of an option, the Company will sell to Azimuth the shares subject to the option at a price equal to the greater of the daily volume weighted average price of the Company’s common stock on the day Azimuth notifies the Company of its election to exercise its option or the threshold price for the option determined by the Company, less a discount calculated in the same manner as it is calculated in the draw down notices.
Azimuth is not required to purchase any shares at a pre-discounted purchase price below $3.00 per share, and any shares sold under this facility will be sold pursuant to a shelf registration statement declared effective by the Securities and Exchange Commission on May 20, 2010. As of December 31, 2011, the Company’s stock price was $0.83. The Purchase Agreement will terminate on May 26, 2012. As of December 31, 2011, there have been no sales of common stock under the Purchase Agreement.
2. Need to Raise Additional Capital
The Company has incurred significant losses from operations since its inception and expects losses to continue for the foreseeable future. As of December 31, 2011, the Company had cash, cash equivalents and marketable securities of $16.9 million and a working capital deficit of $7.4 million. The Company’s operating and capital plans for the next twelve months call for cash expenditure to exceed the cash, cash equivalent and
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marketable security balance. The Company plans to raise additional capital to fund its operations, to develop its product candidates and to develop its manufacturing capabilities. Management plans to finance the Company’s operations through the sale of equity securities, such as the Company’s May 2011 sale of common stock and warrants discussed above, debt arrangements or partnership or licensing collaborations, such as our October 2011 collaboration with Grupo Ferrer Internacional, S.A. (“Grupo Ferrer,” see Note 9). Such funding may not be available or may be on terms that are not favorable to the Company. The Company’s inability to raise capital as and when needed could have a negative impact on its financial condition and its ability to continue as a going concern. Based on the Company’s cash, cash equivalents and marketable securities balance at December 31, 2011, the receipt of the upfront payment from Grupo Ferrer in January 2012 (net of the $5 million payment to the former Symphony Allegro, Inc. stockholders, see Note 9), net proceeds of approximately $20.4 million from the recently completed underwritten public offering (see Note 15), the March 2012 amendment of the Ferrer Agreement (see Note 15) and the Company’s current expected cash usage, accounting for the February 2012 reductions in our workforce, the Company has sufficient capital resources to meet its anticipated cash needs, at our current cost levels, into the fourth quarter of 2012.
The accompanying financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Three levels of inputs, of which the first two are considered observable and the last unobservable, may be used to measure fair value which are the following:
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
| • | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| • | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
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The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and marketable securities) by major security type and contingent consideration liability measured at fair value on a recurring basis as of December 31, 2011 and 2010 (in thousands):
| December 31, 2011 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets |
||||||||||||||||
| Money market funds |
$ | 12,619 | $ | — | $ | — | $ | 12,619 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Available for sale debt securities |
||||||||||||||||
| Corporate debt securities |
$ | — | $ | 2,001 | $ | — | $ | 2,001 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total available for sale debt securities |
$ | — | $ | 2,001 | $ | — | $ | 2,001 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total assets |
$ | 12,619 | $ | 2,001 | $ | — | $ | 14,620 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liabilities |
||||||||||||||||
| Contingent consideration liability |
$ | — | $ | — | $ | 16,500 | $ | 16,500 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total liabilities |
$ | — | $ | — | $ | 16,500 | $ | 16,500 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2010 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets |
||||||||||||||||
| Money market funds |
$ | 12,750 | $ | — | $ | — | $ | 12,750 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Available for sale debt securities |
||||||||||||||||
| Corporate debt securities |
$ | — | $ | 12,997 | $ | — | $ | 12,997 | ||||||||
| Government-sponsored enterprises |
$ | — | $ | 14,781 | $ | — | $ | 14,781 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total available for sale debt securities |
$ | — | $ | 27,778 | $ | — | $ | 27,778 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total assets |
$ | 12,750 | $ | 27,778 | $ | — | $ | 40,528 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liabilities |
||||||||||||||||
| Contingent consideration liability |
$ | — | $ | — | $ | 12,500 | $ | 12,500 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total liabilities |
$ | — | $ | — | $ | 12,500 | $ | 12,500 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company’s available for sale debt securities are valued utilizing a multi-dimensional relational model. Inputs, listed in approximate order of priority for use when available, include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. There have been no transfers between Level 1 and Level 2 measurements during the year ended December 31, 2011, and there were no changes in the Company’s valuation technique.
Contingent consideration liability
In connection with the exercise of the Company’s option to purchase all of the outstanding equity of Allegro, the Company is obligated to make contingent cash payments to the former Allegro stockholders related to certain payments received by the Company from future partnering agreements pertaining to ADASUVE/AZ-104 (Staccato loxapine) or AZ-002 (Staccato alprazolam) (see Note 9). In order to estimate the fair value of the liability associated with the contingent cash payments, the Company prepared several cash flow scenarios for the three product candidates, ADASUVE, AZ-002 and AZ-104, that are subject to the contingent payment obligation. Each potential cash flow scenario consisted of assumptions of the range of estimated milestone and license payments potentially receivable from such partnerships and assumed royalties received from future product sales. Based on these estimates, the Company computed the estimated payments to be made to the former Allegro stockholders. Payments were assumed to terminate upon the expiration of the related patents.
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The projected cash flow assumptions for ADASUVE in the U.S. and Canada continue to be based on the terms of the agreements with Biovail Laboratories International SRL (“Biovail”) signed in February 2010 and multiple internal product sales forecasts, as the Company expects that any potential partnership agreement for ADASUVE in the U.S. and Canada will have similar terms to that of the Biovail agreements, despite these agreements being terminated in October 2010. The timing and extent of the projected cash flows for ADASUVE for the territories licensed to Grupo Ferrer are based on the Grupo Ferrer agreement (see Note 9). The timing and extent of the projected cash flows for the remaining territories for ADASUVE and worldwide for AZ-002 and AZ-104were based on internal estimates for potential milestones and multiple product royalty scenarios and are also consistent in structure to the Biovail agreements (see Note 9) as the Company expects future partnerships for these product candidates to have similar structures.
The Company then assigned a probability to each of the cash flow scenarios based on several factors, including: the product candidate’s stage of development, preclinical and clinical results, technological risk related to the successful development of the different drug candidates, estimated market size, market risk and potential partnership interest to determine a risk adjusted weighted average cash flow based on all of these scenarios. These probability and risk adjusted weighted average cash flows were then discounted utilizing the Company’s estimated weighted average cost of capital (“WACC”). The Company’s WACC considered the Company’s cash position, competition, risk of substitute products, and risk associated with the financing of the development projects. The Company determined the discount rate to be 18% and applied this rate to the probability adjusted cash flow scenarios.
This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s assumptions in measuring fair value.
The Company records any changes in the fair value of the contingent consideration liability in earnings in the period of the change. Certain events including, but not limited to, clinical trial results, U.S. Food and Drug Administration (“FDA”) approval or non-approval of the Company’s submissions, the timing and terms of any strategic partnership agreement, the commercial success of ADASUVE, AZ-104 or AZ-002 and the discount rate assumption could have a material impact on the fair value of the contingent consideration liability, and as a result, the Company’s results of operations and financial position.
In February 2010, Biovail paid the Company an upfront $40 million payment for the rights to commercialize ADASUVE in the United States and Canada (see Note 9). The Company in turn paid $7.5 million of the upfront payment to the former Allegro stockholders under the terms of the agreement to purchase all of the outstanding equity of Allegro. The Company’s collaboration with Biovail has been terminated.
During the year ended December 31, 2010, the Company reduced the fair value of the contingent consideration liability to reflect the reduction in the probability-weighted estimated cash flows from ADASUVE and the timing of receipt of such cash flows, due to (a) the Complete Response Letter (“CRL”) received from the FDA on October 8, 2010 regarding the Company’s New Drug Application (“NDA”) for its ADASUVE product candidate and (b) the termination of the Company’s agreements with Biovail (see Note 9). A CRL is issued by the FDA indicating that the NDA review cycle is complete and the application is not ready for approval in its present form. The Company resubmitted the NDA to the FDA in August 2011. This reduction in the liability resulted in a decrease in net loss per share of $0.08 for the year ended December 31, 2010.
During the year ended December 31, 2011, the Company modified the assumptions regarding the timing and probability of certain cash flows primarily to reflect the ADASUVE commercial partnership entered into with Grupo Ferrer in October 2011 (see Note 9). The changes in these assumptions and the effect of the passage of one year on the present value computation result in a $4,000,000 increase to the contingent consideration liability in the year ended December 31, 2011. The changes in these assumptions resulted in an increase to net loss per share of $0.06 for the year ended December 31, 2011.
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The following table represents a reconciliation of the change in the fair value measurement of the contingent consideration liability for the years ended December 31, 2011 and 2010 (in thousands).
| 2011 | 2010 | |||||||
| (In thousands) | ||||||||
| Beginning balance |
$ | 12,500 | $ | 24,838 | ||||
| Payments made |
— | (7,500 | ) | |||||
| Adjustments to fair value measurement |
4,000 | (4,838 | ) | |||||
|
|
|
|
|
|||||
| Ending balance |
$ | 16,500 | $ | 12,500 | ||||
|
|
|
|
|
|||||
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist of cash, cash equivalents and marketable securities and restricted cash to the extent of the amounts recorded on the balance sheets. The Company’s cash, cash equivalents, marketable securities and restricted cash are placed with high credit-quality U.S. financial institutions and issuers. The Company believes that its established guidelines for investment of its excess cash maintain liquidity through its policies on diversification and investment maturity.
Cash Equivalents and Marketable Securities
Management determines the appropriate classification of its investments at the time of purchase. These securities are recorded as either cash equivalents or marketable securities.
The Company considers all highly liquid investments with original maturities of three months or less from date of purchase to be cash equivalents. Cash equivalents consist of interest-bearing instruments including obligations of U.S. government agencies, high credit rating corporate borrowers and money market funds, which are carried at market value.
All other investments are classified as available-for-sale marketable securities. The Company views its available-for-sale investments as available for use in current operations. Accordingly, the Company has classified all investments as short-term marketable securities, even though the stated maturity date may be one year or more beyond the current balance sheet date. Marketable securities are carried at estimated fair value with unrealized gains or losses included in accumulated other comprehensive income (loss) in stockholders’ equity (deficit).
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest and other income (expense), net. Realized gains and losses, if any, are also included in interest and other income (expense), net. The cost of all securities sold is based on the specific-identification method. Interest and dividends are included in interest income.
The Company reviews its investments for other than temporary decreases in market value on a quarterly basis. To date the Company has not recorded any charges related to other-than-temporary impairments.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Property and equipment are depreciated using the straight-line method over the estimated life of the asset, generally three years for computer equipment and five years for manufacturing equipment and laboratory equipment and seven years for furniture. Leasehold improvements are amortized over the estimated useful life or the remaining lease term, whichever is shorter.
Restricted Cash
The Company must maintain a $400,000 letter of credit as security for performance under its facility lease agreement. The letter of credit is secured by a certificate of deposit for the same amount, which is classified as restricted cash, a non-current asset.
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Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. Through December 31, 2011, the Company has not recorded an impairment of a long-lived asset.
Revenue Recognition
The Company recognizes revenue in accordance with the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by Staff Accounting Bulletin No. 104, Revision of Topic 13.
Revenue has consisted primarily of amounts earned from collaboration agreements and under research grants with the National Institutes of Health. In determining the accounting for collaboration agreements the Company determines if the arrangement represents a single unit of accounting or includes multiple units of accounting. If the arrangement represents a single unit of accounting, the revenue recognition policy and the performance obligation period must be determined, if not already contractually defined, for the entire arrangement. If the arrangement represents separate units of accounting, a revenue recognition policy must be determined for each unit. Revenues for non-refundable upfront license fee payments, where the Company continues to have performance obligations, will be recognized as performance occurs and obligations are completed (see Note 9 for a description of the Company’s collaborations).
The Company’s federal government research grants provided for the reimbursement of qualified expenses for research and development as defined under the terms of each grant. Equipment purchased specifically for grant programs was recorded at cost and depreciated over the grant period. Revenue under grants was recognized when the related qualified research and development expenses were incurred up to the limit of the approval funding amounts. In 2010, the Company recorded $244,000 of grant revenues from the U.S. government’s Qualified Therapeutic Development Program.
In October 2009, the Financial Accounting Standards Board (“FASB”) published Accounting Standards Update (“ASU”) 2009-13, which amends the criteria to identify separate units of accounting within Subtopic 605-25, “Revenue Recognition-Multiple-Element Arrangements”. The revised guidance eliminates the residual method of allocation, and instead requires companies to use the relative selling price method when allocating revenue in a multiple deliverable arrangement. When applying the relative selling price method, the selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists, otherwise using third-party evidence of selling price. If neither vendor specific objective evidence nor third-party evidence of selling price exists for a deliverable, companies shall use their best estimate of the selling price for that deliverable when applying the relative selling price method. The Company applied ASU 2009-13 to multiple deliverable arrangements entered into, or materially modified, after January 1, 2011. The adoption of ASU 2009-13 did not have a material impact on the Company’s financial position, statement of operations or cash flows.
Research and Development
Research and development expenses include personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs and other consulting services. Research and development costs are expensed as incurred.
Clinical development costs are a significant component of research and development expenses. The Company has a history of contracting with third parties that perform various clinical trial activities on its behalf in the ongoing development of its product candidates. The financial terms of these contracts are subject to negotiations and may vary from contract to contract and may result in uneven payment flow. The Company accrues and expenses costs for clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with contract research organizations and clinical trial sites.
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Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
Comprehensive Income (Loss) Attributable to Alexza Common Stockholders
Comprehensive loss attributable to Alexza common stockholders is comprised of net loss, unrealized gains (losses) on marketable securities and comprehensive loss attributed to noncontrolling interest in Allegro, net of taxes. Total comprehensive loss attributable to Alexza common stockholders for the years ended December 31, 2011, 2010 and 2009 and the period from December 19, 2000 (Inception) to December 31, 2011 is as follows (in thousands):
| Period from December 19, 2000 (Inception) to |
||||||||||||||||
| 2011 | 2010 | 2009 | December 31, 2011 | |||||||||||||
| Net loss |
$ | (40,531 | ) | $ | (1,481 | ) | $ | (56,065 | ) | $ | (351,724 | ) | ||||
| Change in unrealized income (loss) on marketable securities, net of taxes |
$ | (2 | ) | $ | 3 | $ | (29 | ) | $ | — | ||||||
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| Comprehensive loss |
$ | (40,533 | ) | $ | (1,478 | ) | $ | (56,094 | ) | $ | (351,724 | ) | ||||
| Comprehensive loss attributable to noncontrolling interest in Symphony Allegro. Inc., net of taxes |
$ | — | $ | — | $ | 13,987 | $ | 45,089 | ||||||||
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| Comprehensive loss attributable to Alexza common stockholders |
$ | (40,533 | ) | $ | (1,478 | ) | $ | (42,107 | ) | $ | (306,635 | ) | ||||
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Share-Based Compensation
Compensation cost for employee share-based awards is based on the grant-date fair value and is recognized on a ratable basis over the requisite service periods of the awards, which are generally the vesting periods or, for performance-based options, the expected period during which the performance criteria is expected to be met. The Company issues employee share-based awards in the form of stock options and restricted stock units under the Company’s equity incentive plans and stock purchase rights under the Company’s employee stock purchase plan.
During the years ended December 31, 2011 and 2010, the Company did not record share-based compensation on certain performance based stock options and restricted stock units issued pursuant to the 2009-2010 Performance Based Incentive Program as the vesting of such items is not considered probable.
Stock Options, Stock Purchase Rights and Restricted Stock Units
During the years ended December 31, 2011, 2010 and 2009, the weighted average fair value of the employee stock options, restricted stock units and stock purchase rights were:
| 2011 | 2010 | 2009 | ||||||||||
| Stock Options |
$ | 1.06 | $ | 1.86 | $ | 1.71 | ||||||
| Restricted Stock Units |
1.33 | 2.54 | 2.19 | |||||||||
| Stock Purchase Rights |
0.82 | 1.97 | 2.81 | |||||||||
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The estimated grant date fair values of the stock options and stock purchase rights were calculated using the Black-Scholes valuation model, and the following assumptions:
| 2011 |
2010 |
2009 | ||||
| Stock Option Plans |
||||||
| Weighted-average expected term |
5.0 Years | 5.0 Years | 5.0 Years | |||
| Expected volatility |
90% | 84% | 86% | |||
| Risk-free interest rate |
1.52% | 2.00% | 1.80% | |||
| Dividend yield |
0% | 0% | 0% | |||
| Employee Stock Purchase Plan |
||||||
| Weighted-average expected term |
1.45 Years | 1.93 Years | 1.90 Years | |||
| Expected volatility |
87% | 79% | 74% | |||
| Risk-free interest rate |
0.59% | 1.60% | 2.60% | |||
| Dividend yield |
0% | 0% | 0% |
Weighted-Average Expected Term The Company determines the expected term of stock options granted through a combination of the Company’s own historical exercise experience and expected future exercise activities and post-vesting termination behavior. Under the Employee Stock Purchase Plan, the expected term of employee stock purchase plan shares is the weighted average of the purchase periods under each offering period.
Volatility The Company utilizes its historical volatility to determine future volatility for the purpose of determining share-based payments for all options granted.
Risk-Free Interest Rate The Company utilizes U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the options or purchase rights on the respective grant dates to determine its risk-free interest rate.
Dividend Yield The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
Forfeiture Rate The Company uses historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.
Restricted Stock Units The estimated fair value of restricted stock unit awards is calculated based on the market price of Alexza’s common stock on the date of grant, reduced by the present value of dividends expected to be paid on Alexza common stock prior to vesting of the restricted stock unit. The Company’s estimate assumes no dividends will be paid prior to the vesting of the restricted stock unit.
As of December 31, 2011, there was $5,821,000, $48,000 and $64,000 total unrecognized compensation costs related to non-vested stock option awards, non-vested restricted stock units and stock purchase rights, respectively, which are expected to be recognized over a weighted average period of 1.67 years, 0.5 years and 0.3 years, respectively.
Recently Issued Accounting Standards
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” ASU 2011-15 requires the presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company will adopt these disclosure requirements in the first quarter of 2012.
On May 12, 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,”. ASU 2011-04 is the result of joint efforts by the FASB and the International Accounting Standards Board (“IASB”) to develop a single, converged fair
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value framework. There are few differences between ASU 2011-04 and its international counterpart, IFRS 13. ASU 2011-04 is largely consistent with existing fair value measurement principles in U.S. GAAP; however it expands ASC 820’s existing disclosure requirements for fair value measurements and makes other amendments. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The Company does not expect the provisions of ASU 2011-04 to have a material effect on its financial position, results of operations or cash flows
4. Net Loss per Share Attributable to Alexza Common Stockholders
Basic and diluted net loss per share attributable to Alexza common stockholders is calculated by dividing the net loss attributable to Alexza common stockholders by the weighted-average number of common shares outstanding for the period less weighted average shares subject to repurchase, of which there were none in 2011, 2010 or 2009. Outstanding stock options, warrants, and unvested restricted stock units are not included in the net loss per share attributable to Alexza common stockholders calculation for the years ended December 31, 2011, 2010 and 2009 as the inclusion of such shares would have had an anti-dilutive effect.
Potentially anti-dilutive securities include the following (in thousands):
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Outstanding stock options |
5,629 | 4,559 | 4,570 | |||||||||
| Unvested restricted stock units |
1,333 | 1,168 | 706 | |||||||||
| Warrants to purchase common stock |
18,951 | 14,290 | 5,091 | |||||||||
5. Cash Equivalents and Marketable Securities
The following table outlines the amortized cost, fair value and unrealized gain/(loss) for the Company’s financial assets by major security type as of December 31, 2011 and 2010 (in thousands):
| December 31, 2011 |
Amortized Cost |
Fair Value | Unrealized Gain/ (Loss) |
|||||||||
| Money market funds |
$ | 12,619 | $ | 12,619 | $ | — | ||||||
| Corporate debt securities |
2,001 | 2,001 | — | |||||||||
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| Total |
$ | 14,620 | $ | 14,620 | $ | — | ||||||
| Less amounts classified as cash equivalents |
$ | (12,619 | ) | $ | (12,619 | ) | $ | — | ||||
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| Total investments |
$ | 2,001 | $ | 2,001 | $ | — | ||||||
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| December 31, 2010 |
Cost | Fair Value | Gain/(Loss) | |||||||||
| Money market funds |
$ | 12,750 | $ | 12,750 | $ | — | ||||||
| Corporate debt securities |
12,994 | 12,997 | 3 | |||||||||
| Government-sponsored enterprises |
14,782 | 14,781 | (1 | ) | ||||||||
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| Total |
$ | 40,526 | $ | 40,528 | $ | 2 | ||||||
| Less amounts classified as cash equivalents |
$ | (12,750 | ) | $ | (12,750 | ) | $ | — | ||||
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| Total investments |
$ | 27,776 | $ | 27,778 | $ | 2 | ||||||
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As of December 31, 2011, all of the Company’s marketable securities have a maturity of less than one year.
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6. Property and Equipment
Property and equipment consisted of the following:
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| (In thousands) | ||||||||
| Lab equipment |
$ | 10,567 | $ | 10,862 | ||||
| Manufacturing equipment |
8,797 | 8,606 | ||||||
| Computer equipment and software |
4,955 | 4,798 | ||||||
| Furniture |
959 | 1,025 | ||||||
| Leasehold improvements |
19,800 | 19,759 | ||||||
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|||||
| 45,078 | 45,050 | |||||||
| Less: accumulated depreciation |
(24,653 | ) | (20,689 | ) | ||||
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| $ | 20,425 | $ | 24,361 | |||||
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7. Other Accrued Liabilities
Other accrued liabilities consisted of the following:
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| (In thousands) | ||||||||
| Accrued compensation |
$ | 1,393 | $ | 1,557 | ||||
| Accrued professional fees |
639 | 798 | ||||||
| Other |
840 | 803 | ||||||
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| $ | 2,872 | $ | 3,158 | |||||
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8. Commitments
Hercules Technology Growth Capital
In May 2010, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Hercules Technology Growth Capital, Inc. (“Hercules”). Under the terms of the Loan Agreement, the Company borrowed $15,000,000 at an interest rate of the higher of (i) 10.75% or (ii) 6.5% plus the prime rate as reported in the Wall Street Journal, with a maximum interest rate of 14% and issued to Hercules a secured term promissory note evidencing the loan. The Company made interest only payments through February 2011, following which the loan is being repaid in 33 equal monthly installments. The Company believes the amortized book value of $10,113,000 at December 31, 2011 represents the approximate fair value of the outstanding debt as of such date.
The Loan Agreement limits both the seniority and amount of future debt the Company may incur. The Company may be required to prepay the loan in the event of a change in control. In conjunction with the loan, the Company issued to Hercules a five-year warrant to purchase 376,394 shares of the Company’s common stock at a price of $2.69 per share. The warrant is immediately exercisable and expires in May 2015. The Company estimated the fair value of this warrant as of the issuance date to be $921,000, which was recorded as a debt discount to the loan and consequently a reduction to the carrying value of the loan. The fair value of the warrant was calculated using the Black-Scholes option valuation model, and was based on the contractual term of the warrant of five years, a risk-free interest rate of 2.31%, expected volatility of 84% and 0% expected dividend yield. The Company also recorded fees paid to Hercules as a debt discount, which further reduced the carrying value of the loan. The debt discount is being amortized to interest expense.
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Autoliv ASP, Inc.
In June 2010, in return for transfer to the Company of all right, title and interest in a production line for the commercial manufacture of chemical heat packages completed or to be completed by Autoliv ASP, Inc. (“Autoliv”) on behalf of the Company, the Company paid Autoliv $4 million in cash and issued Autoliv a $4 million unsecured promissory note. In February 2011, the Company entered into an agreement to amend the terms of the unsecured promissory note. Under the terms of that amendment, the original $4 million note was cancelled and a new unsecured promissory note was issued with a reduced principal amount of $2.8 million (the “New Note”, see the further discussion under the heading “Manufacturing and Supply Agreement” in this Note 8). The $1.2 million reduction in the note resulted in a corresponding decrease of the deposit on the second cell, which was classified as an Other Asset at December 31, 2010.
Beginning on January 1, 2011 the New Note bears interest at 8% per annum and is being paid in 48 consecutive and equal installments of approximately $68,000. The Company believes the amortized book value of $2,167,000 at December 31, 2011 represents the approximate fair value of the outstanding debt as of such date.
Future scheduled principal payments under the term loan agreements as of December 31, 2011 are as follows (in thousands):
| 2012 |
$ | 6,111 | ||
| 2013 |
5,773 | |||
| 2014 |
781 | |||
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| Total |
$ | 12,665 | ||
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Operating Leases
The Company leases two buildings, at 2023 Stierlin Court and 2091 Stierlin Court, Mountain View, California 94043, referred to herein as the “2023 Building” and the “2091 Building”, respectively, which the Company began to occupy in the fourth quarter of 2007. The Company recognizes rental expense on the facilities on a straight line basis over the initial term of the lease. Differences between the straight line rent expense and rent payments are classified as deferred rent liability on the balance sheet. The lease for the 2091 Building expires on March 31, 2018, and the Company has two options to extend the lease for five years each. In February 2012, effective March 30, 2012, the Company terminated the lease for the 2023 Building, totaling 41,290 square feet, and concurrently cancelled the two subleases associated with the 2023 Building, detailed below, consisting of 19,334 and 20,956 square feet, respectively.
The Mountain View lease, as amended, included $15,964,000 of tenant improvement reimbursements from the landlord. The Company has recorded all tenant improvements as additions to property and equipment and is amortizing the improvements over the shorter of the estimated useful life of the improvement or the remaining life of the lease. The reimbursements received from the landlord are included in deferred rent liability and amortized over the life of the lease as a contra-expense.
In May 2008, the Company entered into an agreement to sublease a portion of the 2023 Building. The sublease agreement, as amended on April 4, 2011, was terminated by the Company effective July 4, 2011. The Company subsequently leased this space to another party for the period from July 15, 2011 through March 31, 2012.
In January 2010, the Company entered into an agreement to sublease an additional portion of the 2023 Building from March 1, 2010 through February 28, 2014. In January 2010, the Company recorded a charge of $1,144,000 to record the difference between the lease payments made by the Company and the cash receipts to be generated from the sublease over the life of the sublease and is amortizing this amount to rent expense over the term of the lease as a contra-expense.
In August 2010, the Company entered into an agreement to sublease approximately 2,500 square feet of the 2091 Building to Cypress Bioscience, Inc. (“Cypress”) and to provide certain administrative, facility and information technology support for a period of 12 months. The lease has converted to a month-to-month basis.
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The Company’s recurring losses from operations and its need for additional capital raise substantial doubt about its ability to continue as a going concern, and as a result, the Company has classified all of its financing obligations as current. If this substantial doubt is removed in future periods, the Company will reclassify the financing obligations between current and non-current. Future minimum lease payments and sublease receipts under non-cancelable operating leases, at December 31, 2011 were as follows (in thousands):
| Lease Payments |
Sublease Receipts |
Net Payments |
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| 2012 |
$ | 5,322 | $ | (1,090 | ) | $ | 4,232 | |||||
| 2013 |
4,979 | (615 | ) | 4,364 | ||||||||
| 2014 |
4,983 | (75 | ) | 4,908 | ||||||||
| 2015 |
4,723 | — | 4,723 | |||||||||
| 2016 |
4,858 | — | 4,858 | |||||||||
| Thereafter |
6,277 | — | 6,277 | |||||||||
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| Total minimum payments |
$ | 31,142 | $ | (1,780 | ) | $ | 29,362 | |||||
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Rental expense, net of sublease income, was $2,000,000, $4,169,000, $3,050,000 and $25,140,000, for the years ended December 31, 2011, 2010, 2009 and, for the period from December 19, 2000 (inception) to December 31, 2011, respectively. Rental income from the sublease agreements was $1,584,000, $1,037,000, $656,000, and $3,832,000 for the years ended December 31, 2011, 2010, 2009 and, for the period from December 19, 2000 (inception) to December 31, 2011, respectively.
In February 2012, effective March 30, 2012, the Company terminated the lease for one of its buildings totaling 41,290 square feet and concurrently cancelled the two subleases associated with this building of 19,334 and 20,956 square feet, respectively.
Manufacturing and Supply Agreement
On November 2, 2007, the Company entered into a Manufacturing and Supply Agreement (the “Manufacture Agreement”) with Autoliv relating to the commercial supply of chemical heat packages that can be incorporated into the Company’s Staccato device (the “Chemical Heat Packages”). Autoliv had developed these Chemical Heat Packages for the Company pursuant to a development agreement between Autoliv and the Company. Under the terms of the Manufacture Agreement, Autoliv agreed to develop a manufacturing line capable of producing 10 million Chemical Heat Packages a year.
In June 2010 and February 2011, the Company entered into agreements to amend the terms of the Manufacture Agreement (together the “Amendments”). Under the terms of the first of the Amendments, the Company paid Autoliv $4 million and issued Autoliv a $4 million unsecured promissory note in return for a production line for the commercial manufacture of Chemical Heat Packages. Each production line is comprised of two identical and self-sustaining “cells,” and the first such cell was completed, installed and qualified in connection with such Amendment. Under the terms of the Second Amendment, the original $4 million note was cancelled and the New Note was issued with a reduced principal amount of $2.8 million, and production on the second cell ceased. In the event that the Company requests completion of the second cell of the first production line for the commercial manufacture of Chemical Heat Packages, Autoliv will complete, install and fully qualify such second cell for a cost to the Company of $1.2 million and Autoliv will transfer ownership of such cell to the Company upon the payment in full of such $1.2 million and the New Note. In the year ended December 31, 2010, due to the uncertainty of the building of the second cell of the production line, the Company expensed $2.8 million dollars associated with the build of the second cell.
The provisions of the Amendments supersede (a) the Company’s obligation set forth in the Manufacture Agreement to reimburse Autoliv for certain expenses related to the equipment and tooling used in production and testing of the Chemical Heat Packages in an amount of up to $12 million upon the earliest of December 31, 2011, 60 days after the termination of the Manufacture Agreement or 60 days after approval by the FDA of an NDA filed by the Company, and (b) the obligation of Autoliv to transfer possession of such equipment and tooling.
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Subject to certain exceptions, Autoliv has agreed to manufacture, assemble and test the Chemical Heat Packages solely for the Company in conformance with the Company’s specifications. The Company will pay Autoliv a specified purchase price, which varies based on annual quantities ordered by the Company, per Chemical Heat Package delivered. The initial term of the Manufacture Agreement expires on December 31, 2012, at which time the Manufacture Agreement will automatically renew for successive five-year renewal terms unless the Company or Autoliv notifies the other party no less than 36 months prior to the end of the initial term or the then-current renewal term that such party wishes to terminate the Manufacture Agreement. The Manufacture Agreement provides that during the term of the Manufacture Agreement, Autoliv will be the Company’s exclusive supplier of the Chemical Heat Packages. In addition, the Manufacture Agreement grants Autoliv the right to negotiate for the right to supply commercially any second generation Chemical Heat Package (a “Second Generation Product”) and provides that the Company will pay Autoliv certain royalty payments if the Company manufactures Second Generation Products itself or if the Company obtains Second Generation Products from a third party manufacturer. Upon the termination of the Manufacture Agreement, the Company will be required, on an ongoing basis, to pay Autoliv certain royalty payments related to the manufacture of the Chemical Heat Packages by the Company or third party manufacturers.
9. License Agreements
Symphony Allegro, Inc.
On December 1, 2006, the Company entered into a series of related agreements with Symphony Capital LLC (“Symphony Capital”), Symphony Allegro Holdings LLC (“Holdings”) and Allegro, providing for the financing of the clinical development of its AZ-002, Staccato alprazolam, and ADASUVE/AZ-104, Staccato loxapine, product candidates (the “Programs”). Symphony Capital and other investors (collectively, the “Allegro Investors”) invested $50,000,000 in Holdings, which then invested the $50,000,000 in Allegro. Pursuant to the agreements, Allegro agreed to invest up to the full $50,000,000 to fund the clinical development of the Programs, and the Company licensed to Allegro certain intellectual property rights related to the Programs.
The Company issued to Holdings five-year warrants to purchase 2,000,000 shares of the Company’s common stock at $9.91 per share. In consideration for the warrants, the Company received an exclusive purchase option (the “Purchase Option”) that gave the Company the right, but not the obligation, to acquire all, but not less than all, of the outstanding equity of Allegro, thereby allowing the Company to reacquire all of the Programs.
In June 2009, the Company entered into an agreement with Holdings to amend the provisions of and to exercise the Purchase Option. The Company completed the acquisition of all of the outstanding equity of Allegro pursuant to the amended Purchase Option on August 26, 2009. In exchange for all of the outstanding equity of Allegro, the Company, in lieu of the consideration described above: (i) issued to the Allegro Investors 10,000,000 shares of common stock (ii) issued to the Allegro Investors warrants to purchase 5,000,000 shares of common stock at an exercise price of $2.26 per share that are cash or net exercisable for a period of 5 years and canceled the warrants to purchase 2,000,000 shares of common stock held by the Allegro Investors and (iii) will pay Holdings certain percentages of cash payments that may be generated from future partnering transactions for the Programs. Pursuant to a registration rights agreement with Holdings, the Company filed with the SEC a registration statement for these shares of common stock and the shares of common stock underlying the warrants. The SEC declared such registration statement effective on October 16, 2009 and, pursuant to the registration rights agreement with Holdings, the Company has an obligation to take certain actions as are necessary keep such registration statement effective.
Prior to the completion of the acquisition of all of the outstanding equity of Allegro pursuant to the amended Purchase Option, the Company had concluded that Allegro was by design a variable interest entity. The noncontrolling interest in Allegro represented an equity investment by the Allegro Investors in Allegro of $50,000,000 reduced by $10,708,000 for the value of the Purchase Option, and by $2,829,000 for a structuring fee and related expenses that the Company paid to Symphony Capital in connection with the closing of the Allegro transaction, resulting in the recording of a net noncontrolling interest of $36,463,000 on the effective date. The Company charged the losses incurred by Allegro, prior to August 26, 2009, to the noncontrolling interest in the determination of the net loss attributable to the Alexza common stockholders in the consolidated statements of operations, and the Company also reduced the noncontrolling interest in the consolidated balance
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sheets by Allegro’s losses. For the year ended December 31, 2009 and the period from December 19, 2000 (inception) to December 31, 2009, the net losses of Allegro charged to the noncontrolling interest were $13,987,000 and $45,089,000 respectively.
Upon closing of the acquisition of all of the outstanding equity of Allegro pursuant to the amended Purchase Option, the Company recorded the acquisition as a capital transaction that did not affect its net loss. However, because the acquisition was accounted for as a capital transaction, the excess consideration transferred over the carrying value of the noncontrolling interest in Allegro was treated as a deemed dividend for purposes of reporting net loss per share, increasing net loss per share attributable to Alexza stockholders by $61,566,000 during the year ended December 31, 2009. In addition, upon the closing, the Company ceased to charge net losses of Allegro against the noncontrolling interest.
The following table outlines the estimated fair value of consideration transferred by Alexza and the computation of the excess consideration transferred over the carrying value of the noncontrolling interest in Allegro at the acquisition date (in thousands):
| Description |
Fair Value | |||
| Fair value of consideration transferred: |
||||
| 10,000,000 shares of Alexza common stock |
$ | 28,000 | ||
| Warrant consideration, net |
8,085 | |||
| Fair value of contingent cash payments to Allegro stockholders |
16,855 | |||
|
|
|
|||
| Total consideration transferred |
52,940 | |||
| Add: Deficit of noncontrolling interest in Allegro |
8,626 | |||
|
|
|
|||
| Excess consideration transferred over the carrying value of the noncontrolling interest in Allegro |
$ | 61,566 | ||
|
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|
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The fair value of the Alexza common stock of $2.80 was based on the closing sales price of the Company’s common stock on the NASDAQ Global Market on August 26, 2009, which is the date the transaction was completed.
The estimated fair values of the warrant consideration were calculated using the Black-Scholes valuation model, and the following assumptions:
| Warrant Issued |
Warrant Cancelled | |||
| Number of Shares |
5,000,000 | 2,000,000 | ||
| Expected term |
5.0 years | 2.3 years | ||
| Expected volatility |
89% | 117% | ||
| Risk-free interest rate |
2.46% | 1.06% | ||
| Dividend yield |
0% | 0% |
Endo Pharmaceuticals, Inc.
On December 27, 2007, the Company entered into a license, development and supply agreement (the “license agreement”), with Endo Pharmaceuticals, Inc. (“Endo”) for AZ-003 (Staccato fentanyl) and the fentanyl class of molecules for North America. Under the terms of the license agreement, Endo paid the Company a $10,000,000 non-refundable upfront fee and Endo was obligated to pay potential additional milestone payments of up to $40,000,000 upon achievement of predetermined regulatory and clinical milestones. Endo was also obligated to pay royalties to the Company on net sales of the product, from which the Company would be required to pay for the cost of goods for the manufacture of the commercial version of the product. Under the terms of the license agreement, the Company had primary responsibility for the development and costs of the Staccato Electronic Multiple Dose device and the exclusive right to manufacture the product for clinical development and commercial supply. Endo had the responsibility for future pre-clinical, clinical and regulatory development, and, if AZ-003 was approved for marketing, for commercializing the product in North America.
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The Company recorded the $10,000,000 upfront fee it received from Endo in January 2008 as deferred revenue. The Company was unable to allocate a fair value to the each of the deliverables outlined in the agreement and therefore accounted for the deliverables as a single unit of accounting. The Company began to recognize the $10,000,000 upfront payment as revenue in the third quarter of 2008 over the estimated performance period of six years, resulting in revenues of $486,000 in 2008.
In January 2009, the Company and Endo mutually agreed to terminate the license agreement, with all rights to AZ-003 reverting back to the Company. The Company’s obligations under the license agreement were fulfilled upon the termination of the agreement, and the Company recognized the remaining deferred revenue of $9,514,000 in 2009.
Biovail Laboratories International SRL
In February 2010, the Company entered into a collaboration and license agreement and a manufacture and supply agreement, (together the “collaboration”), with Biovail, for the commercialization of ADASUVE for the treatment of psychiatric and/or neurological indications and the symptoms associated with these indications, including the initial indication for the rapid treatment of agitation in schizophrenia and bipolar disorder patients. On October 18, 2010, Biovail notified the Company of its intention to terminate the collaboration. Upon the termination, the Company reacquired the U.S. and Canadian rights to its ADASUVE product candidate licensed to Biovail pursuant to the collaboration. Neither the Company nor Biovail incurred any early termination penalties in connection with the termination of the collaboration. Under the terms of the collaboration, Biovail paid the Company a non-refundable upfront fee of $40 million that was recognized as revenue in the year ended December 31, 2010.
Cypress Bioscience, Inc.
On August 25, 2010, the Company entered into a license and development agreement (the “Cypress Agreement”) with Cypress for Staccato nicotine. According to the terms of the Cypress Agreement, Cypress paid the Company a non-refundable upfront payment of $5 million to acquire the worldwide license for the Staccato nicotine technology.
Following the completion of certain preclinical and clinical milestones relating to the Staccato nicotine technology, if Cypress elects to continue the development of Staccato nicotine, Cypress will be obligated to pay the Company an additional technology transfer payment of $1 million. The Company has a carried interest of 50% prior to the technology transfer payment and 10% after the completion of certain development activities and receipt of the technology transfer payment, subject to adjustment in certain circumstances, in the net proceeds of any sale or license by Cypress of the Staccato nicotine assets and the carried interest will be subject to put and call rights in certain circumstances.
Cypress has the responsibility for preclinical, clinical and regulatory aspects of the development of Staccato nicotine, along with the commercialization of the product. Cypress paid the Company a total of $3.9 million in research and development funding for the Company’s efforts to execute a development plan culminating with the delivery of clinical trial materials for a Phase 1 study with Staccato nicotine.
Additionally, Cypress and the Company entered into an agreement to sublease approximately 2,500 square feet of the Company’s premises and to provide certain administrative, facility and information technology support for a period of 12 months for $11,000 per month. Beginning in September 2011, the space became leased on a month-to-month basis.
For revenue recognition purposes, the Company viewed the Cypress Agreement as a multiple element arrangement. Multiple element arrangements are analyzed to determine whether the various performance obligations, or elements, can be separated or whether they must be accounted for as a single unit of accounting. The Company evaluated whether the delivered elements under the arrangement have value on a stand-alone basis and whether objective and reliable evidence of fair value of the undelivered items exist. Deliverables that do not meet these criteria are not evaluated separately for the purpose of revenue recognition. For a single unit of accounting, payments received are recognized in a manner consistent with the final deliverable. The Company was unable to allocate a fair value to the each of the deliverables outlined in the agreement and therefore
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accounted for the deliverables as a single unit of accounting. The Company has begun to deliver all elements of the arrangement and is recognizing revenue ratably over the estimated performance period of the agreement. Amounts received prior to amounts earned as revenues are classified as deferred revenues in the balance sheet. In the year ended December 31, 2011 and 2010, the Company recognized $5,035,000 and $2,632,000 of revenue under the Cypress Agreement, respectively, and at December 31, 2011 had deferred revenues of $1,259,000 as a current liability related to the Cypress Agreement.
Grupo Ferrer Internacional, S.A.
On October 5, 2011, the Company and Grupo Ferrer entered into a Collaboration, License and Supply Agreement (the “Ferrer Agreement”) to commercialize ADASUVE in Europe, Latin America, Russia and the Commonwealth of Independent States countries (the “Ferrer Territories”). Under the terms of the Ferrer Agreement, the Company received an upfront cash payment of $10 million in January 2012, of which $5 million was paid to the former Allegro stockholders (see above in this Note 9), and the Company is eligible to receive additional milestone payments, contingent on individual country commercial sales initiation and cumulative net sales targets. The Company will be responsible for filing and obtaining approval of the ADASUVE Marketing Authorization Application (“MAA”) submitted to the European Medicines Agency for an opinion regarding the potential approval of ADASUVE and subsequent decision by the European Commission. Grupo Ferrer will be responsible for satisfaction of all other regulatory and pricing requirements to market and sell ADASUVE in the Ferrer Territories. Grupo Ferrer will have the exclusive rights to commercialize the product in the Ferrer Territories. The Company will supply ADASUVE to Grupo Ferrer for all of its commercial sales, and will receive a specified per-unit transfer price paid in Euros. Either party may terminate the Ferrer Agreement for the other party’s uncured material breach or bankruptcy. The Ferrer Agreement continues in effect on a country-by-country basis until the later of the last to expire patent covering ADASUVE in such country or 12 years after first commercial sale. The Ferrer Agreement is subject to earlier termination in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy or insolvency of either party.
The Company recognized revenue related to the Ferrer Agreement under the guidance of ASC 605-25 and ASU 2009-13 (see Note 3). The Company evaluated whether the delivered elements under the arrangement have value on a stand-alone basis and whether objective and reliable evidence of fair value of the undelivered items exist. Deliverables that do no meet these criteria are not evaluated separately for the purpose of revenue recognition. For a single unit of accounting, payments received are recognized in a manner consistent with the final deliverable. The Company determined that the license and the development and regulatory services are a single unit of accounting as the licenses were determined to not have stand-alone value. The Company has begun to deliver all elements of the arrangement and is recognizing the $10 million upfront payment as revenue ratably over the estimated performance period of the agreement of four years.
During the year ended December 31, 2011, the Company recognized $625,000 in revenues and at December 31, 2011 had deferred revenue of $9,375,000 related to the Ferrer Agreement.
10. Warrants
In March 2002, in connection with an equipment financing agreement, the Company issued immediately exercisable and fully vested warrants to purchase 21,429 shares of Series B preferred stock at a per share price of $1.40. The warrants expire on April 8, 2013. The Company recorded a deferred financing cost of $27,000 related to the issuance of these warrants. The Company valued these warrants using the Black-Scholes valuation model, assuming an exercise price and fair value of $1.40, an expected volatility of 100%, an expected life of 10 years, an expected dividend yield of 0%, and a risk-free interest rate of 4.61%. The estimated fair value of the warrants is recorded as debt discount. This amount was amortized to interest expense over the commitment term of the equipment financing agreement. In 2006, the warrants were converted into warrants to purchase 4,116 shares of common stock at a price of $7.29 per share. As of December 31, 2011, these warrants remained outstanding and exercisable.
In January and September 2003, in connection with the modifications of an equipment financing agreement, the Company issued immediately exercisable and fully vested warrants to purchase 24,058 and 19,247 shares of
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Series C preferred stock, respectively, at a per share price of $1.56. The warrants expire on April 8, 2013. The Company valued these warrants using the Black-Scholes valuation model, assuming an exercise price and fair value of $1.56, an expected volatility of 100%, an expected life of 10 years, an expected dividend yield of 0%, and risk-free interest rate of 4.05% and 4.45%, respectively. The estimated fair values of the warrants issued in January and September of $35,000 and $27,000, respectively, were recorded as debt discount and were amortized to interest expense over the remaining commitment term of the financing agreement. In 2006, these warrants were converted into warrants to purchase 4,852 shares and 3,882 shares of common stock, respectively, both at a price of $7.74 shares. As of December 31, 2011, both of these warrants remained outstanding and exercisable.
In March 2004, in connection with the modifications of an equipment financing agreement, the Company issued immediately exercisable and fully vested warrants to purchase 14,232 shares of Series C preferred stock at a per share price of $1.56. The warrants expire on April 8, 2013. The Company valued these warrants using the Black-Scholes valuation model, assuming an exercise price and fair value of $1.56, an expected volatility of 100%, an expected life of 10 years, an expected dividend yield of 0%, and risk-free interest rate of 4.35%. The estimated fair value of $20,000 was recorded as debt discount and amortized to interest expense over the remaining commitment term of the financing agreement. In 2006, these warrants were converted into a warrant to purchase 2,870 shares of common stock at a price of $7.74. As of December 31, 2011, these warrants remained outstanding and exercisable.
In December 2006, in connection with the Allegro transaction (see Note 9), the Company issued to Holdings a five-year warrant to purchase 2,000,000 shares of the Company’s common stock at $9.91 per share. The warrants issued upon closing were assigned a value of $10.7 million in accordance with the Black-Scholes option valuation methodology assuming an exercise price of $9.91, an expected volatility of 80%, an expected life of 5 years, an expected dividend yield of 0% and risk-free interest rate of 4.45%. This fair value has been recorded as a reduction to the noncontrolling interest in Allegro. In August 2009, this warrant was cancelled in conjunction with the Company’s purchase of Allegro.
In March 2008, in connection with the registered direct equity issuance to Bio*One described in Note 1, the Company issued a warrant to Bio*One to purchase up to 375,000 of additional shares of Alexza common stock at a purchase price per share of $8.00. As outlined in the agreement, the warrant was subject to the same price adjustment as the common stock sale, and effective January 1, 2009 the warrant was adjusted to purchase 415,522 shares at a purchase price of $7.22 per share. The Company committed to initiate and maintain manufacturing operations in Singapore, and the warrant was to become exercisable only if the Company terminates operations in Singapore or does not achieve certain performance milestones. The warrant has a maximum term of 5 years. Net proceeds from the sale of the stock and warrant were approximately $9.84 million after deducting offering expenses. In December 2008, the Company did not meet its defined performance milestone, and as a result the warrant became fully exercisable. At December 31, 2011, this warrant remained outstanding and exercisable.
In August 2009, in connection with the acquisition of Allegro (See Note 9) the Company issued five year warrants to the Allegro Investors to purchase 5,000,000 shares of Alexza common stock at a price per share of $2.26. At December 31, 2011, the warrants remained outstanding and exercisable.
In October 2009, in conjunction with a private equity issuance (see Note 1), the Company issued seven year warrants to purchase an aggregate of 7,296,312 shares of its common stock with an exercise price per share of $2.77. The warrants are cash or net exercisable for a period of seven years from October 5, 2009 and have an exercise price of $2.77 per share. The Company granted to the investors certain registration rights related to the shares of common stock underlying the warrants. The Company filed with the SEC a registration statement covering the resale of these shares, and the SEC declared such registration statement effective on October 27, 2009. The Company also agreed to other customary obligations regarding registration, including indemnification and maintenance of the registration statement. At December 31, 2011, these warrants remained outstanding and exercisable.
In May 2010, in conjunction with the Loan Agreement with Hercules, the Company issued to Hercules a five-year warrant to purchase 376,394 shares of the Company’s common stock at a price of $2.69 per share. The warrant expires in May 2015. At December 31, 2011, this warrant remained outstanding and exercisable.
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In August 2010, the Company issued an aggregate of 6,685,183 shares of its common stock and warrants to purchase up to an additional 3,342,589 shares of its common stock in a registered direct offering. These securities were sold as units with each unit consisting of (i) one share of common stock and (ii) a warrant to purchase 0.5 of a share of common stock, at a purchase price of $2.70 per unit. The warrants are exercisable at $3.30 per share and expire five years after August 2010. At December 31, 2011, these warrants remained outstanding and exercisable.
In May 2011, the Company issued an aggregate of 11,927,034 shares of its common stock and warrants to purchase up to an additional 4,174,457 shares of its common stock in a registered direct offering. The warrants are exercisable at $1.755 per share and will expire on May 6, 2016. At December 31, 2011, these warrants remained outstanding and exercisable.
11. Equity Incentive Plans
2005 Equity Incentive Plan
In December 2005, the Company’s Board of Directors adopted the 2005 Equity Incentive Plan (the “2005 Plan”) and authorized for issuance thereunder 1,088,785 shares of common stock. The 2005 Plan became effective upon the closing of the Company’s initial public offering on March 8, 2006. The 2005 Plan is an amendment and restatement of the Company’s previous stock option plans.
Stock options issued under the 2005 Plan generally vest over 4 years, vesting is generally based on service time, and have a maximum contractual term of 10 years. Restricted stock units granted to employees under the 2005 Plan generally vest over a four-year period from the grant date or upon completion of certain performance milestones. Restricted stock units granted to non-employee directors, which are granted in lieu of paying director fees in cash, generally vest one year after the date of grant. Prior to vesting, restricted stock units do not have dividend equivalent rights, do not have voting rights and the shares underlying the restricted units are not considered issued and outstanding. Shares are issued on the date the restricted stock units vest.
The 2005 Plan provides for annual reserve increases on the first day of each fiscal year commencing on January 1, 2007 and ending on January 1, 2015. The annual reserve increases will be equal to the lesser of (i) 2% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, or (ii) 1,000,000 shares of common stock. The Company’s Board of Directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased prior to the last day of any calendar year.
In May 2008, the Company’s stockholders approved an amendment to the plan to increase the number of shares of the Company’s stock reserved for issuance under the 2005 Plan by an additional 1,500,000 shares. In July 2011, following stockholder approval, the 2005 Plan was amended to increase the shares of common stock reserved for issuance pursuant to the 2005 Plan by 7,500,000 shares of common stock as well as to increase the number of shares that can be issued as incentive stock options pursuant to the 2005 Plan.
In July 2011, following stockholder approval, the 2005 Plan was amended to increase the shares of common stock reserved for issuance pursuant to the 2005 Plan by 7,500,000 shares of common stock as well as to increase the number of shares that can be issued as incentive stock options pursuant to the 2005 Plan.
2005 Non-Employee Directors’ Stock Option Plan
In December 2005, the Company’s Board of Directors adopted the 2005 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”) and authorized for issuance thereunder 250,000 shares of common stock. The Directors’ Plan provides for the automatic grant of nonstatutory stock options to purchase shares of common stock to the Company’s non-employee directors, which vest over four years and have a term of 10 years. The Directors’ Plan provides for an annual reserve increase to be added on the first day of each fiscal year, commencing on January 1, 2007 and ending on January 1, 2015. The annual reserve increases will be equal to the number of shares subject to options granted during the preceding fiscal year less the number of shares that revert back to the share reserve during the preceding fiscal year. The Company’s Board of Directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased prior to the last day of any calendar year.
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2011 Employee Stock Option Exchange Program
On January 21, 2011, the Company commenced a voluntary employee stock option exchange program (the “Exchange Program”) to permit the Company’s eligible employees to exchange some or all of their eligible outstanding options (“Original Options”) to purchase the Company’s common stock with an exercise price greater than or equal to $2.37 per share, whether vested or unvested, for a lesser number of new stock options (“New Options”). In accordance with the terms and conditions of the Exchange Program, on February 22, 2011 (the “Grant Date”), the Company accepted outstanding options to purchase an aggregate of 2,128,430 shares of the Company’s common stock, with exercise prices ranging from $2.38 to $11.70, and issued, in exchange, an aggregate of 808,896 New Options with an exercise price of $1.23. The New Options vested 33% on February 22, 2012 with the balance of the shares vesting in a series of twenty-four successive equal monthly installments thereafter, and have a term of five years. The exchange resulted in a decrease in the Company’s common stock subject to outstanding stock options by 1,319,534 shares, which increased the number of shares available to be issued under the 2005 Plan. The Exchange Program did not result in incremental share-based compensation.
The following table sets forth the summary of option activity under the Company’s share-based compensation plans:
| Outstanding Options | ||||||||
| Number of Shares |
Weighted Average Exercise Price |
|||||||
| Balance as of January 1, 2009 |
4,183,348 | 6.14 | ||||||
| Options granted |
1,394,632 | 2.48 | ||||||
| Options exercised |
(69,708 | ) | 1.20 | |||||
| Options forfeited |
(422,118 | ) | 5.79 | |||||
| Options cancelled |
(345,655 | ) | 6.08 | |||||
|
|
|
|||||||
| Balance as of December 31, 2009 |
4,740,499 | 5.17 | ||||||
| Options granted |
425,071 | 2.77 | ||||||
| Options exercised |
(114,278 | ) | 1.87 | |||||
| Options forfeited |
(113,551 | ) | 6.33 | |||||
| Options cancelled |
(419,085 | ) | 8.18 | |||||
|
|
|
|||||||
| Balance as of December 31, 2010 |
4,518,656 | 4.72 | ||||||
| Options granted |
7,174,696 | 1.49 | ||||||
| Options exercised |
(975 | ) | 1.47 | |||||
| Options forfeited |
(1,193,502 | ) | 2.52 | |||||
| Options cancelled |
(2,039,786 | ) | 6.32 | |||||
|
|
|
|||||||
| Balance as of December 31, 2011 |
8,459,089 | 1.91 | ||||||
|
|
|
|||||||
| Options exercisable at: |
||||||||
| December 31, 2009 |
2,865,898 | $ | 5.71 | |||||
| December 31, 2010 |
3,219,369 | $ | 5.25 | |||||
| December 31, 2011 |
1,459,633 | $ | 3.45 | |||||
The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $0, $141,000 and $80,000, respectively. None of the Company’s options have expired.
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Information regarding the stock options outstanding at December 31, 2011 is summarized below:
| Outstanding | Exercisable | |||||||||||||||||||||||
| Remaining | Remaining | |||||||||||||||||||||||
| Contractual | Aggregate | Contractual | Aggregate | |||||||||||||||||||||
| Number | Life | Intrinsic | Number | Life | Intrinsic | |||||||||||||||||||
| Exercise Price |
of Shares | (In Years) | Value | of Shares | (In Years) | Value | ||||||||||||||||||
| $1.10 — 1.23 |
960,692 | 3.66 | $ | — | 304,181 | 2.76 | $ | — | ||||||||||||||||
| 1.27 — 1.42 |
356,724 | 6.32 | — | 146,424 | 3.38 | — | ||||||||||||||||||
| 1.53 — 1.53 |
5,557,500 | 9.49 | — | 26,040 | 9.57 | — | ||||||||||||||||||
| 1.61 — 2.80 |
847,015 | 7.47 | — | 335,850 | 7.52 | — | ||||||||||||||||||
| 2.81 — 8.89 |
688,645 | 5.96 | — | 598,625 | 5.89 | — | ||||||||||||||||||
| 8.91 — 11.70 |
48,513 | 5.19 | — | 48,513 | 5.41 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| 8,459,089 | 8.18 | $ | — | 1,459,633 | 5.41 | $ | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
The intrinsic value is calculated as the difference between the market value as of December 31, 2011 and the exercise price of the shares. The market value as of December 30, 2011, the last trading date of 2011, was $0.83 as reported by The NASDAQ Stock Market.
Information with respect to unvested share units (restricted stock units) as of December 31, 2011 is as follows:
| Weighted | ||||||||
| Number | Average | |||||||
| of | Grant Date | |||||||
| Shares | Fair Value | |||||||
| Outstanding at Janaury 1, 2009 |
171,954 | 5.86 | ||||||
| Granted |
965,643 | 2.19 | ||||||
| Released |
(839,469 | ) | 2.31 | |||||
| Forfeited |
(101,858 | ) | 4.03 | |||||
|
|
|
|||||||
| Outstanding at December 31, 2009 |
196,270 | 3.90 | ||||||
| Granted |
1,445,284 | 2.54 | ||||||
| Released |
(149,304 | ) | 2.55 | |||||
| Forfeited |
(90,313 | ) | 3.06 | |||||
|
|
|
|||||||
| Outstanding at December 31, 2010 |
1,401,937 | 2.60 | ||||||
| Granted |
227,881 | 1.33 | ||||||
| Released |
(192,024 | ) | 2.83 | |||||
| Forfeited |
(265,430 | ) | 2.38 | |||||
|
|
|
|||||||
| Outstanding at December 31, 2011 |
1,172,364 | 2.37 | ||||||
|
|
|
|||||||
The total intrinsic value of restricted stock units released during the years ended December 31, 2011, 2010 and 2009 was $272,000, $380,000 and $1,898,000, respectively.
The Company authorized shares of common stock for issuance under the 2005 Plan and the Directors’ Plan as follows.
| Year |
Number of Shares | |||
| 2009 |
656,417 | |||
| 2010 |
1,037,500 | |||
| 2011 |
8,575,000 | |||
As of December 31, 2011, 4,945,414 and 50,000 shares remained available for issuance under the 2005 Plan and the Directors’ Plan, respectively.
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On January 1, 2012 an additional 1,000,000 and 200,000 shares were authorized for issuance under the evergreen provisions of the 2005 Plan and the Directors’ Plan, respectively.
2005 Employee Stock Purchase Plan
In December 2005, the Company’s Board of Directors adopted the 2005 Employee Stock Purchase Plan (“ESPP”) and authorized for issuance thereunder 500,000 shares of common stock. The ESPP allows eligible employee participants to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP consists of a fixed offering period, generally twenty-four months with four purchase periods within each offering period. Purchases are generally made on the last trading day of each October and April. Employees purchase shares at each purchase date at 85% of the market value of our common stock on their enrollment date or the end of the purchase period, whichever price is lower.
The ESPP provides for annual reserve increases on the first day of each fiscal year commencing on January 1, 2007 and ending on January 1, 2015. The annual reserve increases will be equal to the lesser of (i) 1% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, or (ii) 250,000 shares of common stock. The Company’s Board of Directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased prior to the last day of any calendar year. On each of January 1, 2011, 2010 and 2009 an additional 250,000 shares, respectively, were reserved for issuance under this provision. At December 31, 2011, 59 shares were available for issuance under the ESPP. The Company issued 249,977, 406,207 and 439,252 shares at weighted average prices of $0.81, $1.19 and $1.36, during the years ended December 31, 2011, 2010, and 2009, respectively.
In May 2011, the Company’s Compensation Committee terminated the then current offering period under the ESPP and resolved to begin a new offering period in August 2011 and also amended the ESPP to reduce the time period of each offering period from twenty-four to six months.
In July 2011, following stockholder approval, the ESPP was amended to, among other changes, modify the annual automatic increase in shares reserved for the plan to an amount equal to the least of (i) one percent (1%) of the total number of shares of common stock outstanding on December 31st of the preceding calendar year, (ii) 750,000 shares of common stock and (iii) an amount determined by the Company’s Board of Directors. The new offering period under the ESPP began on August 15, 2011 and the related purchase will occur on April 30, 2012.
On January 1, 2012 an additional 721,363, shares were reserved for issuance under the ESPP.
12. Restructuring Charges
In January 2009, the Company restructured its operations to focus its efforts on the continued rapid development of its ADASUVE product candidate. The restructuring included a workforce reduction of 50 employees, representing approximately 33% of the Company’s total workforce and was completed in the second quarter of 2009. The Company incurred $2,037,000 of restructuring expenses related to employee severance and other termination benefits, including a non-cash charge of $56,000 related to modifications to share-based awards, and does not expect to incur any additional expenses related to this restructuring in future periods. As of December 31, 2011 and 2010, the Company had no outstanding amounts due related to the restructuring.
In December 2011, the Company issued a Worker Adjustment and Retraining Notification Act notice to all employees informing the employees that their last date of employment with the Company would be February 17, 2012. As a result of the $20.4 million of proceeds from the issuance of common stock and common stock warrants in February 2012 (see Note 15), the Company was able to revoke the termination notices for all but 29 employees. The Company did not provide severance packages to the terminated employees and therefore will not incur a charge related to these terminations.
13. 401(k) Plan
The Company sponsors a 401(k) Plan that stipulates that eligible employees can elect to contribute to the 401(k) Plan, subject to certain limitations. Pursuant to the 401(k) Plan, the Company does not match employee contributions.
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14. Income Taxes
There is no provision for income taxes because the Company has incurred operating losses since inception and applies a full valuation allowance against all deferred tax assets.
The reported amount of income tax expense attributable to operations for the year differs from the amount that would result from applying domestic federal statutory tax rates to loss before income taxes from operations as summarized below (in thousands):
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| Federal tax benefit at statutory rate |
$ | (13,781) | $ | (525) | $ | (14,307) | ||||||
| State tax benefit net of federal effect |
(2,365) | (90) | (2,385) | |||||||||
| Research and development credits |
(1,669) | (1,502) | (2,537) | |||||||||
| Other permanent differences |
11 | 13 | (31) | |||||||||
| Share-based compensation |
902 | 1,296 | 1,112 | |||||||||
| Adjustment to basis in subsidiary |
1,593 | (1,927) | 3,180 | |||||||||
| Change in valuation allowance |
15,233 | 2,740 | 14,662 | |||||||||
| Other |
76 | (5) | 306 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | — | $ | — | $ | — | ||||||
|
|
|
|
|
|
|
|||||||
Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The deferred tax assets were calculated using an effective tax rate of 40%. Significant components of the Company’s deferred tax assets are as follows (in thousands):
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| Federal and state net operating loss carryforwards |
$ | 106,496 | $ | 90,114 | ||||
| Federal and state research and development credit carryforwards |
14,389 | 13,331 | ||||||
| Accrued liabilities |
8,044 | 8,008 | ||||||
| Capitalized research and development costs |
13,397 | 16,142 | ||||||
| Other |
1,592 | 1,695 | ||||||
|
|
|
|
|
|||||
| Total deferred tax assets |
143,918 | 129,290 | ||||||
| Valuation allowance |
(143,918 | ) | (129,290 | ) | ||||
|
|
|
|
|
|||||
| Net deferred tax assets |
$ | — | $ | — | ||||
|
|
|
|
|
|||||
The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of the Company’s net deferred tax assets. The Company primarily considered such factors as the Company’s history of operating losses, the nature of the Company’s deferred tax assets and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. At present, the Company does not believe that it is more likely than not that the deferred tax assets will be realized; accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying balance sheets. The valuation allowance increased by approximately $14,628,000, $2,837,000 and $31,798,000 during the years ended December 31, 2011, 2010 and 2009, respectively.
As of December 31, 2011 the Company had federal net operating loss carryforwards of approximately $268,294,000. The Company also had federal research and development tax credit carryforwards of approximately $10,387,000. The net operating loss and tax credit carryforwards will expire at various dates beginning in 2020, if not utilized.
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As of December 31, 2011, the Company had state net operating loss carryforwards of approximately $271,341,000 which will begin to expire in 2012. The Company also had state research and development tax credit carryforwards of approximately $9,151,000, which have no expiration.
As of December 31, 2011, approximately $555,000 of deferred tax assets is attributable to certain employee stock option deductions and the federal and state net operating loss carryforward has been adjusted accordingly. When realized, the benefit of the tax deduction related to these options will be accounted for as a credit to stockholders’ equity rather than as a reduction of the income tax provision.
A limitation may apply to the use of the net operating loss and credit carryforwards, under provisions of the Internal Revenue Code that are applicable if the Company experiences an “ownership change”. That may occur, for example, as a result of trading in the Company’s stock by institutional investors as well issuance of new equity. Should these limitations apply, the carryforwards would be subject to an annual limitation, resulting in a substantial reduction in the gross deferred tax assets before considering the valuation allowance. As of December 31, 2011, the Company has not performed an analysis to determine if the Company’s net operating loss and credit carryforwards would be subject to such limitations.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| Balance at Janaury 1, 2009 |
$ | 1,580 | ||
| Additions based on tax positions taken during a prior period |
645 | |||
| Reductions based on tax positions taken during a prior period |
— | |||
| Additions based on tax positions taken during the current period |
385 | |||
| Reductions based on tax positions taken during the current period |
— | |||
| Reductions related to settlement of tax matters |
— | |||
| Reductions related to a lapse of applicable statute of limitations |
— | |||
|
|
|
|||
| Balance at December 31, 2009 |
2,610 | |||
| Additions based on tax positions taken during a prior period |
46 | |||
| Reductions based on tax positions taken during a prior period |
||||
| Additions based on tax positions taken during the current period |
302 | |||
| Reductions based on tax positions taken during the current period |
— | |||
| Reductions related to settlement of tax matters |
— | |||
| Reductions related to a lapse of applicable statute of limitations |
— | |||
|
|
|
|||
| Balance at December 31, 2010 |
2,958 | |||
| Additions based on tax positions taken during a prior period |
— | |||
| Reductions based on tax positions taken during a prior period |
(277 | ) | ||
| Additions based on tax positions taken during the current period |
253 | |||
| Reductions based on tax positions taken during the current period |
— | |||
| Reductions related to settlement of tax matters |
— | |||
| Reductions related to a lapse of applicable statute of limitations |
— | |||
|
|
|
|||
| Balance at December 31, 2011 |
$ | 2,934 | ||
|
|
|
|||
If the Company eventually is able to recognize these uncertain tax positions, the unrecognized tax benefits would not reduce the effective tax rate if the Company is applying a full valuation allowance against the deferred tax assets, as is the Company’s current policy.
The Company has not incurred any material tax interest or penalties as of December 31, 2011. The Company does not anticipate any significant change within 12 months of this reporting date of its uncertain tax
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positions. The Company is subject to taxation in the United States and various states jurisdictions. There are no other ongoing examinations by taxing authorities at this time. The Company’s various tax years starting with 2000 to 2011 remain open in various taxing jurisdictions.
15. Subsequent Events
On February 23, 2012, the Company issued an aggregate of 44,000,000 shares of the Company’s common stock and warrants to purchase up to an additional 44,000,000 shares of the Company’s common stock in an underwritten public offering. Net proceeds from the offering were approximately $20.4 million, after deducting offering expenses. The warrants are exercisable beginning February 24, 2013, at an exercise price of $0.50 per share, and will expire on February 23, 2017. The shares of common stock and warrants were sold pursuant to a shelf registration statement declared effective by the SEC on May 20, 2010. The Company agreed to customary obligations, including indemnification.
In March 2012, the Company entered into an amendment to the Ferrer Agreement. Grupo Ferrer and the Company agreed to eliminate a future potential milestone payment in exchange for Grupo Ferrer’s purchase of $3 million of the Company’s common stock. Grupo Ferrer agreed to purchase approximately 2.42 million shares of the Company’s common stock for $1.24 per share in March 2012. During 2012, up to an additional $8 million of the Company’s common stock may be purchased by Grupo Ferrer, upon a request by the Company and subject to acceptance by Grupo Ferrer, in exchange for the elimination of additional milestones at a price per share that will be a premium to the market price on the date of purchase.
16. Quarterly Results (Unaudited)
The following table is in thousands, except per share amounts:
| Quarter Ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| Fiscal 2011 |
||||||||||||||||
| Revenues |
$ | 1,259 | $ | 1,258 | $ | 1,259 | $ | 1,884 | ||||||||
| Loss from operations |
(7,823 | ) | (8,141 | ) | (9,901 | ) | (8,503 | ) | ||||||||
| Net loss |
(8,415 | ) | (9,006 | ) | (13,417 | ) | (9,693 | ) | ||||||||
| Basic and diluted net loss per share attributable to Alexza common stockholders |
(0.14 | ) | (0.13 | ) | (0.19 | ) | (0.14 | ) | ||||||||
| Fiscal 2010 |
||||||||||||||||
| Revenues |
$ | — | $ | — | $ | 744 | $ | 42,132 | ||||||||
| Profit (loss) from operations |
(12,616 | ) | (12,102 | ) | (8,520 | ) | 28,586 | |||||||||
| Net income (loss ) |
(13,412 | ) | (12,893 | ) | (591 | ) | 25,415 | |||||||||
| Net loss attributable to Alexza common stockholders |
(13,412 | ) | (12,893 | ) | (591 | ) | 25,415 | |||||||||
| Basic net loss per share attributable to Alexza common stockholders |
(0.26 | ) | (0.24 | ) | (0.01 | ) | 0.43 | |||||||||
| Diluted net loss per share attributable to Alexza common |
(0.26 | ) | (0.24 | ) | (0.01 | ) | 0.42 | |||||||||
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| Item 9. Changes | in and Disagreements With Accountants on Accounting and Financial Disclosure |
Not Applicable.
| Item 9A. Controls | and Procedures |
Evaluation of Disclosure Controls and Procedures:
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of December 31, 2011, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2011. Our independent registered public accounting firm, Ernst & Young LLP, audited the consolidated financial statements included in this Annual Report on Form 10-K and have issued an audit report on the effectiveness of our internal control over financial reporting. Their report on the audit of internal control over financial reporting appears below.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Alexza Pharmaceuticals, Inc.
We have audited Alexza Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Alexza Pharmaceuticals, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Alexza Pharmaceuticals, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Alexza Pharmaceuticals, Inc. (a development stage company) as of December 31, 2011 and December 31, 2010 and the related consolidated statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2011 and for the period from December 19, 2000 (inception) to December 31, 2011 and our report dated March 12, 2012 expressed an unqualified opinion that included an explanatory paragraph regarding Alexza Pharmaceutical, Inc.’s ability to continue as a going concern.
| /s/ Ernst & Young LLP |
| Ernst & Young LLP |
Redwood Shores, California
March 12, 2012
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Changes in Internal Control Over Financial Reporting:
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| Item 9B. Other | Information |
None.
| Item 10. Directors | and Executive Officers of the Registrant |
The information required by this Item concerning our directors is incorporated by reference to the information to be set forth in the sections entitled “Proposal No. 1 — Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for the 2012 Annual Meeting of Stockholders to be filed within 120 days after the end of the Registrant’s fiscal year ended December 31, 2011, or the Proxy Statement. The information required by this Item concerning our executive officers is incorporated by reference to the information to be set forth in the section of the Proxy Statement entitled “Executive Officers.” The information required by this item concerning compliance with Section 16(a) of the Exchange Act, our code of business conduct and ethics, the procedures by which security holders may recommend nominees for our board of directors and certain information related to our Audit and Ethics Committee is incorporated by reference to the information to be set forth in the sections entitled “Information Regarding the Board of Directors and Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
| Item 11. Executive | Compensation |
The information required by this Item 11 is incorporated by reference to the information to be set forth in the sections entitled “Executive Compensation” and “Information Regarding the Board of Directors and Corporate Governance” in the Proxy Statement.
| Item 12. Security | Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item 12 with respect to stock ownership of certain beneficial owners and management is incorporated by reference to the information to be set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
Securities Authorized For Issuance Under Equity Compensation Plans
We maintain our 2005 Equity Incentive Plan, or the 2005 Plan, 2005 Non-Employee Directors’ Stock Option Plan, or the Directors’ Plan, and 2005 Employee Stock Purchase Plan, or the ESPP, pursuant to which we may grant equity awards to eligible persons.
The following table gives information about equity awards under the 2005 Plan, the Directors’ Plan and the ESPP as of December 31, 2011:
| Plan Category |
(a) Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights |
(b) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights |
(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) |
|||||||||
| Equity compensation plans approved by security holders |
9,631,453 | $1.67 | 4,995,473(1)(2) | |||||||||
| Equity compensation plans not approved by security holders |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
9,631,453 | $1.67 | 4,995,473 | |||||||||
|
|
|
|
|
|
|
|||||||
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| (1) | The 2005 Plan incorporates an evergreen formula pursuant to which on each January 1, the aggregate number of shares reserved for issuance under the 2005 Plan will increase by a number equal to the least of (i) 1,000,000 shares, (ii) 2% of the outstanding shares on December 31 of the preceding calendar year, or (iii) an amount determined by our Board. |
The Directors’ Plan incorporates an evergreen formula pursuant to which on each January 1, the aggregate number of shares reserved for issuance under the Directors’ Plan will increase by the number of shares subject to options granted during the preceding calendar year less the number of shares that revert back to the share reserve during the preceding calendar year.
The ESPP incorporates an evergreen formula pursuant to which on each January 1, the aggregate number of shares reserved for issuance under the ESPP will increase by a number equal to the least of (i) 750,000 shares, (ii) 1% of the outstanding shares on December 31 of the preceding calendar year, or (iii) an amount determined by our Board.
| (2) | Of these shares, 4,945,414 shares remained available as of December 31, 2011 under the 2005 Plan, 50,000 shares under the Directors’ Plan and 59 under the ESPP. |
| Item 13. Certain | Relationships and Related Transactions and Director Independence |
The information required by this Item 13 is incorporated by reference to the information to be set forth in the sections entitled “Certain Relationships and Related Transactions and Director Independence” and “Information Regarding the Board of Directors and Corporate Governance” in the Proxy Statement.
| Item 14. Principal | Accountant Fees and Services |
The information required by this Item 14 is incorporated by reference to the information to be set forth in the sections entitled “Principal Accountant Fees and Services” and “Pre-Approval Policies and Procedures” in the Proxy Statement.
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
See Index to Financial Statements under Item 8 on page 61
(a) 2. Financial Statement Schedules
All schedules are omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Financial Statements or notes thereto.
(a) 3. Exhibits
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EXHIBIT INDEX
| Exhibit |
Description of Document | |
| 3.1 | Restated Certificate of Incorporation(20) | |
| 3.2 | Certificate of Amendment to Restated Certificate of Incorporation(20) | |
| 3.2 | Amended and Restated Bylaws(1) | |
| 3.3 | Amendment to Amended and Restated Bylaws(5) | |
| 4.1 | Specimen Common Stock Certificate(1) | |
| 4.2 | Second Amended and Restated Investors’ Rights Agreement between Registrant and certain holders of Preferred Stock dated November 5, 2004(1) | |
| 10.1* | Form of Director/Officer Indemnification Agreement entered into between Registrant and each of its directors and officers(7) | |
| 10.2.1* | Form of Change of Control Agreement(13) | |
| 10.2.2* | Form of Amendment to Change of Control Agreement(10) | |
| 10.3.1* | 2005 Equity Incentive Plan, as amended(23) | |
| 10.3.2* | Form of Option Grant Notice, Form of Option Agreement and Form of Notice of Exercise to 2005 Equity Incentive Plan(1) | |
| 10.3.3* | Form of Notice of Grant of Stock Options to 2005 Equity Incentive Plan(19) | |
| 10.3.4* | Form of Option Agreement to 2005 Equity Incentive Plan(19) | |
| 10.3.5* | Form of Option Agreement to 2005 Equity Incentive Plan(19) | |
| 10.3.6* | Form of Notice of Grant of Award and Stock Unit Award Agreement to 2005 Equity Incentive Plan(13) | |
| 10.4.1 | 2005 Non-Employee Directors’ Stock Option Plan(1) | |
| 10.4.2 | Amendment to 2005 Non Employee Directors’ Option Plan(17) | |
| 10.4.3 | Form of Option Grant Notice, Form of Option Agreement and Form of Notice of Exercise to 2005 Non-Employee Directors’ Stock Option Plan(1) | |
| 10.5.1* | 2005 Employee Stock Purchase Plan, as amended(23) | |
| 10.5.2* | Form of Offering Document to 2005 Employee Stock Purchase Plan(1) | |
| 10.6* | 2009-2010 Performance Based Incentive Program(8) | |
| 10.7* | Form of RSU Agreement between Registrant and each of Thomas B. King, August J. Moretti, James V. Casella and Michael J. Simms dated May 19, 2010(16) | |
| 10.8* | 2011 Cash Bonus Plan(25) | |
| 10.9 | Warrant to Purchase shares of Series B Preferred Stock issued to Silicon Valley Bank dated March 20, 2002(1) | |
| 10.10 | Warrant to Purchase shares of Series C Preferred Stock issued to Silicon Valley Bank dated January 7, 2003, as amended on March 4, 2003(1) | |
| 10.11 | Warrant to Purchase shares of Series C Preferred Stock issued to Silicon Valley Bank dated September 19, 2003(1) | |
| 10.12 | Warrant to Purchase shares of Series C Preferred Stock issued to Silicon Valley Bank dated April 7, 2004(1) | |
| 10.13.1 | Lease Agreement between the Brittania, LLC and Registrant dated August 25, 2006(2) | |
| 10.13.2 | First Amendment to Lease between Britannia Hacienda VIII LLC and Registrant dated May 4, 2007(3) | |
| 10.13.3† | Second Amendment to Lease between Britannia Hacienda VIII LLC and Registrant dated August 28, 2007(4) |
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Table of Contents
| 10.13.4¿ | Partial Lease Termination Agreement between the Registrant and Britannia Hacienda VIII LLC dated February 7, 2012 | |
| 10.14.1† | Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc., dated November 2, 2007(5) | |
| 10.14.2† | Amendment No. 1 to Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc. dated June 30, 2010(14) | |
| 10.14.3† | Amendment No. 2 to Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc. dated February 15, 2011(25) | |
| 10.15 | Promissory Note issued by Registrant to Autoliv ASP, Inc. dated June 30, 2010(14) | |
| 10.16 | Promissory Note issued by Registrant to Autoliv ASP, Inc. dated February 15, 2011(25) | |
| 10.17* | Offer Letter between Registrant and Michael Simms, dated January 23, 2008(5) | |
| 10.18 | Stock and Warrant Purchase Agreement between Registrant and Biomedical Investment Fund Pte Ltd., dated March 26, 2008(6) | |
| 10.19 | Warrant to Purchase shares of Common Stock issued to Biomedical Investment Fund Pte Ltd. dated March 27, 2008(6) | |
| 10.20 | Amended and Restated Purchase Option Agreement by and among Registrant, Symphony Allegro Holdings LLC and Symphony Allegro, Inc. dated June 15, 2009(9) | |
| 10.21 | Warrant Purchase Agreement between Registrant and Symphony Allegro Holdings LLC dated June 15, 2009(9) | |
| 10.22 | Amended and Restated Registration Rights Agreement between Registrant and Symphony Allegro Holdings LLC dated June 15, 2009(9) | |
| 10.23 | Form of Warrants to Purchase Shares of Common Stock, dated August 26, 2009(11) | |
| 10.24 | Letter Agreement among Registrant, Symphony Allegro Holdings LLC, Symphony Capital Partners, L.P. and Symphony Strategic Partners, LLC, dated August 26, 2009(11) | |
| 10.25 | Securities Purchase Agreement by and among Registrant and the purchasers identified therein, dated September 29, 2009(12) | |
| 10.26 | Form of Warrants to Purchase shares of Common Stock, dated October 5, 2009(12) | |
| 10.27.1 | Loan and Security Agreement between Registrant and Hercules Technology Growth Capital, Inc. dated May 4, 2010(14) | |
| 10.27.2 | Amendment No. 1 to Loan and Security Agreement between Registrant and Hercules Technology Growth Capital, Inc. dated September 20, 2010(17) | |
| 10.27.3¿ | Amendment No. 2 to Loan and Security Agreement among Registrant, Symphony Allegro, Inc. and Hercules Technology Growth Capital, Inc. dated January 25, 2012 | |
| 10.28 | Warrant issued by Registrant to Hercules Technology Growth Capital, Inc. dated May 4, 2010(14) | |
| 10.29 | Common Stock Purchase Agreement between Registrant and Azimuth Opportunity Ltd. dated May 26, 2010(15) | |
| 10.30 | Form of Warrant to Purchase Shares of Common Stock dated August 10, 2010(18) | |
| 10.31 | Securities Purchase Agreement dated May 3, 2011(22) | |
| 10.32 | Form of Warrant to Purchase Shares of Common Stock dated May 6, 2011(22) | |
| 10.33.1¿†† | Collaboration, License and Supply Agreement between Registrant and Grupo Ferrer Internacional, S.A. dated October 5, 2011 | |
| 10.33.2¿ | Amendment to Collaboration, License and Supply Agreement between Registrant and Grupo Ferrer, Internacional, S.A. dated March 5, 2012 | |
| 10.34 | Form of Warrant to Purchase Shares of Common Stock dated February 23, 2012(24) | |
| 10.35 | Summary of Compensation Arrangements with Non-Employee Directors(21) | |
| 14.1 | Alexza Pharmaceuticals, Inc. Code of Business Conduct for Employees, Executive Officers and Directors(2) |
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| 21.1¿ | Subsidiaries of Registrant | |
| 23.1¿ | Consent of Independent Registered Public Accounting Firm | |
| 24.1¿ | Power of Attorney included on the signature pages hereto | |
| 31.1¿ | Section 302 Certification of CEO. | |
| 31.2¿ | Section 302 Certification of PFO. | |
| 32.1‡ | Section 906 Certifications of CEO and PFO. | |
| 101.INS‡‡ | XBRL Instance Document (furnished electronically herewith). | |
| 101.SCH‡‡ | XBRL Taxonomy Extension Schema Document (furnished electronically herewith). | |
| 101.CAL‡‡ | XBRL Taxonomy Extension Calculation Linkbase Document (furnished electronically herewith). | |
| 101.DEF‡‡ | XBRL Taxonomy Extension Definition Linkbase Document (furnished electronically herewith). | |
| 101.LAB‡‡ | XBRL Taxonomy Extension Label Linkbase Document (furnished electronically herewith). | |
| 101.PRE‡‡ | XBRL Taxonomy Extension Presentation Linkbase Document (furnished electronically herewith). |
| * | Management contract or compensation plan or arrangement. |
| ¿ | Filed herewith |
| ‡ | Furnished herewith |
| ‡‡ | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
| † | Confidential treatment has been granted with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. Omitted portions have been filed separately with the SEC. |
| †† | Confidential treatment has been requested with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. Omitted portions have been filed separately with the SEC. |
| (1) | Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on December 22, 2005, as amended (File No. 333-130644). |
| (2) | Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 29, 2007. |
| (3) | Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on August 13, 2007. |
| (4) | Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on November 1, 2007. |
| (5) | Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 17, 2008. |
| (6) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on March 17, 2008. |
| (7) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on June 5, 2006. |
| (8) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on February 24, 2009. |
| (9) | Incorporated by reference to our Current Report on Form 8-K/A (File No. 000-51820) as filed with the SEC on June 26, 2009. |
| (10) | Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on August 5, 2009. |
| (11) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on August 26, 2009. |
| (12) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on September 30, 2009. |
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| (13) | Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 10, 2009. |
| (14) | Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on July 26, 2010. |
| (15) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on May 26, 2010. |
| (16) | Incorporated by reference to our Quarterly Report on Form 10-Q/A (File No. 000-51820) as filed with the SEC on July 28, 2010. |
| (17) | Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on November 9, 2010. |
| (18) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on August 5, 2010. |
| (19) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on February 22, 2011. |
| (20) | Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on August 8, 2011. |
| (21) | Incorporated by reference to our Annual Report on Form 10-K/A (File No. 000-51820) as filed with the SEC on April 28, 2011. |
| (22) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on May 3, 2011. |
| (23) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on August 2, 2011. |
| (24) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on February 17, 2012. |
| (25) | Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 15, 2011. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ALEXZA PHARMACEUTICALS, INC. | ||
| By: | /s/ THOMAS B. KING | |
| Thomas B. King | ||
| President and Chief Executive Officer | ||
Dated: March 12, 2012
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas B. King and Mark K. Oki, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 12, 2012.
| Signature |
Title | |
| /s/ THOMAS B. KING |
President, Chief Executive Officer and Director (Principal Executive Officer) | |
| Thomas B. King | ||
| /s/ MARK K. OKI |
Vice President, Finance, Controller and Secretary (Principal Accounting Officer, Principal Financial Officer) | |
| Mark K. Oki
|
||
| /s/ HAL V. BARRON |
Director | |
| Hal V. Barron | ||
| /s/ ANDREW L. BUSSER |
Director | |
| Andrew L. Busser | ||
| /s/ SAMUEL D. COLELLA |
Director | |
| Samuel D. Colella | ||
| /s/ Deepika R. Pakianathan |
Director | |
| Deepika R. Pakianathan | ||
| /s/ J. Leighton Read |
Director | |
| J. Leighton Read | ||
| /s/ GORDON RINGOLD |
Director | |
| Gordon Ringold | ||
| /s/ ISAAC STEIN |
Director | |
| Isaac Stein | ||
| /s/ JOSEPH L. TURNER |
Director | |
| Joseph L. Turner | ||
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| Exhibit |
Description of Document | |
| 3.1 | Restated Certificate of Incorporation(20) | |
| 3.2 | Certificate of Amendment to Restated Certificate of Incorporation(20) | |
| 3.2 | Amended and Restated Bylaws(1) | |
| 3.3 | Amendment to Amended and Restated Bylaws(5) | |
| 4.1 | Specimen Common Stock Certificate(1) | |
| 4.2 | Second Amended and Restated Investors’ Rights Agreement between Registrant and certain holders of Preferred Stock dated November 5, 2004(1) | |
| 10.1* | Form of Director/Officer Indemnification Agreement entered into between Registrant and each of its directors and officers(7) | |
| 10.2.1* | Form of Change of Control Agreement(13) | |
| 10.2.2* | Form of Amendment to Change of Control Agreement(10) | |
| 10.3.1* | 2005 Equity Incentive Plan, as amended(23) | |
| 10.3.2* | Form of Option Grant Notice, Form of Option Agreement and Form of Notice of Exercise to 2005 Equity Incentive Plan(1) | |
| 10.3.3* | Form of Notice of Grant of Stock Options to 2005 Equity Incentive Plan(19) | |
| 10.3.4* | Form of Option Agreement to 2005 Equity Incentive Plan(19) | |
| 10.3.5* | Form of Option Agreement to 2005 Equity Incentive Plan(19) | |
| 10.3.6* | Form of Notice of Grant of Award and Stock Unit Award Agreement to 2005 Equity Incentive Plan(13) | |
| 10.4.1 | 2005 Non-Employee Directors’ Stock Option Plan(1) | |
| 10.4.2 | Amendment to 2005 Non Employee Directors’ Option Plan(17) | |
| 10.4.3 | Form of Option Grant Notice, Form of Option Agreement and Form of Notice of Exercise to 2005 Non-Employee Directors’ Stock Option Plan(1) | |
| 10.5.1* | 2005 Employee Stock Purchase Plan, as amended(23) | |
| 10.5.2* | Form of Offering Document to 2005 Employee Stock Purchase Plan(1) | |
| 10.6* | 2009-2010 Performance Based Incentive Program(8) | |
| 10.7* | Form of RSU Agreement between Registrant and each of Thomas B. King, August J. Moretti, James V. Casella and Michael J. Simms dated May 19, 2010(16) | |
| 10.8* | 2011 Cash Bonus Plan(25) | |
| 10.9 | Warrant to Purchase shares of Series B Preferred Stock issued to Silicon Valley Bank dated March 20, 2002(1) | |
| 10.10 | Warrant to Purchase shares of Series C Preferred Stock issued to Silicon Valley Bank dated January 7, 2003, as amended on March 4, 2003(1) | |
| 10.11 | Warrant to Purchase shares of Series C Preferred Stock issued to Silicon Valley Bank dated September 19, 2003(1) | |
| 10.12 | Warrant to Purchase shares of Series C Preferred Stock issued to Silicon Valley Bank dated April 7, 2004(1) | |
| 10.13.1 | Lease Agreement between the Brittania, LLC and Registrant dated August 25, 2006(2) | |
| 10.13.2 | First Amendment to Lease between Britannia Hacienda VIII LLC and Registrant dated May 4, 2007(3) | |
| 10.13.3† | Second Amendment to Lease between Britannia Hacienda VIII LLC and Registrant dated August 28, 2007(4) |
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| 10.13.4¿ | Partial Lease Termination Agreement between the Registrant and Britannia Hacienda VIII LLC dated February 7, 2012 | |
| 10.14.1† | Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc., dated November 2, 2007(5) | |
| 10.14.2† | Amendment No. 1 to Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc. dated June 30, 2010(14) | |
| 10.14.3† | Amendment No. 2 to Manufacturing and Supply Agreement between Registrant and Autoliv ASP, Inc. dated February 15, 2011(25) | |
| 10.15 | Promissory Note issued by Registrant to Autoliv ASP, Inc. dated June 30, 2010(14) | |
| 10.16 | Promissory Note issued by Registrant to Autoliv ASP, Inc. dated February 15, 2011(25) | |
| 10.17* | Offer Letter between Registrant and Michael Simms, dated January 23, 2008(5) | |
| 10.18 | Stock and Warrant Purchase Agreement between Registrant and Biomedical Investment Fund Pte Ltd., dated March 26, 2008(6) | |
| 10.19 | Warrant to Purchase shares of Common Stock issued to Biomedical Investment Fund Pte Ltd. dated March 27, 2008(6) | |
| 10.20 | Amended and Restated Purchase Option Agreement by and among Registrant, Symphony Allegro Holdings LLC and Symphony Allegro, Inc. dated June 15, 2009(9) | |
| 10.21 | Warrant Purchase Agreement between Registrant and Symphony Allegro Holdings LLC dated June 15, 2009(9) | |
| 10.22 | Amended and Restated Registration Rights Agreement between Registrant and Symphony Allegro Holdings LLC dated June 15, 2009(9) | |
| 10.23 | Form of Warrants to Purchase Shares of Common Stock, dated August 26, 2009(11) | |
| 10.24 | Letter Agreement among Registrant, Symphony Allegro Holdings LLC, Symphony Capital Partners, L.P. and Symphony Strategic Partners, LLC, dated August 26, 2009(11) | |
| 10.25 | Securities Purchase Agreement by and among Registrant and the purchasers identified therein, dated September 29, 2009(12) | |
| 10.26 | Form of Warrants to Purchase shares of Common Stock, dated October 5, 2009(12) | |
| 10.27.1 | Loan and Security Agreement between Registrant and Hercules Technology Growth Capital, Inc. dated May 4, 2010(14) | |
| 10.27.2 | Amendment No. 1 to Loan and Security Agreement between Registrant and Hercules Technology Growth Capital, Inc. dated September 20, 2010(17) | |
| 10.27.3¿ | Amendment No. 2 to Loan and Security Agreement among Registrant, Symphony Allegro, Inc. and Hercules Technology Growth Capital, Inc. dated January 25, 2012 | |
| 10.28 | Warrant issued by Registrant to Hercules Technology Growth Capital, Inc. dated May 4, 2010(14) | |
| 10.29 | Common Stock Purchase Agreement between Registrant and Azimuth Opportunity Ltd. dated May 26, 2010(15) | |
| 10.30 | Form of Warrant to Purchase Shares of Common Stock dated August 10, 2010(18) | |
| 10.31 | Securities Purchase Agreement dated May 3, 2011(22) | |
| 10.32 | Form of Warrant to Purchase Shares of Common Stock dated May 6, 2011(22) | |
| 10.33.1¿†† | Collaboration, License and Supply Agreement between Registrant and Grupo Ferrer Internacional, S.A. dated October 5, 2011 | |
| 10.33.2¿ | Amendment to Collaboration, License and Supply Agreement between Registrant and Grupo Ferrer, Internacional, S.A. dated March 5, 2012 | |
| 10.34 | Form of Warrant to Purchase Shares of Common Stock dated February 23, 2012(24) | |
| 10.35 | Summary of Compensation Arrangements with Non-Employee Directors(21) | |
| 14.1 | Alexza Pharmaceuticals, Inc. Code of Business Conduct for Employees, Executive Officers and Directors(2) |
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| 21.1¿ | Subsidiaries of Registrant | |
| 23.1¿ | Consent of Independent Registered Public Accounting Firm | |
| 24.1¿ | Power of Attorney included on the signature pages hereto | |
| 31.1¿ | Section 302 Certification of CEO. | |
| 31.2¿ | Section 302 Certification of PFO. | |
| 32.1‡ | Section 906 Certifications of CEO and PFO. | |
| 101.INS‡‡ | XBRL Instance Document (furnished electronically herewith). | |
| 101.SCH‡‡ | XBRL Taxonomy Extension Schema Document (furnished electronically herewith). | |
| 101.CAL‡‡ | XBRL Taxonomy Extension Calculation Linkbase Document (furnished electronically herewith). | |
| 101.DEF‡‡ | XBRL Taxonomy Extension Definition Linkbase Document (furnished electronically herewith). | |
| 101.LAB‡‡ | XBRL Taxonomy Extension Label Linkbase Document (furnished electronically herewith). | |
| 101.PRE‡‡ | XBRL Taxonomy Extension Presentation Linkbase Document (furnished electronically herewith). |
| * | Management contract or compensation plan or arrangement. |
| ¿ | Filed herewith |
| ‡ | Furnished herewith |
| ‡‡ | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
| † | Confidential treatment has been granted with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. Omitted portions have been filed separately with the SEC. |
| †† | Confidential treatment has been requested with respect to certain portions of this exhibit. This exhibit omits the information subject to this confidentiality request. Omitted portions have been filed separately with the SEC. |
| (1) | Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on December 22, 2005, as amended (File No. 333-130644). |
| (2) | Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 29, 2007. |
| (3) | Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on August 13, 2007. |
| (4) | Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on November 1, 2007. |
| (5) | Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 17, 2008. |
| (6) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on March 17, 2008. |
| (7) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on June 5, 2006. |
| (8) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on February 24, 2009. |
| (9) | Incorporated by reference to our Current Report on Form 8-K/A (File No. 000-51820) as filed with the SEC on June 26, 2009. |
| (10) | Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on August 5, 2009. |
| (11) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on August 26, 2009. |
| (12) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on September 30, 2009. |
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| (13) | Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 10, 2009. |
| (14) | Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on July 26, 2010. |
| (15) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on May 26, 2010. |
| (16) | Incorporated by reference to our Quarterly Report on Form 10-Q/A (File No. 000-51820) as filed with the SEC on July 28, 2010. |
| (17) | Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on November 9, 2010. |
| (18) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on August 5, 2010. |
| (19) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on February 22, 2011. |
| (20) | Incorporated by reference to our Quarterly Report on Form 10-Q (File No. 000-51820) as filed with the SEC on August 8, 2011. |
| (21) | Incorporated by reference to our Annual Report on Form 10-K/A (File No. 000-51820) as filed with the SEC on April 28, 2011. |
| (22) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on May 3, 2011. |
| (23) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on August 2, 2011. |
| (24) | Incorporated by reference to our Current Report on Form 8-K (File No. 000-51820) as filed with the SEC on February 17, 2012. |
| (25) | Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 15, 2011. |
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