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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 1997
or,
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
COMMISSION FILE NUMBER: 0-23556
INHALE THERAPEUTIC SYSTEMS
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3134940
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(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1525 INDUSTRIAL WAY
BELMONT, CALIFORNIA 94002
(Address of principal executive offices)
650-631-3100
(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
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. /X/ Yes / / No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of outstanding shares of the registrant's Common Stock, no par value,
was 13,768,880 as of October 1, 1997.
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INHALE THERAPEUTIC SYSTEMS
INDEX
PAGE
-----
PART I: FINANCIAL INFORMATION
Item 1. Condensed Financial Statements--unaudited........................................................ 3
Condensed Balance Sheets--September 30, 1997 and December 31, 1996............................... 3
Condensed Statements of Operations for the three and nine month periods ended September 30, 1997
and 1996....................................................................................... 4
Condensed Statements of Cash Flows for the nine month periods ended September 30, 1997 and
1996........................................................................................... 5
Notes to Condensed Financial Statements.......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 21
Item 2. Changes in Securities............................................................................ 21
Item 3. Defaults Upon Senior Securities.................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 21
Item 5. Other Information................................................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................................................. 21
Signatures....................................................................................... 23
2
ITEM 1.
INHALE THERAPEUTIC SYSTEMS
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 9,627 $ 18,568
Short-term investments................................................... 48,032 17,741
Note receivable.......................................................... 5,000 --
Other current assets..................................................... 1,699 1,239
------- -------
Total current assets................................................... 64,358 37,548
Property and equipment, net................................................ 10,355 3,770
Deposits and other assets.................................................. 135 174
------- -------
$ 74,848 $ 41,492
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................................. $ 5,038 $ 3,042
Accrued compensation and benefits........................................ 1,069 479
Deferred revenue......................................................... 8,508 2,723
------- -------
Total current liabilities.............................................. 14,615 6,244
Long-term liabilities:
Equipment financing obligations.......................................... 148 187
Accrued rent............................................................. 240 --
------- -------
Total long-term liabilities.......................................... 388 187
Shareholders' equity:
Common stock, no par value: 30,000 shares authorized, 13,769 shares and
11,835 shares issued and outstanding at September 30, 1997 and December
31, 1996, respectively................................................. 94,529 62,840
Deferred compensation.................................................... -- (88)
Accumulated deficit...................................................... (34,684) (27,691)
------- -------
Total shareholders' equity............................................. 59,845 35,061
------- -------
$ 74,848 $ 41,492
------- -------
------- -------
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
3
INHALE THERAPEUTIC SYSTEMS
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Contract research revenue.............................................. $ 4,309 $ 1,791 $ 11,459 $ 4,722
Operating costs and expenses:
Research and development............................................. 6,427 3,697 16,640 10,129
General and administrative........................................... 1,345 784 4,244 2,341
--------- --------- --------- ---------
Total operating costs and expenses..................................... 7,772 4,481 20,884 12,470
--------- --------- --------- ---------
Loss from operations................................................... (3,463) (2,690) (9,425) (7,748)
Interest income, net................................................... 812 437 2,432 1,109
--------- --------- --------- ---------
Net loss............................................................... $ (2,651) $ (2,253) $ (6,993) $ (6,639)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share..................................................... $ (0.19) $ (0.20) $ (0.52) $ (0.60)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing net loss per share............................ 13,726 11,538 13,417 11,025
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes.
4
INHALE THERAPEUTIC SYSTEMS
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash used in operations.................................................................... $ (2,015) $ (6,670)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments, net of sales and maturities........................... (30,291) (6,316)
Purchases of property and equipment........................................................ (8,196) (1,608)
--------- ---------
Net cash used in investing activities........................................................ (38,487) (7,924)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of equipment financing obligations................................................ (128) (201)
Issuance of common stock, net of issuance costs............................................ 31,689 19,592
--------- ---------
Net cash provided by financing activities.................................................. 31,561 19,391
--------- ---------
Net increase (decrease) in cash and cash equivalents......................................... (8,941) 4,797
Cash and cash equivalents at beginning of period............................................. 18,568 3,834
--------- ---------
Cash and cash equivalents at end of period................................................... $ 9,627 $ 8,631
--------- ---------
--------- ---------
See accompanying notes.
5
INHALE THERAPEUTIC SYSTEMS
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Inhale
Therapeutic Systems ("Inhale" or the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions for Form 10-Q and Article 10 of Regulation S-X. The balance
sheet as of September 30, 1997 and the related statements of operations for the
three and nine month periods ended September 30, 1997 and 1996 and cash flows
for the nine month periods ended September 30, 1997 and 1996, are unaudited but
include all adjustments (consisting of normal recurring adjustments) which the
Company considers necessary for a fair presentation of the financial position at
such dates and the operating results and cash flows for those periods. Although
the Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain information
normally included in financial statements and related footnotes prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). The accompanying financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996
filed with the Commission.
Results for any interim period are not necessarily indicative of results for
any other interim period or for the entire year.
2. REVENUE RECOGNITION
Contract revenue from collaborative research agreements is recorded when
earned and as the related costs are incurred. Payments received which are
related to future performance are deferred and recognized as revenue when earned
over future performance periods. In accordance with contract terms, up-front and
milestone payments from collaborative research agreements are considered
reimbursements for costs incurred under the agreements, and accordingly, are
generally recognized based on actual efforts expended over the terms of the
agreements. The Company's research revenue is derived primarily from partners in
the pharmaceutical and biotechnology industries. All of the Company's research
and development agreements are generally cancelable by the partner without
significant penalty to the partner.
Contract research revenue from two partners represented 70% of the Company's
revenue in the nine month period ended September 30, 1997. Contract revenue from
two partners accounted for 88% of the Company's revenue in the comparable period
in 1996. Costs of contract research revenue approximate such revenue and are
included in research and development expenses.
3. AVAILABLE-FOR-SALE SECURITIES
At September 30, 1997, all debt securities are designated as
available-for-sale and are carried at fair value, with material unrealized gains
and losses, if any, reported in shareholders' equity. The amortized cost of
securities is adjusted for amortization of material premiums and accretion of
discounts to maturity. Such amortization, if any, is included in interest
income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities, if any, are included in
interest income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
6
INHALE THERAPEUTIC SYSTEMS
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
3. AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
The following is a summary of available-for-sale securities as of September
30, 1997:
AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------------- ------------- -----------
(IN THOUSANDS)
Obligations of U.S. government securities.......................... $ 19,997 $ -- $ -- $ 19,997
U.S. corporate commercial paper.................................... 28,035 -- -- 28,035
Repurchase agreements, secured by U.S. government securities....... 3,860 -- -- 3,860
Repurchase agreements, secured by U.S. corporations................ 4,490 -- -- 4,490
Other.............................................................. 17 -- -- 17
--------- ----- ----- -----------
$ 56,399 $ -- $ -- $ 56,399
--------- ----- ----- -----------
--------- ----- ----- -----------
Amounts included in cash and cash equivalents...................... $ 8,367 $ -- $ -- $ 8,367
Amounts included in short-term investments......................... 48,032 -- -- 48,032
--------- ----- ----- -----------
$ 56,399 $ -- $ -- $ 56,399
--------- ----- ----- -----------
--------- ----- ----- -----------
The gross realized losses and gains on the sale of securities
available-for-sale during the nine month periods ended September 30, 1996 and
1997 were not material. As of September 30, 1997, the contractual maturity of
any single investment did not exceed one year.
4. NOTE RECEIVABLE
In April 1997 the Company provided the landlord of its facility in Belmont,
California a short term loan of $5.0 million. The loan bears interest at 8.5%.
The Company receives monthly interest payments and the principal is due and
payable at the end of the six-month loan term. In addition, the loan is secured
by a deed of trust on the facility. The loan is recorded on the balance sheet at
September 30, 1997 as a note receivable.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
Laboratory and other equipment.................................. $ 6,384 $ 3,679
Leasehold improvements.......................................... 7,749 2,258
Leased equipment................................................ 677 677
------------- ------------
14,810 6,614
Less accumulated depreciation and amortization.................. (4,455) (2,844)
------------- ------------
$ 10,355 $ 3,770
------------- ------------
------------- ------------
7
INHALE THERAPEUTIC SYSTEMS
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
6. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of Common Stock outstanding. Common equivalent shares from stock options and
warrants are excluded from the computation as their effect is antidilutive.
In February 1997, the Financial Accounting Standard Board issued Statement
No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating basic, formerly primary, earnings per share,
the dilutive effect of stock options will be excluded. The statement is expected
to have no impact on the Company's primary or fully diluted earnings per share
for the nine month period ended September 30, 1997.
7. EQUITY
In February 1997 the Company received $30.4 million in net proceeds from a
private placement of 1,800,000 shares its Common Stock to a group of
institutional investors at a price of $18 per share.
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations for the three and nine month periods ended September 30, 1997 and
1996 should be read in conjunction with the Management's Discussion and Analysis
of Financial Condition and Results of Operations included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996. The following
discussion contains forward-looking statements that involve risk and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein as well as those
discussed under the heading "Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any revision
to these forward-looking statements which may be made to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
Since its inception in July 1990, Inhale has been engaged in the development
of a pulmonary system for the delivery of macromolecules and other drugs for
systemic and local lung applications. The Company has been unprofitable since
inception and expects to incur significant and increasing additional operating
losses over the next several years primarily due to increasing research and
development expenditures and expansion of late stage clinical and early stage
commercial manufacturing facilities. To date, Inhale has not sold any products
and does not anticipate receiving revenue from product sales or royalties in the
near future. For the period from inception through September 30, 1997, the
Company incurred a cumulative net loss of approximately $34.7 million. The
sources of working capital have been equity financing, financing of equipment
acquisitions, interest earned on investments of cash, and revenues from
short-term research and feasibility agreements and development contracts.
Inhale typically has been compensated for research and development expenses
during initial feasibility work performed under collaborative arrangements.
Inhale's strategy is to enter into development contracts with pharmaceutical and
biotechnology corporate partners after feasibility is demonstrated. Partners
that enter into collaborative agreements will pay for research and development
expenses and may make payments to Inhale as it achieves certain key milestones.
Inhale expects to receive royalties from its partners based on revenues received
from product sales, and to receive revenue from the manufacturing of powders and
the supply of devices. In certain cases, the Company may enter into
collaborative agreements under which the Company's partners would manufacture or
package powders or supply inhalation devices, thereby potentially limiting one
or more sources of revenue for the Company. To achieve and sustain profitable
operations, the Company, alone or with others, must successfully develop, obtain
regulatory approval for, manufacture, introduce, market and sell products
utilizing its pulmonary drug delivery system. There can be no assurance that the
Company can generate sufficient product or contract research revenue to become
profitable or to sustain profitability.
RESULTS OF OPERATIONS
Revenue in the third quarter of 1997 was $4,309,000, as compared to
$1,791,000 in the third quarter of 1996, an increase of 141%. Revenues for the
nine months ended September 30, 1997 were $11,459,000 as compared to $4,722,000
for the nine months ended September 30, 1996, an increase of 143%. The increase
in revenue for both the three and nine month periods was primarily due to the
signing of additional corporate partners in 1997 as well as the expansion of the
Company's existing collaborative agreements. In
9
January 1997 the Company entered into a development agreement with Eli Lilly and
Company ("Lilly") to develop pulmonary-delivery for a selected osteoporosis
product. Under the terms of the agreement, Inhale will receive up to an
estimated $20 million in initial fees, funding for research and milestone
payments. In return, Lilly will receive global commercialization rights for the
pulmonary delivery of the products with Inhale receiving royalties on any
marketed products. In addition, in January 1997 the Company entered into an
agreement with Centeon L.L.C. to develop a pulmonary formulation of alpha-1
proteinase inhibitor. Under this agreement the Company will receive up to an
estimated $15 million in funding for research and milestone payments. In return,
Centeon will receive commercialization rights worldwide outside of Japan with
Inhale receiving royalties on future product sales. Revenue for the nine months
ended September 30, 1997 and 1996 was comprised of reimbursed research and
development expenses and the amortization of the pro-rata portion of the
up-front signing and milestone payments based on actual efforts expended. Costs
of contract research revenue approximate such revenue and are included in
research and development expenses.
Research and development expenses increased to approximately $6,427,000 in
the third quarter of 1997 from $3,697,000 in the comparable period of 1996, an
increase of 74%. Research and development expenses for the nine months ended
September 30, 1997 were $16,640,000 compared to $10,129,000 for the nine months
ended September 30, 1996, an increase of 64%. The increase for the three and
nine month periods ended September 30, 1997 is primarily attributed to continued
expansion of research activities resulting from an increase in the number of
projects, additional hiring of scientific personnel, costs associated with the
development of its commercial manufacturing facility and increased costs of
laboratory supplies and consulting services. The Company expects research,
development, and process development spending to increase significantly over the
next few years as the Company continues to expand its research and development
and prepares for its initial commercial manufacturing.
General and administrative expenses increased to $1,345,000 in the third
quarter of 1997 from $784,000 in the third quarter of 1996, an increase of 72%.
For the nine month period ended September 30, 1997, general and administrative
expenses were $4,244,000 compared to $2,341,000 in the comparable period of
1996, an increase of 81%. The increase for the three and nine month periods
ended September 30, 1997 was due primarily to support of the Company's increased
research efforts including administrative staffing, business development
activities and marketing activities. General and administrative expenses are
expected to continue to increase to support increased levels of research,
development and manufacturing activities.
Net interest income increased to $812,000 in the third quarter of 1997
compared to $437,000 in the third quarter of 1996, an increase of 86%. Net
interest income increased to $2,432,000 for the nine months ended September 30,
1997 compared to $1,109,000 for the nine months ended September 30, 1996.
Interest income was earned on larger cash and investment balances held by the
Company in the three and nine month periods ended September 30, 1997, compared
to the same periods in 1996. The higher cash and investment balances are a
result of the Company receiving milestone and research funding payments from
collaborative partners as well as the completion of a private placement of the
Company's Common Stock in February 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through private placements
and public offerings of its equity securities, contract research and milestone
revenues, interest income earned on its investments of cash and financing of
equipment acquisitions. On February 7, 1997, the Company completed a private
placement of its Common Stock, selling 1.8 million newly issued shares for net
proceeds of $30.4 million. At September 30, 1997, the Company had cash, cash
equivalents and short-term investments of approximately $57.7 million.
10
The Company's operations used cash of $2.0 million in the nine months ended
September 30, 1997, as compared to the Company's operations using $6.7 million
for the nine months ended September 30, 1996. The decrease in cash usage from
operations is due primarily to the increase in advance payments received under
the Company's collaborative agreements for work to be performed in future
periods. Cash used in operations differed from the Company's net operating
losses in these periods due principally to depreciation expenses, decreases in
accounts receivable and increases in other current assets, notes receivable,
accounts payable, deferred revenue and accrued liabilities.
In the nine months ended September 30, 1997 the Company purchased property
and equipment of $8.2 million as compared to $1.6 million for the same period in
1996. The increase is primarily due to the expansion of the Company's
facilities.
The Company expects its cash requirements to increase due to expected
increases in expenses related to the further research and development of its
technologies resulting from a larger number of projects, development of drug
formulations, process development for the manufacture and filling of powders and
devices, marketing, and general and administrative costs. These expenses
include, but are not limited to, increases in personnel and personnel related
costs, purchases of capital equipment, inhalation device prototype construction,
and facilities expansion, including the planning and building of a late-stage
clinical and early-stage commercial manufacturing facility.
The Company believes that its cash, cash equivalents and short-term
investments as of September 30, 1997, together with interest income and possible
additional equipment financing, will be sufficient to meet its operating expense
and capital expenditure requirements at least through 1998; however, the
Company's capital needs will depend on many factors, including continued
scientific progress in its research and development arrangements, progress with
pre-clinical and clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs of developing and the rate of scale-up of the
Company's powder processing and packaging technologies, the timing and cost of
its late-stage clinical and early commercial production facility, the costs
involved in preparing, filing, prosecuting, maintaining, and enforcing patent
claims, the need to acquire licenses to new technologies, and the status of
competitive products. To satisfy its long-term needs, the Company intends to
seek additional funding, as necessary, from corporate partners and from the sale
of securities. There can be no assurance that additional funds, if and when
required, will be available to the Company on favorable terms, if at all.
RISK FACTORS
EARLY STAGE COMPANY. Inhale is in an early stage of development. There can
be no assurance that the Company's pulmonary delivery technology will prove to
be technically feasible or commercially applicable to a range of macromolecules
and small molecule drugs. Only five of the Company's fourteen pulmonary delivery
formulations, insulin, interleukin-1 receptor, salmon calcitonin, the Lilly
osteoporosis drug and a small molecule have been subject to any human clinical
testing. Although many of the underlying drug compounds with which the Company
is working have been tested in humans by others using alternative delivery
routes, Inhale's potential products will require extensive research,
development, preclinical and clinical testing, and may involve lengthy
regulatory review. There can be no assurance that any of the Company's potential
products will prove to be safe and effective in clinical trials, meet applicable
regulatory standards, be capable of being produced in commercial quantities at
acceptable cost or be marketed successfully. Any failure of the Company to
achieve technical feasibility, demonstrate safety, achieve clinical efficacy,
obtain regulatory approval or, together with partners, successfully market
products, would have a material adverse effect on the Company.
UNCERTAINTIES RELATED TO TECHNOLOGY AND PRODUCT DEVELOPMENT. The success of
Inhale's pulmonary drug delivery system for any drugs will depend upon the
Company achieving sufficient system efficiency (measured by the percentage of
bulk drug entering the manufacturing process that eventually is absorbed
11
into the bloodstream relative to injection for systemic indications, or the
amount of drug delivered to the lung tissue for local lung indications),
formulation stability, safety and dosage reproducibility.
The initial screening determinant for the feasibility of pulmonary delivery
of any systemic drug is pulmonary bioavailability, which measures the percentage
of the drug absorbed into the bloodstream when delivered directly to the lungs.
In addition, a certain percentage of each drug dose is lost at various stages of
the manufacturing and pulmonary delivery process--in drug formulation, dry
powder processing, packaging, and in moving the drug from a delivery device into
the lungs. Excessive drug loss at any one stage or cumulatively in the
manufacturing and delivery process could render a drug commercially unfeasible
for pulmonary delivery.
Formulation stability (the physical and chemical stability of the formulated
drug over time and under various storage conditions) and safety will vary with
each drug and the type and amount of excipients that are used in the
formulation. Reproducible dosing (the ability to deliver a consistent and
predictable amount of drug into the bloodstream over time both for a single
patient and across patient groups) requires the development of an inhalation
device that consistently delivers predictable amounts of dry powder formulations
to the deep lung, accurate unit dose packaging of dry powder formulations and
moisture resistant packaging. There can be no assurance that the Company will be
able to develop successfully such an inhalation device or overcome such other
obstacles to reproducible dosing.
The Company's integrated approach to systems development relies upon several
different but related technologies. Development of powder formulations,
processing and packaging technology and the delivery device, establishing
collaborations with partners, laboratory and clinical testing, and manufacturing
scale-up must proceed contemporaneously so as not to delay any aspect of systems
development. Any delay in one component of product or business development could
cause consequential delays in the Company's ability to develop, obtain approval
of or market therapeutic products using its system. Further refinement of the
Company's device prototype, further scale-up of the powder processing system and
automated packaging system will need to be accomplished before initiation of
late stage clinical trials.
There can be no assurance that Inhale will be able to demonstrate pulmonary
bioavailability for the drug candidates it has identified or may identify, will
be able to achieve commercial viability of its pulmonary delivery system or will
achieve the total system efficiency needed to be competitive with alternative
routes of delivery. Further, there can be no assurance that the Company's
pulmonary delivery system will prove to be safe or provide reproducible dosages
of stable formulations sufficient to achieve clinical efficacy, regulatory
approval or market acceptance. In addition, there can be no assurance that
Inhale will advance the numerous aspects of product and business development
such that delays in overall product development do not occur. The failure to
demonstrate pulmonary bioavailability, achieve total system efficiency, provide
safe, reproducible dosages of stable formulations or advance on a timely basis
the numerous aspects of product and business development would have a material
adverse effect on the Company.
UNCERTAINTIES RELATED TO CLINICAL TRIALS The Company has limited experience
in conducting clinical trials and intends to rely primarily on the
pharmaceutical companies with which it collaborates, including Pfizer and Lilly.
The Company is responsible for managing the clinical trials in its collaboration
with Baxter. Before seeking regulatory approvals for the commercial sale of
products under development, the Company must demonstrate through preclinical
studies and clinical trials that such products are safe and effective for use in
the target indications. The results from preclinical studies and early clinical
trials may not be indicative of results that will be obtained in large-scale
testing, and there can be no assurance that the Company's clinical trials will
demonstrate sufficient safety and efficacy to obtain the requisite regulatory
approvals or will result in marketable products. Clinical trials are also often
conducted with patients having advanced stages of disease. During the course of
treatment, these patients can die or suffer other adverse medical effects for
reasons that may not be related to the pharmaceutical agent being tested but
which can nevertheless affect clinical trial results. A number of companies in
the pharmaceutical industry have suffered significant setbacks in advanced
clinical trials, even after promising results in earlier
12
trials. Clinical trials for products being developed by the Company and its
partners may be delayed by many factors, including enrolling a sufficient number
of patients fitting the appropriate trial profile. If any of the Company's
products under development are not shown to be safe and effective in clinical
trials, the resulting delays in developing other compounds and conducting
related preclinical testing and clinical trials, as well as the need for
additional financing, would have a material adverse effect on the Company.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. The
Company has not been profitable since inception and, through September 30, 1997,
has incurred a cumulative deficit of approximately $34.7 million. The Company
expects to continue to incur substantial and increasing losses over at least the
next several years as the Company's research and development efforts,
preclinical and clinical testing activities and manufacturing scale-up efforts
expand and as the Company plans and builds its late stage clinical and early
commercial production facility. All of the Company's potential products are in
research or in the early stages of development, and no revenues have been
generated from approved product sales. The Company's revenues to date have
consisted primarily of payments under short-term research and feasibility
agreements and development contracts. To achieve and sustain profitable
operations, the Company, alone or with others, must successfully develop, obtain
regulatory approval for, manufacture, introduce, market and sell products
utilizing its pulmonary drug delivery system. There can be no assurance that the
Company can generate sufficient product or contract research revenue to become
profitable or to sustain profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE UPON COLLABORATIVE PARTNERS. The Company currently does not
possess the resources necessary to develop, obtain regulatory approvals, or
commercialize any of its potential therapeutic products. The Company's ability
to apply its pulmonary delivery system to a broad range of drugs will depend
upon its ability to establish and maintain collaborative arrangements since many
of the drugs currently approved for sale or in clinical testing are covered by
third-party patents. The Company has entered into collaborative arrangements
with certain of its partners to fund clinical trials, assist in obtaining
regulatory approvals, supply drugs for formulation and market and distribute
products. While Inhale has also entered into agreements with partners to test
the feasibility of its pulmonary delivery system with certain of their
proprietary molecules, there can be no assurance that the Company will be able
to enter into additional collaborations or that its feasibility agreements will
lead to collaborations. There also can be no assurance that the Company will be
able to maintain any such collaborative arrangements or feasibility agreements
or that any such collaborative arrangements or feasibility agreements will be
successful. The failure of the Company to enter into or maintain such
collaborative arrangements and feasibility agreements would have a material
adverse effect on the Company. Moreover, the inability of the Company to enter
into a collaborative arrangement with the owner of any patented drug may
preclude the Company from working with such drug.
The Company's existing partners have rights to pursue parallel development
of other drug delivery systems which may compete with the Company's pulmonary
drug delivery system and to terminate their agreements with the Company at any
time without significant penalty. The Company anticipates that any future
partners would have similar rights. Although the Company intends generally to
formulate and manufacture powders for partners and to supply inhalation devices
for such powders, certain partners may choose to formulate or manufacture their
own powders, or to develop or supply their own device, thereby limiting one or
more potential sources of revenue for Inhale. In addition, the Company
anticipates that it may be precluded from entering into new arrangements with
companies whose products compete with those of its existing partners. The
Company also has limited or no control over the resources that any partner may
devote to the Company's products, over partners' development efforts, including
the design and conduct of clinical trials, and over the pricing of any such
products. The pharmaceutical and biotechnology industries are consolidating, and
acquisitions by, or of, the Company's existing or potential collaborative
partners may affect the initiation or continuation of any such collaborations.
There can be no assurances that any of the Company's present or future
collaborative partners will perform their obligations as expected, will devote
sufficient resources to the development, clinical testing or marketing of the
13
Company's potential products or will not terminate their agreements with the
Company prematurely or renegotiate such agreements. Any parallel development by
a partner of alternate drug delivery systems, development by a partner rather
than by Inhale of components of the delivery system, preclusion from entering
into competitive arrangements, failure to obtain timely regulatory approvals,
premature termination of an agreement, renegotiation of an agreement, or failure
by a partner to devote sufficient resources to the development and
commercialization of the Company's products would have a material adverse effect
on the Company.
LIMITED MANUFACTURING EXPERIENCE; RISK OF SCALE-UP. To achieve the levels
of production of Inhale's dry powder drug formulations necessary to support late
stage human clinical trials and for early commercialization of any of such
products, the Company will need to scale-up its current powder processing
facilities and automated filling, build a late stage clinical and early
commercial production facility, and comply with the good manufacturing practices
("GMP") prescribed by the United States Food and Drug Administration ("FDA") and
other standards prescribed by various federal, state and local regulatory
agencies in the United States and any other country of use.
The Company has no experience manufacturing products for large scale
clinical testing or commercial purposes. To date, the Company has performed
powder processing on the small scale needed for early stage trials and for
testing formulations of certain other potential therapeutic products and
scaled-up powder processing for larger clinical trials. There can be no
assurance that manufacturing and control problems will not arise as the Company
attempts to further scale-up its powder processing facilities or that such
scale-up can be achieved in a timely manner or at a commercially reasonable
cost. Any failure to surmount such problems could delay or prevent late stage
clinical testing and commercialization of the Company's products and would have
a material adverse effect on the Company. To date, the Company has relied on a
particular method of powder processing. There can be no assurance that this
technology will be applicable to all drugs or that the drug losses in powder
processing will not be too high for commercial viability for certain drugs. In
the event that the Company decides to pursue alternative powder processing
methods for some or all of its drugs, there can be no assurance that these
methods will prove commercially practical for aerosol drugs or that the Company
will have or be able to acquire rights to use such alternative methods. See
"Risk Factors--Dependence Upon Proprietary Technology; Uncertainty of Obtaining
Licenses or Developing Technology."
Fine particle powders and small quantity packaging (such as those to be used
in the Company's delivery system) require special handling. The Company has
designed and qualified small scale automated filling equipment for small
quantity packaging of fine powders. The Company faces significant technical
challenges scaling-up an automated filling system that can accurately and
economically handle the small dose and particle sizes of its powders in
commercial quantities. There can be no assurances that the Company will be able
to scale-up its automated filling equipment in a timely manner or at
commercially reasonable costs. Any failure or delay in such scale-up would delay
product development or bar commercialization of the Company's products and would
have a material adverse effect on the Company.
The Company also faces technical challenges in further developing its
inhalation device to achieve the efficiency necessary to deliver a broad range
of drugs, to produce such a device in quantities sufficient for later stage
clinical trials and early commercialization, and to adapt the device as may be
required for different powder formulations. There can be no assurance that
Inhale will successfully achieve such efficiencies, will be able to produce such
quantities or will be able to adapt the device as required. The failure of the
Company to overcome any such challenges would have a material adverse effect on
the Company. For late stage clinical trials and initial commercial production,
the Company intends to use one or more contract manufacturers to produce its
device. There can be no assurance that Inhale will be able to enter into or
maintain such arrangements. The failure of the Company to enter into and
maintain such arrangements would have a material adverse effect on the Company.
14
UNCERTAINTY OF MARKET ACCEPTANCE. The commercial success of the Company's
pulmonary drug delivery system will depend upon market acceptance by health care
providers, payors and patients. The Company's products under development use a
new method of drug delivery, and there can be no assurance that any of the
Company's products under development will ever achieve market acceptance. Market
acceptance will depend on many factors, including the safety and efficacy
results of the Company's clinical trials, favorable regulatory approval and
product labeling, the frequency of administration, the availability of
third-party reimbursement, the availability of alternative technologies and the
price of the Company's products relative to alternative technologies. There can
be no assurance that health care providers, patients or third-party payors will
accept the Company's pulmonary drug delivery system and the failure to do so
would have a material adverse effect on the Company.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company's
operations to date have consumed substantial and increasing amounts of cash. The
negative cash flow from operations is expected to continue and to accelerate in
the foreseeable future. The development of the Company's technology and proposed
products will require a commitment of substantial funds to conduct costly and
time-consuming research, preclinical and clinical testing, establish an early
commercial production facility and bring any such products to market. The
Company's future capital requirements will depend on many factors, including
continued progress in the research and development of the Company's technology
and drug delivery system, the ability of the Company to establish and maintain
collaborative arrangements with others and the terms thereof, payments received
from partners under research and development agreements, progress with
preclinical and clinical trials, the time and costs involved in obtaining
regulatory approvals, the cost of development and the rate of scale-up of the
Company's powder processing and packaging technologies, the timing and costs of
its late stage clinical and early commercial production facility, the cost
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims, the need to acquire licenses to new technology and the status of
competitive products.
The Company expects that its existing capital resources, contract research
revenues from collaborations and the net proceeds of this offering and interest
thereon, will enable the Company to maintain its current and planned operations
at least through 1999. Thereafter, the Company may need to raise substantial
additional capital to fund its operations. The Company intends to seek such
additional funding through collaborative or partnering arrangements, the
extension of existing arrangements, or through public or private equity or debt
financings. There can be no assurance that additional financing will be
available on acceptable terms or at all. If additional funds are raised by
issuing equity securities, further dilution to shareholders may result. If
adequate funds are not available, the Company may be required to delay, reduce
the scope of, or eliminate one or more of its research or development programs
or obtain funds through arrangements with collaborative partners or others that
may require the Company to relinquish rights to certain of its technologies,
product candidates or products that the Company would otherwise seek to develop
or commercialize.
DEPENDENCE UPON PROPRIETARY TECHNOLOGY; UNCERTAINTY OF OBTAINING LICENSES OR
DEVELOPING TECHNOLOGY. The Company's success will depend in part upon protecting
its proprietary technology from infringement, misappropriation, duplication and
discovery. The Company intends to rely principally on a combination of patent
law, trade secrets and contract law to protect its proprietary technology in the
United States and abroad. Inhale has filed patent applications covering certain
aspects of its device, powder processing technology, and powder formulations and
pulmonary route of delivery for certain molecules, and plans to file additional
patent applications. There can be no assurance that any of the patents applied
for by the Company will issue, or that any patents that issue will be valid and
enforceable. Even if such patents are enforceable, the Company anticipates that
any attempt to enforce its patents could be time consuming and costly.
The patent positions of pharmaceutical, biotechnology and drug delivery
companies, including Inhale, are uncertain and involve complex legal and factual
issues. Additionally, the coverage claimed in a patent application can be
significantly reduced before the patent is issued. As a consequence, the Company
does not know whether any of its patent applications will result in the issuance
of patents or, if any patents issue,
15
whether they will provide significant proprietary protection or will be
circumvented or invalidated. Since patent applications in the United States are
maintained in secrecy until patents issue, and since publication of discoveries
in the scientific or patent literature often lag behind actual discoveries, the
Company cannot be certain that it was the first inventor of inventions covered
by its pending patent applications or that it was the first to file patent
applications for such inventions. Moreover, the Company may have to participate
in interference proceedings declared by the United States Patent and Trademark
Office ("PTO") to determine priority of invention, which could result in
substantial cost to the Company, even if the eventual outcome is favorable to
the Company. An adverse outcome could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from or to
third parties or require the Company to cease using the technology in dispute.
The Company is aware of numerous pending and issued U.S. and foreign patent
rights and other proprietary rights owned by third parties that relate to
aerosol devices and delivery, pharmaceutical formulations, dry powder processing
technology and the pulmonary route of delivery for certain macromolecules. The
Company cannot predict with any certainty which, if any, patents and patent
applications will be considered relevant to the Company's technology by
authorities in the various jurisdictions where such rights exist, nor can the
Company predict with certainty which, if any, of these rights will or may be
asserted against it by such third parties. The Company is aware of an alternate
dry powder processing technology which Inhale is not using for its current
products under development but may desire to use for certain products in the
future. The ownership of this powder processing technology is unclear and the
Company is aware that multiple parties, including Inhale, claim patent, trade
secret and other rights in the technology. If the Company determines that this
alternate powder processing technology is relevant to the development of future
products and further determines that a license to this alternate powder
processing technology is needed, there can be no assurance that the Company can
obtain a license from the relevant party or parties on commercially reasonable
terms, if at all. The Company is also aware of an issued U.S. patent which
covers a broad range of macromolecule drugs in dry formulations. The Company is
evaluating the validity of this patent, its relevance to the Company's products
and whether the license proposed by the patent owner is of interest to the
Company. There can be no assurance that the Company can obtain any license to
any technology that the Company determines it needs, on reasonable terms, if at
all, or that Inhale could develop or otherwise obtain alternate technology. The
failure of the Company to obtain licenses if needed would have a material
adverse effect on the Company.
In June 1997, the Company acquired the intellectual property portfolio of
the BioPreservation Division of Pafra Limited of Basildon, England ("Pafra").
This portfolio includes issued U.S. and foreign Letters Patent and pending
applications relating to the stabilization of macromolecule drugs in dry
formulations. A granted European patent included in this portfolio is currently
the subject of an opposition proceeding before the European Patent Office and
the Company is continuing the defense of this patent, the opposition to which
was initiated prior to the acquisition. There can be no assurance that the
Company will be successful in the defense of this opposition proceeding. In
addition, there can be no assurance that any of the Pafra patent applications
will issue, or that any Pafra patents will be valid and enforceable. The loss of
the opposition proceeding or the ability to obtain or defend the Pafra patents
could have a material adverse effect on the Company.
Third parties from time to time have asserted and may assert that the
Company is employing technology that they believe is based on issued patents,
trade secrets or know-how of others. In addition, future patents may issue to
third parties which the Company's technology may infringe. The Company could
incur substantial costs in defending itself and its partners against any such
claims. Furthermore, parties making such claims may be able to obtain injunctive
or other equitable relief which could effectively block the Company's ability to
further develop or commercialize some or all of its products in the United
States and abroad, and could result in the award of substantial damages. In the
event of a claim of infringement, the Company and its partners may be required
to obtain one or more licenses from third parties. There can be no assurances
that the Company or its partners will be able to obtain such licenses at
16
a reasonable cost, if at all. Defense of any lawsuit or failure to obtain any
such license could have a material adverse effect on the Company.
The Company's ability to develop and commercialize its technology will be
affected by the Company's or its partners' access to the drugs which are to be
formulated. Many drugs, including powder formulations of certain drugs which are
presently under development by the Company, are subject to issued and pending
United States and foreign patent rights which may be owned by competing
entities. There are issued patents and pending patent applications relating to
the pulmonary delivery of macromolecule drugs, including several for which the
Company is developing pulmonary delivery formulations. Specifically, patents
have been granted in the United States and Europe directed to aerosol
formulations for the treatment of the lung containing alpha-1 antitrypsin (U.S.)
and serine protease inhibitors (Europe). The Company's development partner for
alpha-1 antitrypsin, Centeon, is negotiating with multiple partners to secure
rights under these patents. The failure by Centeon to secure rights under these
patents could result in the termination of this program by Centeon. The
resulting patent situation is highly complex, and the ability of any one company
to commercialize a particular biopharmaceutical drug is highly unpredictable.
The Company intends generally to rely on the ability of its partners to provide
access to the drugs which are to be formulated for pulmonary delivery. There can
be no assurance that the Company's partners will be able to provide access to
drug candidates for formulation for pulmonary delivery or that, if such access
is provided, the Company or its partners will not be accused of, or determined
to be, infringing a third party's rights and will not be prohibited from working
with the drug or be found liable for damages that may not be subject to
indemnification. Any such restriction on access or liability for damages would
have a material adverse effect on the Company.
The Company also will rely on trade secrets and contract law to protect
certain of its proprietary technology. There can be no assurance that any such
contract will not be breached, or that if breached, the Company will have
adequate remedies. Furthermore, there can be no assurance that any of the
Company's trade secrets will not become known or independently discovered by
third parties.
In 1995 the PTO adopted changes to the United States patent law that changed
the term of issued patents, subject to certain transition periods, to 20 years
from the date of filing rather than 17 years from date of issuance. Beginning in
June 1995, the patent term became 20 years from the earliest effective filing
date of the underlying patent application. Such change may reduce the effective
term of protection for patents that are pending for more than three years in the
PTO. In addition, as of January 1996, all inventors who work outside of the
United States are able to establish a date of invention on the same basis as
those working in the United States. Such change could adversely affect the
ability of the Company to prevail in a priority of invention dispute with a
third party located or doing work outside of the United States. While the
Company cannot predict the effect that such changes will have on its business,
such changes could have a material adverse effect on the Company's ability to
protect its proprietary information and sustain the commercial viability of its
products. Furthermore, the possibility of extensive delays in such process,
could effectively further reduce the term during which a marketed product could
be protected by patents.
DEPENDENCE UPON AND NEED TO ATTRACT KEY PERSONNEL. The Company is highly
dependent upon the principal members of its scientific and management staff. The
Company does not have employment contracts with its key employees, nor does the
Company have key man insurance policies on them. The Company also relies on
consultants and advisors to assist the Company in formulating research and
development strategy. To pursue its product development and commercialization
plans, the Company will be required to hire additional qualified scientific
personnel to perform research and development, as well as personnel with
expertise in clinical testing, government regulation and manufacturing.
Expansion in product development and manufacturing also is expected to require
the addition of management personnel and the development of additional expertise
by existing management personnel. Retaining and attracting qualified personnel,
consultants and advisors will be critical to the Company's success. The Company
faces competition for qualified individuals from numerous pharmaceutical,
biotechnology and
17
drug delivery companies, universities and other research institutions. There can
be no assurance that the Company will be able to retain its current key
employees or attract and retain qualified additional personnel and management
when needed and its failure to do so would have a material adverse effect on the
Company's ability to develop and commercialize products.
GOVERNMENT REGULATION; UNCERTAINTY OF OBTAINING REGULATORY APPROVAL. The
production and marketing of the Company's products and its ongoing research and
development activities are subject to regulation by numerous governmental
authorities in the United States and other countries. Prior to marketing a new
dosage form of any drug, including one developed for use with the Company's
pulmonary drug delivery system, whether or not such drug was already approved
for marketing in another dosage form, the product must undergo rigorous
preclinical and clinical testing and an extensive review process mandated by the
FDA and equivalent foreign authorities. These processes generally take a number
of years and require the expenditure of substantial resources. None of the
Company's proposed products has been submitted to the FDA for marketing
approval. The Company has no experience obtaining such regulatory approval, does
not have the expertise or other resources to do so and intends to rely on its
partners to fund clinical testing and to obtain product approvals.
The time required for completing such testing and obtaining such approvals
is uncertain. Further refinement of the device prototype, further scale-up of
the powder processing system and automated powder filling and packaging system
will need to be accomplished before initiation of later stage clinical trials.
Any delay in any of these components of product development may delay testing.
In addition, delays or rejections may be encountered based upon changes in FDA
policy during the period of product development. Similar delays may also be
encountered in other countries. If regulatory approval of a product is granted,
such approval may entail limitations on the indicated uses for which the product
may be marketed, and the marketed product, its manufacturer, and its
manufacturing facilities remain subject to continual review and periodic
inspections. Later discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market. There can be
no assurance that regulatory approval will be obtained for any products
developed by the Company on a timely basis, or at all. The failure to obtain
timely regulatory approval of its products, any product marketing limitations or
a product withdrawal would have a material adverse effect on the Company.
UNCERTAINTY RELATED TO THE HEALTH CARE INDUSTRY AND THIRD-PARTY
REIMBURSEMENT. Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. Recent
initiatives to reduce the federal deficit and to reform health care delivery are
increasing cost-containment efforts. The Company anticipates that Congress,
state legislatures and the private sector will continue to review and assess
alternative benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups, price controls on
pharmaceuticals and other fundamental changes to the health care delivery
system. Any such proposed or actual changes could cause the Company or its
collaborative partners to limit or eliminate spending on development projects.
Legislative debate is expected to continue in the future, and market forces are
expected to demand reduced costs. Inhale cannot predict what effect the adoption
of any federal or state health care reform measures or future private sector
reforms may have on its business.
In both domestic and foreign markets, sales of the Company's products under
development will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
managed care providers, private health insurers and other organizations. In
addition, other third-party payors are increasingly challenging the price and
cost effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
There can be no assurance that the Company's proposed products will be
considered cost effective or that adequate third-party reimbursement will be
available to enable Inhale to maintain
18
price levels sufficient to realize an appropriate return on its investment in
product development. Legislation and regulations affecting the pricing of
pharmaceuticals may change before the Company's proposed products are approved
for marketing. Adoption of such legislation could further limit reimbursement
for medical products. If adequate coverage and reimbursement levels are not
provided by the government and third-party payors for the Company's potential
products, the market acceptance of these products would be adversely affected,
which would have a material adverse effect on the Company.
HIGHLY COMPETITIVE INDUSTRY; RISK OF TECHNOLOGICAL OBSOLESCENCE. The
biotechnology and pharmaceutical industries are highly competitive and rapidly
evolving and significant developments are expected to continue at a rapid pace.
The Company's success depends upon maintaining a competitive position in the
development of products and technologies for pulmonary delivery of
pharmaceutical drugs. If a competing company were to develop or acquire rights
to a better dry powder pulmonary delivery device or fine powder processing
technology, a better system for efficiently and reproducibly delivering drugs to
the deep lung, a non-invasive drug delivery system which is more attractive for
the delivery of drugs than pulmonary delivery, or an invasive delivery system
which overcomes some of the drawbacks of current invasive systems for chronic or
subchronic indications (such as a sustained release system), the Company's
business could be materially adversely affected.
The Company is in competition with pharmaceutical, biotechnology and drug
delivery companies, hospitals, research organizations, individual scientists and
nonprofit organizations engaged in the development of alternative drug delivery
systems or new drug research and testing, as well as with entities producing and
developing injectable drugs. The Company is aware of a number of companies
currently seeking to develop new products and non-invasive alternatives to
injectable drug delivery, including oral delivery systems, intranasal delivery
systems, transdermal systems and colonic absorption systems. Several of these
companies may have developed or be developing dry powder devices that could be
used for pulmonary delivery. The Company is also aware of other companies
currently engaged in the development and commercialization of pulmonary drug
delivery systems and enhanced injectable drug delivery systems. Many of these
companies and entities have greater research and development capabilities,
experience, manufacturing, marketing, financial and managerial resources than
the Company and represent significant competition for the Company. Acquisitions
of competing drug delivery companies by large pharmaceutical companies could
enhance competitors' financial, marketing and other resources. Accordingly, the
Company's competitors may succeed in developing competing technologies,
obtaining FDA approval for products more rapidly than the Company and gaining
market acceptance. There can be no assurance that developments by others will
not render the Company's products or technologies uncompetitive or obsolete.
PRODUCT LIABILITY; AVAILABILITY OF INSURANCE. The design, development and
manufacture of the Company's products involve an inherent risk of product
liability claims and associated adverse publicity. Although the Company
currently maintains general liability insurance, there can be no assurance that
the coverage limits of the Company's insurance policies will be adequate. The
Company obtained clinical trial product liability insurance of $3.0 million per
event for certain clinical trials and intends to obtain insurance for future
clinical trials of insulin and other products under development. There can be no
assurance, however, that the Company will be able to obtain or maintain
insurance for any future clinical trials. Such insurance is expensive, difficult
to obtain and may not be available in the future on acceptable terms, or at all.
A successful claim brought against the Company in excess of the Company's
insurance coverage would have a material adverse effect upon the Company and its
financial condition.
HAZARDOUS MATERIALS. The Company's research and development involves the
controlled use of hazardous materials, chemicals and various radioactive
compounds. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by state
and federal regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages
19
that result and any such liability could exceed the resources of the Company.
The Company may incur substantial costs to comply with environmental
regulations.
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Restated
Articles of Incorporation and the California General Corporation Law could
discourage a third party from attempting to acquire, or make it more difficult
for a third party to acquire, control of the Company without approval of the
Company's Board of Directors. Such provisions could also limit the price that
certain investors might be willing to pay in the future for shares of Common
Stock. Certain of such provisions allow the Board of Directors to authorize the
issuance of Preferred Stock with rights superior to those of the Common Stock.
The Company also will be subject to the provisions of Section 1203 of the
California General Corporation Law which requires a fairness opinion to be
provided to the Company's shareholders in connection with their consideration of
any proposed "interested party" reorganization transaction.
POTENTIAL VOLATILITY OF STOCK PRICE. The market prices for securities of
early stage biotechnology companies have historically been highly volatile and
the market from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new therapeutic products or the
announcement or termination of collaborative relationships by the Company or its
competitors, governmental regulation, clinical trial results, developments in
patent or other proprietary rights, public concern as to the safety of drug
formulations developed by the Company or others and general market conditions
may have a significant effect on the market price of the Common Stock. The
Company's securities are subject to a high degree of risk and volatility. In the
past, following periods of volatility in the market price of a company's
securities, class action securities litigation has often been instituted against
such a company. Any such litigation instigated against the Company could result
in substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect on the Company's business, financial
condition and operating results.
20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings--Not Applicable
Item 2. Changes in Securities--None
Item 3. Defaults upon Senior Securities--None
Item 4. Submission of Matters to a Vote of Security Holders--None
Item 5. Other Information--None
Item 6. Exhibits and Reports on Form 8-K
(#) Exhibits
The following exhibits are filed herewith or incorporated by reference
EXHIBIT EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
3.1(3) Restated Articles of Incorporation of the Registrant.
3.2(1) Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 through 3.2.
4.2(1) Restated Investor Rights Agreement among the Registrant and certain other
persons named therein, dated April 29, 1993, as amended October 29,
1993.
4.5(1) Warrant to purchase 18,182 Shares of Series C Preferred Stock between the
Registrant and Phoenix Leasing Incorporated, dated October 29, 1993.
4.6(1) Specimen stock certificate.
4.9(2) Stock Purchase Agreement between the Registrant and Pfizer Inc., dated
January 18, 1995.
4.10(8) Warrant to purchase 10,000 shares of Common Stock between the Registrant
and Thomas J. Peirona, dated November 1, 1996.
4.11(8) Warrant to purchase 10,000 shares of Common Stock between the Registrant
and Kiet Nguyen, dated November 1, 1996.
4.12(9) Form of Stock Purchase Agreement between the Registrant and the Selling
Shareholders dated January 28, 1997.
10.1(4) Registrant's 1994 Equity Incentive Plan (the "Equity Incentive Plan").
10.2(1) Form of Incentive Stock Option under the Equity Incentive Plan.
10.3(1) Form of Nonstatutory Stock Option under the Equity Incentive Plan.
10.4(7) Registrant's 1994 Non-Employee Directors' Stock Option Plan, as amended.
10.5(1) Registrant's 1994 Employee Stock Purchase Plan.
10.6(1) Standard Industrial Lease between the Registrant and W.F. Batton & Co.,
Inc., dated September 17, 1992, as amended September 18, 1992.
10.7(1) Master Equipment Lease between the Registrant and Phoenix Leasing
Incorporated, dated August 15, 1992 and Schedules i to 4 thereto.
10.8(1) Senior Loan and Security Agreement between the Registrant and Phoenix
Leasing Incorporated, dated September 15, 1993.
10.9(1) Sublicense Agreement between the Registrant and John S. Patton, dated
September 13, 1991.
10.10(2) Offer Letter, dated September 16, 1994, from the Registrant to Jack M.
Anthony.
21
EXHIBIT EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
10.11(2) Addendum to Lease dated September 17, 1992, between the Registrant and
W.F. Batton & Marie A. Batton.
10.12(6) Lease dated May 31, 1995, between the Registrant and W.F. Batton & Marie
A. Batton.
10.13(6) Addendum Number One to Lease dated September 17, 1992, between the
Registrant and W.F. Batton & Marie A. Batton.
10.14(6) Addendum to Lease dated May 31, 1995 between the Registrant and W.F.
Batton & Marie A. Batton.
10.15(6) Addendum Number Two to Lease dated September 17, 1992, between the
Registrant and W.F. Batton & Marie A. Batton.
10.16(5) Stock Purchase Agreement between the Registrant and Baxter World Trade
Corporation, dated March 1, 1996.
10.17(8) Sublease and Lease Agreement, dated October 2, 1996 between the Registrant
and T.M.T. Associates L.L.C.
27.1 Financial Data Schedule
- ------------------------
(1) Incorporated by reference to the indicated exhibit in the Company's
Registration Statement (No. 33-75942), as amended.
(2) Incorporated by reference to the indicated exhibit in the Company's
Registration Statement (No. 33-89502), as amended.
(3) Incorporated by reference to the indicated exhibit in the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-07969).
(5) Incorporated by reference to the indicated exhibit in the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(6) Incorporated by reference to the indicated exhibit in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the indicated exhibit in the company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
(8) Incorporated by reference to the indicated exhibit in the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-20787)
(b) Reports on Form 8-K. No reports were filed on Form 8-K during the
quarter ended September 30, 1997
22
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto.
INHALE THERAPEUTIC SYSTEMS
DATE: October 3, 1997 BY: /s/ ROBERT B. CHESS
-----------------------------------------
Robert B. Chess
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
DATE: October 3, 1997 BY: /s/ JUDI R. LUM
-----------------------------------------
Judi R. Lum
VICE PRESIDENT FINANCE AND ADMINISTRATION,
CHIEF FINANCIAL OFFICER
23
5
1,000
9-MOS
DEC-31-1997
JAN-01-1997
SEP-30-1997
9,627
48,032
5,000
0
0
1,699
14,810
(4,455)
74,848
14,615
0
0
0
94,529
0
74,848
0
11,459
0
20,884
0
0
(21)
(6,993)
0
(6,993)
0
0
0
(6,993)
(0.52)
0
