UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the fiscal year ended December 31, 2001 | ||
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to . | ||
Commission File Number: 0-28402
ARADIGM CORPORATION
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California
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94-3133088 | |
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(State or Other Jurisdiction of
Incorporation or Organization) |
(I.R.S. Employer
Identification No.) |
3929 Point Eden Way, Hayward, CA 94545
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark 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 this Form 10-K or any amendment to this Form 10-K. o
As of February 28, 2002, there were 29,543,883 shares of common stock outstanding. The aggregate market value of common stock held by non-affiliates of the Registrant was approximately $65,317,000 based upon the closing price of the common stock on February 28, 2002 on The Nasdaq Stock Market. Shares of common stock held by each officer, director and holder of five percent or more of the 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.
Items 10, 11, 12 and 13 of Part III incorporate information by reference from the Registrant’s definitive proxy statement for the Annual Meeting of Shareholders to be held on May 17, 2002.
PART I
Item 1. Business
This Report on Form 10-K contains forward-looking statements, including, without limitation, statements regarding timing and results of clinical trials, the timing of regulatory approvals, the establishment of corporate partnering arrangements, the anticipated commercial introduction of our products and the timing of our cash requirements. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. Potential risks and uncertainties include, without limitation, those mentioned in this Report and, in particular, the factors described below in Part II under the heading “Risk Factors”.
Overview
Aradigm Corporation is a leading developer of advanced pulmonary drug delivery systems for the treatment of systemic conditions as well as lung diseases. Our hand-held AERx platform is being designed for the rapid and reproducible delivery of a wide range of pharmaceutical drugs and biotech compounds via pulmonary delivery or through the lung. We believe that our non-invasive AERx systems, which have been shown in clinical studies to achieve performance comparable to injection, will be a welcome alternative to injection-based drug delivery. In addition, our systems may improve therapeutic efficacy in cases where other existing drug delivery methods, such as pills, transdermal patches or inhalers, are too slow or imprecise.
According to IMS Health Incorporated, the total United States market for injectable drugs was approximately $20 billion in 2000. Of this market, we believe that drugs with aggregate sales in excess of $7 billion could potentially be delivered using the AERx platform. In addition, most biotech compounds currently under development rely on injection as their primary means of delivery.
We have tested 11 compounds in human clinical trials, including Phase 2b clinical trials that were successfully completed during the fourth quarter of 2001. We have attracted the attention of some of the world’s leading pharmaceutical and biotechnology companies, who have contributed cumulatively over $88 million in contract revenue for the advancement of our AERx technology. Our most advanced programs are based on development partnerships with:
| • | Novo Nordisk A/S, the world leader in insulin products, for the needle-free delivery of insulin for diabetes; and | |
| • | SmithKline Beecham, now GlaxoSmithKline plc, for the rapid, needle-free delivery of morphine to treat severe pain. |
We believe that our technology platform will provide the basis for the next generation in pulmonary drug delivery systems. Our AERx platform is based on a set of proprietary technologies, protected to date by 77 issued United States patents, that control the physical factors critical for rapid, reproducible pulmonary drug delivery. These proprietary technologies allow us to:
| • | utilize existing liquid formulation technology instead of more expensive dry powder processing; | |
| • | consistently create the high-quality aerosol required to reach the deep lung; | |
| • | guide patients to inhale in the most effective manner for deep lung delivery; and | |
| • | automatically monitor and control patient drug usage, allowing for better disease management. |
Background — Pulmonary Drug Delivery
Today an increasing number of drugs, including nearly all biotech drugs, are delivered by injection. While injections are quick and efficient, they have inherent limitations, including inconvenience, discomfort and risk of infection. These limitations have prompted drug manufacturers to explore alternatives such as improved oral delivery formulations, transdermal, or through the skin, patch technologies and pulmonary delivery
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Pulmonary delivery systems were originally developed to treat lung diseases by depositing aerosolized, or fine particles or mists of, medication in the large airways of the lung. These aerosols were created in medical devices, i.e. nebulizers, metered-dose inhalers and dry powder inhalers, for inhalation by the patient. While these systems have been useful in the treatment of diseases such as asthma, they generate a wide range of particle sizes, only a portion of which can reach the targeted lung tissues, and rely heavily on proper patient breathing technique to effect actual delivery.
Considerable recent research has been devoted to developing a means to create well defined small particle aerosols suitable for efficient pulmonary delivery of drugs, either to treat lung diseases or for absorption into the bloodstream for systemic effect. To deliver pharmaceuticals to or through the lungs, drugs must be transformed into an aerosol that can be inhaled by the patient. In order for aerosols to be delivered to the deep lung, the individual particles must be small, three microns or less in diameter, and the velocity of these particles must be low as they pass through the upper airways and into the deep lung. The particle velocity is largely determined by how fast the patient is inhaling. Larger or fast moving particles typically get deposited in the mouth or upper airways where they cannot be absorbed and may not be effective.
Recent advances in dry powder formulation technology have made possible the creation of smaller particle aerosols suitable for more efficient deep lung delivery, and several companies are developing systems based on this approach. However, most drugs being considered for pulmonary delivery are currently marketed in stable liquid formulations. We believe the extra steps involved in making dry powder formulations of these drugs will make them more difficult and costly to produce than liquid-based formulations. In addition, today’s dry powder delivery systems under development continue to rely on individual patient breathing technique to effect the actual drug delivery. It is well documented that the typical patient frequently strays from proper inhalation technique and may not be able to maintain a consistent approach over even moderate periods of time after training. Given the need with many medications to achieve precise and reproducible dosing, variability in technique among patients or from dose to dose may compromise safety or therapeutic efficacy.
The Aradigm Solution
Our AERx technology platform is being developed to enable pulmonary delivery of a wide range of pharmaceuticals in liquid formulations for local or systemic effect. Our proprietary AERx technologies focus principally on small particle aerosol generation from liquid formulation at the point of delivery and control over patient inhalation technique in order to efficiently and reproducibly deliver the aerosol drug to the deep lung. We have developed these proprietary technologies through an integrated approach that combines expertise in physics, electrical engineering, mechanical engineering, laser engineering and pharmaceutical sciences. The key features of the AERx platform include:
Ease of Drug Formulation
The AERx platform takes advantage of existing liquid drug formulations, reducing the time, cost and risk of formulation development compared to dry powder-based technologies. The liquid formulation technology of the AERx platform allows us to use standard, sterile pharmaceutical manufacturing techniques. We believe that this approach will result in lower cost production methods than those used in dry powder systems because we are able to bypass entirely the complex formulation processes required for those systems. Moreover, the liquid drug formulations used in AERx systems are expected to have the same stability profile as the currently marketed versions of the same drugs.
Efficient, Precise Aerosol Generation
Our proprietary technology produces the low-velocity, small-particle aerosols necessary for efficient deposition of a drug in the deep lung. Liquid drug formulations are aerosolized from pre-packaged, single-use, disposable packets using the hand-held AERx device. Each disposable packet is comprised of a small blister package of drug adjacent to an aerosolization nozzle. The AERx device compresses the packet to push the
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Automated Breath-Controlled Delivery
Studies have shown that even well trained patients tend to develop improper inhalation technique over time, resulting in less effective therapy. The AERx platform employs a patented technology to electronically measure the patients inhalation flow rate through the mouthpiece of the hand-held device. Indicator lights on the device guide the patient to inhale slowly and evenly for optimal drug delivery. When the desired flow rate is established early in the breath, drug delivery is automatically initiated. As a result, a consistent dose of medication is delivered each time the product is used.
Individual AERx systems can also be designed to incorporate features desirable for the particular therapeutic application through customization of the patient interface. For example, the electronic inhaler can record information, such as the date, the time and the name of the drug on each dose delivered. An AERx system can also be configured to impose timed programmable lockouts and to limit access to the inhaler to authorized users. We can even design the system to allow the patient to adjust the dosage administered from an individual packet if that degree of precision is required for effective therapy.
Strategy
Our goal is to become the leader in the development and commercialization of pulmonary drug delivery products. Our strategy incorporates the following principal elements:
Establish Broad Applicability of the AERx Platform
We believe that the AERx platform will be broadly applicable to drugs that are intended for systemic delivery and for local delivery to the lung. Many patients suffering from pain, diabetes, obesity, cancer, AIDS, Parkinson’s disease, multiple sclerosis, hepatitis, growth hormone deficiency and other debilitating chronic diseases currently can only get effective treatment by injection. In addition to two major collaborations, we are conducting clinical and preclinical studies on a number of compounds to demonstrate the applicability of the AERx platform to a broad range of molecule sizes and types, including small and large proteins and other substances to distribute genetic materials in the body. We believe this strategy will maximize the number of commercial product opportunities for us and will increase the interest of potential partners in developing drugs for the AERx platform, thereby reducing our dependence on any single product.
In addition, our work on proteins and gene vector delivery anticipates the role that genomics and proteomics are expected to play in future drug discovery. Many new drugs developed as a result of information garnered from efforts to sequence and study the human genome will be composed of protein or DNA. Pulmonary drug delivery may be the only viable non-invasive way to deliver many of these new therapies. We believe that the capabilities of the AERx platform will make it particularly attractive for these potential future applications.
Focus on Quicker-to-Market Opportunities
Our principal commercial development efforts have been focused on product opportunities that have the potential to reach the market quickly. As part of this effort, we seek to minimize development risk by focusing on marketed drugs that are well characterized and have demonstrated safety profiles. This approach is evidenced by the drugs (insulin and morphine) that underlie our two leading development programs.
Expand Existing and Develop New Collaborative Relationships
In order to enhance our commercial opportunities and effectively leverage our core scientific resources, we intend to continue entering into multiple collaborative relationships with pharmaceutical and biotech
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Create a Large and Loyal Customer Base
Our goal is to create a large and loyal customer base that will repeatedly purchase disposable AERx packets. The disposable packets are expected to generate most of our revenues and substantially all of our profits over time. The AERx device is being designed to be a convenient hand-held unit that has features that meet the specific needs of patients in each therapeutic category. We believe that physicians and patients will find our unique product features attractive relative to anticipated competitive products. We intend to capitalize on what we believe will be a customer preference for the value-added features of our AERx device by pricing the device competitively to help ensure ongoing repeat usage of the high-margin disposable AERx packets. We believe that patients will tend to remain loyal to a superior product for the life of the device. Accordingly, we are designing the AERx device to last for several years.
Enhance Our Strong Proprietary Position
We believe that establishing a strong proprietary position in pulmonary drug delivery could provide an important competitive advantage in our target markets. We have aggressively pursued comprehensive patent protection of our technology and, as of February 28, 2002, had 77 issued United States patents with a number of additional United States patent applications pending. While there can be no assurance that any of our patents will provide a significant commercial advantage, these patents are intended to provide protection for important aspects of our technology, including aerosol generation, breath control, compliance monitoring and unit-dose formulation. In addition, we are maintaining as trade secrets key elements of our manufacturing technologies, particularly those associated with production of disposable unit-dose packets for the AERx systems.
Maintain Technological Leadership
We are making a substantial research and development investment to establish and maintain technological leadership in pulmonary drug delivery. This includes a research and development program to design the future generations of the AERx technology platform. The goal of this program is to access a wider range of markets, broaden our technology base, achieve manufacturing efficiencies and reduce the size and weight of our hand-held devices.
Aradigm Product Applications
We are developing the hand-held AERx platform based on a comprehensive approach to pulmonary drug delivery that includes drug formulation, aerosol generation, patient breath control and compliance monitoring technologies. We are currently developing AERx products for pain and diabetes management. In addition, we are planning to develop AERx systems for the non-invasive delivery of certain other drugs, including proteins, peptides, gene vectors and small molecules.
AERx insulin Diabetes Management System
We are developing the AERx insulin Diabetes Management System to permit patients with diabetes to non-invasively self-administer insulin. We believe that patients, when provided with a non-invasive delivery
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The Market
Unregulated glucose levels in people with diabetes are associated with short and long-term effects, including blindness, kidney disease, heart disease, amputation resulting from chronic or extended periods of reduced blood circulation to body tissue and other circulatory disorders. Patients with Type 1 diabetes do not have the ability to produce their own insulin and must self-inject insulin regularly to control their disease. Patients with Type 2 diabetes are unable to efficiently use the insulin that their bodies produce. While they may have some impairment in their ability to produce insulin as well, it is the defect in their ability to use insulin efficiently that leads to the addition of insulin to their treatment program. By increasing the circulating insulin concentration in their bodies, patients with Type 2 diabetes can partially overcome the inefficiency. The Diabetes Control and Complications Trial study of patients with Type 1 diabetes sponsored by National Institutes of Health indicated that insulin doses should be adjusted throughout the day in response to frequently measured blood glucose levels. The Diabetes Control and Complications Trial study showed that keeping blood glucose levels as close to normal as possible slows complications caused by diabetes. In fact, the Diabetes Control and Complications Trial study demonstrated that any sustained lowering of blood glucose levels is beneficial, even if the person has a history of poor blood glucose control. Separately, the United Kingdom Prospective Diabetes Study has also demonstrated that tighter blood glucose control can provide essentially the same benefits for patients with Type 2 diabetes.
We believe that approximately 800,000 Americans suffer from Type 1 diabetes. Virtually all of them are on daily insulin injection therapy, and most are currently monitoring their own blood glucose level. According to the Center for Disease Control, as of 2000, approximately ten million Americans had been diagnosed with Type 2 diabetes. These Type 2 diabetes patients consume the majority of insulin used in the United States due to their larger numbers. However, given their less severe impairment, many of these patients are reluctant to use injection-based therapy. We believe that this failure to comply with recommended therapies contributes to approximately $45 billion in annual direct costs associated with the treatment of diabetes. Through our convenient, non-invasive AERx insulin Diabetes Management System, we believe we can address this patient reluctance, reduce overall treatment costs and grow the total worldwide insulin market beyond 1999 levels of $3.6 billion. The leading supplier of insulin is Novo Nordisk, followed by Eli Lilly, and these two companies together account for more than 90% of the worldwide insulin market.
The Product
Patients with diabetes often avoid or limit the amount of insulin therapy because of the pain and inconvenience of administering the drug by injection. The AERx insulin Diabetes Management System is being designed as a painless and convenient alternative to drug injection to enable patients with diabetes to comply more effectively with their insulin therapy, thereby lessening the risk of long-term complications. We also believe that the features of the AERx insulin Diabetes Management System will allow people with diabetes to achieve more consistent and precise control over their blood glucose levels. A clinical study conducted by us in healthy fasting volunteers has shown that the way an individual breathes during drug delivery has a significant effect on the pharmacokinetic (measurement of drug level in the blood) profile of the delivered insulin. We believe that the proprietary breath control technology incorporated in the AERx insulin Diabetes Management System may eliminate this potential variability as a factor in the pulmonary delivery of insulin.
Standard insulin therapies presently require that doses of insulin given by injection be adjusted in increments of one international unit, which is a standard unit of measure for insulin. We are not aware of any competitive products under development that are being designed to provide the same one unit dosing adjustability as the AERx insulin Diabetes Management System. We believe that our AERx insulin Diabetes
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Clinical Development
In 2000, we presented data that showed that as the dose of insulin inhaled from our AERx system is increased, both the blood level of insulin and its ability to reduce glucose in the blood are increased proportionally. A publication by Brunner et al at the American Diabetes Association (ADA) meeting in San Antonio, Texas, showed proportionately increasing blood levels of insulin with increasing AERx insulin doses in 18 female and male, non-smoking, Type 1 diabetic subjects. The euglycaemic clamp method, which is a method by which the effect of insulin is measured by the incremental amount of glucose required to keep the blood glucose level constant in the body, used in this study demonstrated a linear or proportional response to the insulin delivery as measured by the glucose infusion rate. The efficiency of the amount of insulin packaged in an AERx dosage form relative to insulin injected from a syringe was approximately 13%. We presented similar results from a study of AERx insulin given immediately before a standard meal, compared to insulin given by subcutaneous injection 30 minutes prior to the meal. A study by Kipnes et al in 20 Type 1 diabetics was presented at the European Association for the Study of Diabetes (EASD) meeting in Jerusalem, Israel. The AERx system efficiency compared to subcutaneous insulin injections was 16% when comparing blood insulin levels and 17% when comparing blood glucose levels. These data mean that insulin, when inhaled, may require six to eight times more drug than when it is injected to have the same effect. We also completed a number of concurrent clinical studies in both healthy subjects and in diabetic subjects in 2000 in preparation for the upcoming pivotal trials.
In November 2001, we successfully completed Phase 2b clinical trials for our AERx insulin Diabetes Management System, which showed that the product may be successfully used to treat Type 2 diabetes patients with insulin delivered via the pulmonary route. The Phase 2 trial was designed to investigate the safety and efficacy of pulmonary insulin via the AERx insulin Diabetes Management System compared to intensified treatment with insulin injections in patients with Type 2 diabetes. Approximately 100 patients were included for a twelve-week period in the study. The results of the study showed the AERx insulin Diabetes Management System to be at least as effective as intensified subcutaneous injections of insulin.
The Collaboration
In June 1998, we entered into a product development and commercialization agreement with Novo Nordisk, the world leader in insulin therapy, covering the use of the AERx insulin Diabetes Management System for the delivery of blood glucose regulating medicines. Novo Nordisk has been granted worldwide sales and marketing rights to any products developed under the terms of the agreement, and we retain all manufacturing rights. For any system developed under the collaboration, which receives regulatory approval, we expect to receive a share of gross profit on the sales of such products by Novo Nordisk.
Pursuant to the Novo Nordisk agreement, we could receive approximately $38 million in milestone payments in addition to reimbursement for product development expenses and $10 million in equity investments by the time the first product from the collaboration is commercialized. Through December 31, 2001, we received from Novo Nordisk approximately $61.3 million in product development payments, approximately $7 million in milestone payments and $10 million from the purchase of our common stock by Novo Nordisk, $5 million of which was sold at a 25% premium to market price. Through December 31, 2001, of the payments received approximately $51.9 million of product development and $3.5 million of milestone payments have been recognized as contract revenue. Additional milestone payments and product development payments will be paid by Novo Nordisk if Novo Nordisk and we decide to jointly develop additional AERx products under the terms of the agreement.
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In October 2001, we entered into a common stock purchase agreement with Novo Nordisk Pharmaceuticals, Inc., an affiliate of Novo Nordisk A/ S, pursuant to which Novo Nordisk Pharmaceuticals purchased $20 million of our common stock at the fair market price. We also have the option under the agreement to sell an aggregate of up to $25 million additional shares to Novo Nordisk Pharmaceuticals for the purchase price provided in the agreement by delivering written notice, or a share sales notice, to Novo Nordisk Pharmaceuticals of our election to sell additional shares. Subject to certain restrictions, we may deliver a sale shares notice specifying an amount between $5 million and $10 million for Novo Nordisk Pharmaceuticals to purchase once every three months until we have sold an aggregate of $25 million additional shares of common stock to Novo Nordisk Pharmaceuticals. The sale of additional shares is subject to certain conditions, including, among other things, Novo Nordisk not owning more than 45% of our outstanding common stock and the accuracy of certain representations. Novo Nordisk and its affiliates currently own approximately 23% of our outstanding common stock. In a separate agreement, we and Novo Nordisk agreed to share manufacturing responsibilities where Novo Nordisk has accepted all responsibility for high volume production beyond the capacity of our first factory. This has potentially shifted a significant future investment in additional manufacturing capacity to Novo Nordisk and was accomplished without changing the basic economic arrangements of the original agreement.
AERx Pain Management System
We are developing the hand-held AERx Pain Management System as a non-invasive, patient-controlled pulmonary drug delivery product for treatment of severe pain. We are developing and plan to commercialize this product in collaboration with GlaxoSmithKline. In October 2001, we successfully completed Phase 2b clinical trials of the AERx Pain Management System. We will be working with GlaxoSmithKline to determine the next steps for the AERx morphine program. Future progress for this program is contingent on either GlaxoSmithKline recommitting to this program or a new partner entering into another development agreement with us. We will continue to prepare this program towards commencement of Phase 3 clinical trials, which could occur 6 to 12 months after entering into a development agreement with a new partner. There can be no assurance that this development program will be successful.
The Market
We have targeted cancer pain and other chronic pain as the first two applications for the AERx Pain Management System. More than four million cancer patients worldwide suffer from pain, a majority of which experience multiple breakthrough pain events each day. Breakthrough pain relates to extreme levels of pain the patient experiences that is above and beyond the pain level being managed by routine use of medication. The market for potent narcotic analgesics (pain killers) to treat such pain events in the United States in 2000 was approximately $3.8 billion.
Most pain medication taken by patients at home is delivered orally or by transdermal patch. These methods are typically slow to act and difficult to adjust to match the level of pain. Intravenous patient-controlled analgesia products, which are used primarily in hospitals, allow patients to self-administer pain medication on demand from a microprocessor-controlled infusion pump. Although effective for treating severe pain, widespread adoption of patient-controlled analgesia outside the hospital has been limited by the regular and expensive maintenance required by its use. Home use of patient-controlled analgesia can cost as much as $4,000 per month, due partially to the home nursing required to maintain the needle site. However, there are currently no non-invasive pain management products that can match the speed of intravenous administration of narcotic analgesics for rapid relief of breakthrough pain events.
The Product
We believe that a patient-controlled, non-invasive drug delivery system that enables rapid uptake of medication could significantly expand the market for pain management in the outpatient setting and improve the management of pain in the hospital. The AERx Pain Management System is expected to have features similar to current intravenous patient-controlled analgesia systems, but without the need for intravenous access and the resulting impairment of patient mobility and risk of infection. The AERx Pain Management
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Clinical Development
In 2000, we reported the start of a Phase 2b study using the AERx Pain Management System to deliver inhaled morphine to cancer patients and also the results of two completed clinical studies involving inhaled fentanyl (narcotic agent) via the AERx Pain Management System.
The two fentanyl studies were conducted at the Centre for Anaesthesia and Pain Management Research, University of Sydney at Royal North Shore Hospital, Sydney, Australia. The first study involved 10 healthy volunteers and was designed to evaluate the safety and pharmacokinetic profile of inhaled fentanyl. The subjects received two inhalations of fentanyl via the AERx Pain Management System followed one week later by an intravenous drip of fentanyl. Results showed an average inhaled bioavailability (the fraction of drug dosage in each unit-dose packet absorbed into the blood) of 67% from the AERx Pain Management System, with a plasma or blood profile very similar to that of the intravenous injection. This means that inhaled fentanyl may require one-third more drug than the injectable form to have the same effect. These data were presented at the 29th Annual Meeting of the American College of Clinical Pharmacology held in September 2000, in Chicago, Illinois.
The second trial on fentanyl via the AERx Pain Management System was an open-label (where the patient knows which drug they are taking) study of 20 cancer patients who were experiencing breakthrough pain episodes and who were receiving opioid-based pain management. Results of this study showed that all patients were able to achieve satisfactory breakthrough pain relief using the AERx Pain Management System. The average time to satisfactory pain relief was 10 minutes (range 6-24 minutes) which is similar to that reported for intravenous fentanyl. Ninety percent of patients expressed very good to excellent pain relief on the AERx Pain Management System. The results of this study were presented at the 19th Annual Scientific Meeting of the American Pain Society held in November 2000, in Atlanta, Georgia.
In December 2001, we successfully completed Phase 2b clinical trials for our AERx Pain Management System. The multicenter, Phase 2b AERx morphine trials were conducted in the United States and Australia. Over 100 patients were treated in two separate studies. In a study of 16 patients with breakthrough pain from advanced cancer, AERx morphine demonstrated significantly faster onset of pain control and comparable overall pain relief when compared to immediate release oral morphine solution. In a separate study of 89 patients with acute postoperative pain, the AERx Pain Management System was shown to provide pain relief comparable to intravenous morphine when given in similar doses. These data were presented at the American Pain Society 21st Annual Scientific Meeting held in March 2002, in Baltimore, Maryland.
The Collaboration
In September 1997, we entered into a product development and worldwide commercialization agreement with SmithKline Beecham (now GlaxoSmithKline) covering the use of the AERx Pain Management System for the delivery of narcotic analgesics. In December 2000, the agreement was amended to transfer control of further development and provide certain other new rights to us. We also assumed responsibility for financing the remainder of all development activities under the agreement, as amended. Under the terms of the amended agreement, unless GlaxoSmithKline or we have terminated the agreement, GlaxoSmithKline can restore its rights and obligations to participate in and fund development and commercialization of the AERx Management System upon payment of a restoration fee. We anticipate that GlaxoSmithKline will review its restoration election after the delivery of Phase 2b trial results, which will be made available to them in the first
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Additional Potential AERx Applications
We believe that the AERx system has applicability for a range of compounds developed by pharmaceutical and biotechnology companies, including many compounds that cannot be delivered orally. Due to their large size and poor oral bioavailability, large molecules developed by the biotechnology industry are typically developed in liquid formulations and delivered by injection. We believe that the AERx platform can provide for improved delivery and increased utilization of these therapies.
We believe that we have greater experience in human clinical trials than any other company in the advanced pulmonary drug delivery market. In addition, we believe that the breadth of our human testing, which has encompassed both small molecules and large molecules for both local lung delivery and systemic delivery, is the most comprehensive ever conducted in pulmonary drug delivery.
We currently have six programs that are developing or evaluating the use of the AERx delivery technology across a range of drug therapies. In addition to our collaboration with Novo Nordisk, these programs include a Stage II grant from the National Institutes of Health to evaluate the use of the AERx platform for delivery of gene therapies.
In addition to the above active programs, we have
conducted feasibility testing across a broad range of molecules,
including three additional compounds where we have conducted
early phase clinical trials that we believe could be pursued in
the future. Some of these molecules are listed below:
Chronic bronchitis and emphysema drugs
Antibodies
Gene therapies
Asthma drugs
Hematopoetic factors
Human growth factors
Anti-obesity drugs
Migraine drugs
Anti-Parkinson’s drugs
Interleukins
Interferons
Antibiotics
Sales and Marketing
We plan to establish additional collaborative relationships, similar to our agreement with Novo Nordisk, to develop and commercialize our AERx products. Through these collaborations, we intend to access resources and expertise to conduct late-stage clinical development and to market and sell AERx products. Ideal development partners will generally have both a commercial and a development presence in the target market, and will also have a commitment to grow that market via our drug delivery technology. Where consistent with other objectives, we plan to give preference to development partners whose pipelines contain multiple products whose value could be enhanced by our AERx pulmonary drug delivery technology.
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Manufacturing
Our clinical packet manufacturing facility was completed and validated in July 1998. We believe that it is capable of producing the AERx unit-dose packets in volumes adequate to support all of our current and anticipated clinical trials for our products under development and limited commercial requirements. Current capacity of this facility exceeds 50 million disposable packets per year.
While significant capital expenditures will be required to provide for the high-volume drug packet capacity needed to support commercialization of multiple AERx products, that capacity will be based on existing standard pharmaceutical manufacturing processes and no significant additional process development will be necessary. As a result, we believe that we can move too much higher levels of scale in a reasonably predictable manner and with minimal risk to our product development programs.
We completed the construction of a new facility for commercial scale production in 2001. We plan to internally produce the disposable nozzles, assemble the disposable unit-dose packets and fill the drug into the unit-dose packets. We will look to contract manufacturers to produce the main components and subassemblies for the AERx devices, but we plan to perform final assembly, calibration, testing and packaging of these devices ourselves. All of our manufacturing capabilities are being established at our facilities in California.
There can be no assurance that we will not encounter unanticipated delays or expenses in establishing high-volume production capacity for AERx devices and disposable drug packets. Any such delays or expenses could harm our business.
Intellectual Property and Other Proprietary Rights
Our business and competitive position is dependent upon our ability to protect our proprietary technology and avoid infringing the proprietary rights of others. We have conducted original research on a number of aspects relating to pulmonary drug delivery. This research has led to novel ideas, which in turn have resulted in our being issued 77 United States patents to date, with 34 United States patent applications pending. In addition, we have purchased three United States patents covering inventions that are relevant to our technologies. We have 51 issued foreign patents and 82 foreign patent applications pending.
We are protecting the AERx technology platform through patents covering the AERx device, the AERx disposable drug packet and methods for using the AERx platform for specific drug delivery applications. Our patents, such as United States patents 5,469,750; 5,509,404; 5,522,385; 5,694,919; 5,735,263 and 5,855,564, address current or potential features related to the AERx device. Our United States patents 4,508,749; 5,497,763; 5,544,646; 5,718,222; 5,823,178 and 5,829,435, address current or potential features related to the AERx disposable drug packet and pertinent manufacturing methods.
We have conducted clinical studies demonstrating requirements for delivering insulin and insulin analogs by inhalation. These studies have allowed us to define various specific breathing maneuvers required for efficient, reproducible delivery of insulin and insulin analogs by inhalation. These discoveries have led to the issuance of key patents, which cover the delivery of insulin, and insulin analogs regardless of the device used (e.g., automatic or manual) or the drug formulation technique employed (e.g., liquid or powder). Examples of these patents are:
| • | United States patent 5,672,581, which is directed to the inspiratory or inhaled flow rate and volume at which an insulin aerosol should be released into the patient’s inhalation. | |
| • | United States patent 5,884,620, which is directed to the role of total inhaled volume for the delivery of aerosolized insulin. | |
| • | United States patent 5,888,477, which is directed to the delivery of monomeric, or fast acting, insulin by inhalation. |
Our success will depend to a significant extent on our ability to obtain and enforce patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. Because the field of aerosolized drug delivery is crowded and a substantial number of patents have been issued and because patent positions can be highly uncertain and frequently involve complex legal and factual questions, the breadth of claims obtained in any application or the enforceability of our patents cannot be predicted. Commercialization
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Our current policy is to file patent applications on what we deem to be important technological developments that might relate to our products or methods of using our products. We also seek to protect some of these inventions through foreign counterpart applications in selected other countries. Statutory differences in patentable subject matter may limit the protection we can obtain on some of our inventions outside of the United States. For example, methods of treating humans are not patentable in many countries outside of the United States. These and other issues may limit the patent protection we will be able to secure outside of the United States.
The coverage claimed in a patent application can be significantly reduced before a patent is issued, either in the United States or abroad. Consequently, we do not know whether any of our pending or future patent applications will result in the issuance of patents or, to the extent patents have been issued or will be issued, whether these patents will be subjected to further proceedings limiting their scope, will provide significant proprietary protection or competitive advantage, or will be circumvented or invalidated. Furthermore, patents already issued to us or our pending applications may become subject to dispute, and any disputes could be resolved against us. For example, Eli Lilly has brought an action against us seeking to have one or more employees of Eli Lilly named as co-inventors on one of our patents. In addition, because patent applications in the United States are currently maintained in secrecy until patents issue and patent applications in certain other countries generally are not published until more than 18 months after they are first filed, and because publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first creator of inventions covered by pending patent applications or that we were the first to file patent applications on such inventions.
Our policy is to require our officers, employees, consultants and advisors to execute proprietary information and invention and assignment agreements upon commencement of their relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the relationship shall be kept confidential except in specified circumstances. These agreements also provide that all inventions developed by the individual on behalf of us shall be assigned to us and that the individual will cooperate with us in connection with securing patent protection on the invention if we wish to pursue such protection. There can be no assurance, however, that these agreements will provide meaningful protection for our inventions, trade secrets or other proprietary information in the event of unauthorized use or disclosure of such information.
We also execute confidentiality agreements with outside collaborators and consultants. However, disputes may arise as to the ownership of proprietary rights to the extent that outside collaborators or consultants apply technological information developed independently by them or others to our projects, or apply our technology to other projects, and there can be no assurance that any such disputes would be resolved in our favor.
We may incur substantial costs if we are required to defend ourselves in patent suits brought by third parties. These legal actions could seek damages and seek to enjoin testing, manufacturing and marketing of the accused product or process. In addition to potential liability for significant damages, we could be required to obtain a license to continue to manufacture or market the accused product or process and there would be no assurance that any license required under any such patent would be made available to us on acceptable terms, if at all. Litigation may also be necessary to enforce our patents against others or to protect our know-how or trade secrets. Such litigation could result in substantial expense, and there can be no assurance that any litigation would be resolved in our favor.
Competition
We are in competition with pharmaceutical, biotechnology and drug delivery companies, hospitals, research organizations, individual scientists and nonprofit organizations engaged in the development of alternative drug delivery systems or new drug research and testing, as well as with entities producing and developing injectable drugs. We are aware of a number of companies currently seeking to develop new products and non-invasive alternatives to injectable drug delivery, including oral delivery systems, intranasal delivery systems, transdermal systems, bucal, or mouth cavity, and colonic absorption systems. Several of
12
We believe our technology and integrated pulmonary delivery systems approach provides us with important competitive advantages in the delivery of drugs compared with currently known alternatives. While we believe that the capabilities of our AERx platform will provide us with certain important competitive advantages, new drugs or further developments in alternative drug delivery methods may provide greater therapeutic benefits, or comparable benefits at lower cost, in a given drug application than the AERx system.
Several companies are marketing and developing dry powder and other devices that could have applications for pulmonary drug delivery, including Inhale Therapeutic Systems and Alkermes Pharmaceuticals. These companies also have collaborative arrangements with corporate partners for the development of pulmonary delivery systems for insulin. There can be no assurance that competitors will not introduce products or processes competitive with or superior to ours.
Government Regulation
All medical devices and drugs, including our products under development, are subject to extensive and rigorous regulation by the federal government, principally the FDA, and by state and local governments. If these products are marketed abroad, they also are subject to export requirements and to regulation by foreign governments. The regulatory clearance process is generally lengthy, expensive and uncertain. The Federal Food, Drug, and Cosmetic Act, and other federal statutes and regulations, govern or influence the development, testing, manufacture, labeling, storage, approval, advertising, promotion, sale and distribution of such products. Failure to comply with applicable FDA and other regulatory requirements can result in sanctions being imposed on us or the manufacturers of our products, including warning letters, fines, product recalls or seizures, injunctions, refusals to permit products to be imported into or exported out of the United States, refusals of the FDA to grant approval of drugs or to allow us to enter into government supply contracts, withdrawals of previously approved marketing applications and criminal prosecutions.
The activities required before a new drug product may be marketed in the United States include preclinical and clinical testing. Preclinical tests include laboratory evaluation of product chemistry and other characteristics and animal studies to assess the potential safety and efficacy of the product as formulated. Many preclinical studies are regulated by the FDA under a series of regulations called the current Good Laboratory Practice regulations. Violations of these regulations can, in some cases, lead to invalidation of the studies, requiring such studies to be replicated.
The preclinical work necessary to administer investigational drugs to human subjects is summarized in an Investigational New Drug application to the FDA. FDA regulations provide that human clinical trials may begin 30 days following submission of an Investigational New Drug application, unless the FDA advises otherwise or requests additional information. There is no assurance that the submission of an Investigational New Drug application will eventually allow a company to commence clinical trials. Once trials have commenced, the FDA may stop the trials by placing them on “clinical hold” because of concerns about, for example, the safety of the product being tested.
Clinical testing involves the administration of the drug to healthy human volunteers or to patients under the supervision of a qualified principal investigator, usually a physician, pursuant to FDA reviewed protocol. Each clinical study is conducted under the auspices of an Institutional Review Board at each of the institutions at which the study will be conducted. An Institutional Review Board will consider, among other things, ethical factors, the safety of human subjects, informed consent requirements and the possible liability of the institution. Human clinical trials typically are conducted in three sequential phases, but the phases may overlap. Phase 1 trials consist of testing the product in a small number of patients or normal volunteers, primarily for safety, at one or more dosage levels, as well as characterization of a drug’s pharmacokinetic and/ or pharmacodynamic profile. In Phase 2 clinical trials, in addition to safety, the efficacy of the product is
13
A company seeking FDA approval to market a new drug must file a new drug application with the FDA pursuant to the Federal Food, Drug, and Cosmetic Act. In addition to reports of the pre-clinical and clinical trials conducted under an effective Investigational New Drug application, the new drug application includes information pertaining to the preparation of the drug substance, analytical methods, drug product formulation, details on the manufacture of finished products and proposed product packaging and labeling. Submission of a new drug application does not assure FDA approval for marketing. The application review process can take a year or more to complete, although reviews of treatments for cancer and other life-threatening diseases may be accelerated or expedited. However, the process may take substantially longer if, among other things, the FDA has questions or concerns about the safety or efficacy of a product. In general, the FDA requires at least two properly conducted, adequate and well-controlled clinical studies demonstrating efficacy with sufficient levels of statistical assurance.
Notwithstanding the submission of safety and efficacy data, the FDA ultimately may decide that the application does not satisfy all of its regulatory criteria for approval. The FDA could also determine that there is insufficient data or experience with chronic administration of drugs delivered via the lung for systemic effect to demonstrate that such chronic administration is safe, and could require further studies. The FDA also may require additional clinical tests (i.e., Phase 4 clinical trials) following new drug application approval to confirm safety and efficacy.
In addition, the FDA may in some circumstances impose restrictions on the use of the drug that may be difficult and expensive to administer. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems occur after the product reaches the market. The FDA also requires reporting of certain safety and other information that becomes known to a manufacturer of an approved drug. The product testing and approval process is likely to take a substantial number of years and involves expenditure of substantial resources. There is no guarantee that any approval will be granted on a timely basis, or at all. Upon approval, a prescription drug may only be marketed for the approved symptoms in the approved dosage forms and at the approved dosage.
Among the other requirements for drug product approval is the requirement that the prospective manufacturer conform to the FDA’s Good Manufacturing Practices, or GMP, regulations for drugs. In complying with the GMP regulations, manufacturers must continue to expend time, money and effort in production, record keeping and quality control to assure that the product meets applicable specifications and other requirements. The FDA periodically inspects manufacturing facilities in the United States to assure compliance with applicable GMP requirements. A company’s failure to comply with the GMP regulations or other FDA regulatory requirements could have a material adverse effect on that company’s business.
Products marketed outside the United States that are manufactured in the United States are subject to certain FDA regulations, as well as regulation by the country in which the products are to be sold. We also would be subject to foreign regulatory requirements governing clinical trials and drug product sales if products are marketed abroad. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries usually must be obtained prior to the marketing of the product in those countries. The approval process varies from country to country and the time required may be longer or shorter than that required for FDA approval.
We are subject to numerous federal, state and local laws relating to such matters as:
| • | controlled drug substances; | |
| • | safe working conditions; | |
| • | manufacturing practices | |
| • | environmental protection; | |
| • | fire hazard control; and | |
| • | disposal of hazardous or potentially hazardous substances. |
14
We are subject to numerous federal, state and local laws relating to such matters as controlled drug substances, safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. For example, the United States Drug Enforcement Agency, or DEA, regulates controlled drug substances, such as morphine and other narcotics. Establishments handling controlled drug substances such as morphine must be registered and inspected by the DEA and may be subject to export, import, security and production quota requirements. In addition, advertising and promotional materials are, in certain instances, subject to regulation by the Federal Trade Commission. There can be no assurance that we will not be required to incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon our business.
Product development and approval within this regulatory framework takes a number of years, involves the expenditure of substantial resources and is uncertain. Many drug products ultimately do not reach the market because they are not found to be safe or effective or cannot meet the FDA’s other regulatory requirements. In addition, there can be no assurance that the current regulatory framework will not change or that additional regulation will not arise at any stage of our product development that may affect approval, delay the submission or review of an application or require additional expenditures by us. There can be no assurance that we will be able to obtain necessary regulatory clearances or approvals on a timely basis, if at all, for any of our products under development, and delays in receipt or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or failure to comply with existing or future regulatory requirements could have a material adverse effect on our business.
International Scientific Advisory Board
We have assembled an International Scientific
Advisory Board comprised of scientific and development advisors
that provide expertise, on a consulting basis, in the areas of
pain management, allergy and immunology, pharmaceutical
development and drug delivery, but are employed elsewhere on a
full time basis. As a result, they can only spend a limited
amount of time on our affairs. The International Scientific
Advisory Board assists us on issues related to potential product
applications, product development and clinical testing. Its
members, and their affiliations and areas of expertise, include:
Name
Affiliation
Area of Expertise
Medical College of Virginia, Virginia
Commonwealth University
Aerosol Science/ Pharmaceutics
University of Sydney, Australia
Pain Management
The Johns Hopkins University School of Medicine
Allergy/ Immunology/ Asthma
Sequoia Hospital
Pain Management
Acrux Limited
Drug Delivery
NovoNordisk
Device Technology
The Johns Hopkins University School of Medicine
Allergy/ Immunology
Medlantic Research Institute
Endocrinology
The John Hopkins University School of Medicine
Endocrinology
CEO, Profound Quality Resources
Pharmaceutical Product Development
USC School of Pharmacy
Drug Delivery
15
Employees
As of February 28, 2002, we had 307 employees, of whom 262 were in research and development and product development and 45 were in business development, finance and administration. We believe that our future success is dependent on attracting and retaining highly skilled scientific, sales and marketing and senior management personnel. Competition for such skills is intense, and there is no assurance that we will continue to be able to attract and retain high-quality employees. Our employees are not represented by any collective bargaining agreement. We consider our relations with our employees to be good.
16
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the
Company and their ages as of February 28, 2002 are as
follows:
Name
Age
Position
50
President, Chief Executive Officer and Director
43
Vice President, Operations
42
Vice President, Pharmaceutical Sciences
47
Vice President, Engineering
51
Vice President, Quality
50
Chief Operating Officer
46
Vice President, Project Management
63
Vice President, Human Resources
44
Vice President, Clinical & Regulatory Affairs
71
Director
51
Director
54
Director
53
Director
51
Director
62
Director
| (1) | Member of the Audit Committee. |
| (2) | Member of the Compensation Committee. |
Richard P. Thompson has been a director and has served as our President and Chief Executive Officer since 1994 and was named Chairman of the Board in 2000. From 1991 to 1994, he was President of LifeScan, Inc., a Johnson & Johnson Company, a diversified health care company. In 1981, Mr. Thompson co-founded LifeScan, which was sold to Johnson & Johnson in 1986. Mr. Thompson holds a B.S. in biological sciences from the University of California at Irvine and an MBA from California Lutheran College.
Bikash K. Chatterjee has served as our Vice President, Pharmaceutical Operations since March 1998. From September 1997 until March 1998, Mr. Chatterjee was our Director of Pharmaceutical Operations. From January 1992 to August 1997, Mr. Chatterjee was the plant manager for manufacturing Boehringer-Mannheim’s disposable coagulation testing system. From 1988 to 1992, he held a number of senior manufacturing positions at various pharmaceutical companies, including Syntex Corporation. Mr. Chatterjee holds a B.A. in biochemistry and a B.S. in chemical engineering from the University of California at San Diego.
Stephen J. Farr , Ph.D., has served as our Vice President, Research and Development since July 2000. From January 1999 to June 2000, Dr. Farr was Vice President, Pharmaceutical Sciences and from January 1995 to December 1998, he was Senior Director of Pharmaceutical Sciences. From September 1985 to December 1994, Dr. Farr was Lecturer and later Senior Lecturer in the Welsh School of Pharmacy, Cardiff University, United Kingdom. He was a founder and director of Cardiff Scintigraphics Ltd. Dr. Farr holds a B.Sc. in pharmacy from DeMontfort University, a Ph.D. in pharmaceutics from the University of Wales and is a Visiting Associate Professor in the Department of Pharmaceutics, School of Pharmacy, Virginia Commonwealth University, Richmond, Virginia.
Maximillian D. Fiore has served as our Vice President, Engineering since September 1994. From January 1991 to September 1994, Mr. Fiore served as Director of Engineering at LifeScan, Inc. From November 1989 to December 1990, Mr. Fiore held various senior engineering and management positions with Abbott Laboratories, a pharmaceutical and medical device company. Mr. Fiore holds a B.S.E.E. and a B.S. in
17
Klaus D. Kohl , Ph.D., has served as our Vice President, Quality, since October 2000. From 1998 to 2000, Dr. Kohl was Quality Manager of GE Bayer Silicones, a joint venture of General Electric and Bayer Corporation. From 1996 to 1998, he was Vice President of Quality Assurance, Pharmaceutical Division, Bayer Corporation North America. Dr. Kohl joined Bayer in 1985 and held various positions in quality assurance/drug product development in the United States and in Europe. Previously, Dr. Kohl spent more than 7 years in basic research at the Research Center Juelich, Germany and the Max Planck Institute, Dortmund Germany. Dr. Kohl received his undergraduate degree in mathematics and physics from the University of Marburg, Germany and his Ph.D. from the University of Aachen, Germany.
V. Bryan Lawlis , Ph.D., joined in 2001 as our Chief Operating Officer. Previously, he was acting Chairman, President and Chief Executive Officer of Diosynth RTP, Inc. Dr. Lawlis founded Covance Biotechnology Services, a contract biopharmaceutical manufacturing operation, and served as its President and Chief Executive Officer from 1996 to 2000, and as Chairman in 2001, when it was sold to Diosynth, a division of Akzo Nobel. From 1981 to 1996 he was employed at Genencor, Inc. and Genentech, Inc. His last position at Genentech was Vice President of Process Sciences. Dr. Lawlis holds a B.A. in microbiology from the University of Texas at Austin, and a Ph.D. in biochemistry from Washington State University.
Daniel P. Maher has served as our Vice President, Project Management and Program Director, AERx iDMS, since April 2001. From November 1998 to April 2001, Mr. Maher was Sr. Director of Project Management, and Program Director, AERx iDMS. From 1996 to 1998, he was the Director of Clinical Operations at Chiron Corporation. Previously, Mr. Maher was Vice President of Operations at Spectra Biomedical Inc. Earlier, he was the Director of Therapeutics Project Management at Chiron Corporation and held various positions at Genentech in operations and product development, ultimately heading the Product Development Group. Mr. Maher holds a B.A. in biology from San Francisco State University and an MBA in health services management from Golden Gate University.
Norma L. Milligin has served as our Vice President, Human Resources since September 1998. From January 1995 to August 1998, Ms. Milligin worked as a consultant in the human resources area for a number of firms. From 1985 to January 1994, she held positions as Vice President of Human Resources at LifeScan, Inc., a Johnson & Johnson Company, and Chemtrak, Inc., a medical device company. From 1978 to 1985, she also held a number of senior human resource positions at Syntex Corporation. Ms. Milligin has taught organizational behavior at Pepperdine University, and holds a B.S. in business from the University of Colorado and an MBA from Pepperdine University.
Babatunde A. Otulana, M.D. , has served as our Vice President, Clinical Affairs since October 1997. From 1991 to September 1997, Dr. Otulana was a Medical Reviewer in the Division of Pulmonary Drug Products at the Center for Drug Evaluation and Research, Food and Drug Administration. From 1991 to 1997, Dr. Otulana also served as an Assistant Professor of Medicine in the Division of Pulmonary and Critical Care Medicine, Howard University Hospital. Dr. Otulana obtained his M.D. from the University of Ibadan, Nigeria and completed a Pulmonary Fellowship at Papworth Hospital, University of Cambridge, United Kingdom.
Frank H. Barker has been a director since May 1999. He has been the Chairman of U.S. Dermatologics, Inc., an over-the-counter pharmaceutical company, since February 1999, and was its President and Chief Executive Officer from October 1997 to February 1999. From January 1989 to January 1996, Mr. Barker served as a company group chairman of Johnson & Johnson. Mr. Barker holds a B.A. in business administration from Rollins College, Winter Park, Florida. Mr. Barker is a director of Catalina Marketing Corporation, a direct-to-consumer marketing company.
Stan M. Benson has been a director since April 2001. Mr. Benson served as Senior Vice President, Sales and Marketing of Amgen, Inc., a biotechnology company from 1995 to 2001. Prior to joining Amgen, Mr. Benson worked at Pfizer Inc, a pharmaceutical company, for 19 years in various senior management
18
Igor Gonda, Ph.D. , has been a director since September 2001. He is the Chief Executive Officer and Managing Director of Acrux Limited, a drug delivery company in Melbourne, Australia. Dr. Gonda was our Chief Scientific Officer until December 2001 and previously held the position of Vice President, Research and Development, from October 1995 until July 2001. From February 1992 to September 1995, Dr. Gonda was a Senior Scientist and Group Leader at Genentech, Inc. Prior to that, Dr. Gonda held academic positions at the University of Aston in Birmingham, UK, and the University of Sydney, Australia. Dr. Gonda has a B.Sc. in chemistry and a Ph.D. in physical chemistry from Leeds University, UK. He is the Chairman of Scientific Boards at Aradigm Corporation and Exhale Therapeutics, Inc.
John M. Nehra was elected director by our Board of Directors in December 2001. Mr. Nehra is a Special Partner of NEA 10, a venture capital partnership, and a General Partner of NEA VI, NEA VII, NEA VIII and NEA IX. Mr. Nehra is also the managing General Partner of Catalyst Ventures, a venture capital partnership. Prior to joining NEA and its affiliated venture funds in 1989, Mr. Nehra was Managing Director of Alex. Brown & Sons, an investment banking firm. Upon joining Alex. Brown in 1975, Mr. Nehra was responsible for building the firm’s healthcare research and healthcare banking practice, and forming its capital markets group. Mr. Nehra is a director of Iridex Corporation and Celeris Corporation and also serves on the boards of several privately held healthcare companies. Mr. Nehra holds a B.A. from the University of Michigan.
Wayne I. Roe has been a director since May 1999. Mr. Roe was Senior Vice President of United Therapeutics Corporation, a pharmaceutical manufacturer, from 1999 to 2000. He was Chairman of Covance Health Economics and Outcomes Services, Inc., a strategic marketing firm from 1996 to 1998. From June 1988 to March 1996, Mr. Roe was the President of Health Technology Associates, a pharmaceutical industry consulting firm. Mr. Roe received a B.A. from Union College, an M.A. from the State University of New York at Albany and an M.A. from the University of Maryland. He is also a director of Ista Pharmaceuticals Inc., Aderis Pharmaceuticals Inc., Novosonics Inc., and Favrille Inc. Mr. Roe currently is an independent consultant in the life sciences industry.
Virgil D. Thompson has been a director since June 1995. Since September 2000, he has been President, Chief Executive Officer and Director of Chimeric Therapies, Inc., a biotechnology company. From May 1999 until September 2000, he was the President, Chief Operating Officer and a Director of Bio-Technology General Corp., a pharmaceutical company. From January 1996 to April 1999, he was the President and Chief Executive Officer and a Director of Cytel Corporation, a biopharmaceutical company. From 1994 to 1996, he was President and Chief Executive Officer of Cibus Pharmaceuticals, Inc., a drug delivery device company. From 1991 to 1993 he was President of Syntex Laboratories, Inc., a pharmaceutical company. Mr. Thompson holds a B.S. in pharmacy from Kansas University and a J.D. from The George Washington University Law School. He is also a director of Questcor Pharmaceutical Corporation and Bio-Technology General Corporation.
Item 2. Properties
At December 31, 2001, we leased a total of approximately 253,898 square feet of office space in two office parks. We leased approximately 163,658 square feet in three buildings in an office park at 3929 Point Eden Way, Hayward, California and leased 90,240 square feet in one building in an office park located at 2704 West Winton Avenue, Hayward, California. The leases for the various office spaces expire at various times through the year 2016. Minimum annual payments under these leases will be approximately $4.9 million and $ 5.1 million in 2002 and 2003, respectively. We use this space for general administrative, product development, clinical, manufacturing and research and development purposes. We believe that our existing facilities are adequate to meet our requirements for the near term and that additional space will be available on commercially reasonable terms if needed.
19
Item 3. Legal Proceedings
In June 1998, Eli Lilly and Company filed a complaint against us in the United States District Court for the Southern District of Indiana. The complaint made various allegations against us, arising from our decision to enter into an exclusive collaboration with Novo Nordisk with respect to the development and commercialization of a pulmonary delivery system for insulin and insulin analogs. We sponsored various studies of the pulmonary delivery of insulin and insulin analogs using materials supplied by Lilly under a series of agreements dating from January 1996. We and Lilly had also conducted negotiations concerning a long-term supply agreement under which Lilly would supply bulk insulin to us for commercialization in our AERx insulin Diabetes Management System, and a separate agreement under which we would license certain intellectual property to Lilly. These negotiations were terminated after we proceeded with our agreement with Novo Nordisk. The complaint sought a declaration that Lilly scientists were co-inventors of a patent application filed by us relating to pulmonary delivery of an insulin analog or, in the alternative, enforcement of an alleged agreement to grant Lilly a nonexclusive license under such patent application. The complaint also contained allegations of misappropriation of trade secrets, breach of fiduciary duty, conversion and unjust enrichment and seeks unspecified damages and injunctive relief. We filed an answer denying all material allegations of the complaint and a motion for summary judgment directed against all claims in Lilly’s complaint. The Court has issued two written rulings on our motion substantially limiting the claims against us. Specifically, the Court granted our motion as to Lilly’s claim to enforce an alleged license agreement, for misappropriation of trade secrets, breach of fiduciary duty, conversion, estoppel and breach of contract (in part) and dismissed those claims from the case. The Court denied our motion as to Lilly’s claims for declaratory relief, unjust enrichment and breach of contract (in part), based on factual disputes between the parties, and those issues remain to be resolved. We recently filed a motion asking the Court to reconsider summary judgment on the inventorship and unjust enrichment claims, based on evidence recently produced by Lilly; the Court denied our motion but we may raise those issues again. Lilly filed a motion seeking to add several new patents to the case, but withdrew that motion after our opposition papers were filed and after discussion with the Court. Trial was set for November 2001, but has been continued to April 22, 2002 due to a conflict on the Court’s calendar. The risks to us should Lilly prevail in this case are that Lilly would be given rights of an owner, along with us, on one of our patents relating to pulmonary delivery of monomeric, or fast acting, insulin lispro and/or that Lilly would be awarded damages on its remaining claims for breach of contract and unjust enrichment. Lilly also contends that factual findings made in any trial of this case would have some effect on other patents relating to pulmonary delivery of monomeric insulin lispro. Management believes that we have meritorious defenses against each of Eli Lilly’s remaining claims and that this litigation will not have a material adverse effect on our business. However, there can be no assurance that we will prevail in this case.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matters were submitted to a vote of our security holders during the quarter ended December 31, 2001.
20
PART II
Item 5.
Market
for the Registrant’s Common Stock and Related Stockholder
Matters
Market Information
Our common stock is traded on The Nasdaq Stock
Market under the symbol “ARDM.” The following table
sets forth the intra-day high and low sale prices for our common
stock as reported on The Nasdaq Stock Market for the periods
indicated below.
High
Low
$
44.25
$
10.50
19.25
13.25
25.00
11.19
26.88
13.19
$
15.25
$
4.28
8.56
4.88
6.92
3.02
7.10
3.15
$
7.29
$
4.01
On February 28, 2002, there were 138 holders of record of our common stock. On March 14, 2002, the last sale price reported on the Nasdaq National Market for the common stock was $4.05 per share.
Dividend Policy
We have never declared or paid any cash dividends. We currently intend to retain any future earnings to finance the growth and development of our business and therefore do not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
On December 14, 2001, we issued 2,001,236 shares of our Series A Convertible Preferred Stock to certain institutional investors for an aggregate purchase price of $48.4 million in a private placement. Each share of Series A preferred stock is convertible at any time into four shares of our common stock, for an aggregate of 8,004,944 shares of common stock. In connection with the sale, we issued warrants to purchase an aggregate of 5,203,212 shares of our common stock at an exercise price of $6.97 per share. The warrants are exercisable at the election of the warrant holders for a five-year term. The sale and issuance of the preferred stock and warrants was deemed to be exempt from registration under the Securities Act of 1933, as amended, by virtue of Regulation D promulgated under such Act. Each purchaser represented that it was an accredited investor within the meaning of Rule 501(a) of the Act and that it was acquiring the securities for investment only and not with the view to the distribution thereof.
21
Item 6. Selected Financial Data
The following selected financial data should be
read in conjunction with the “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” and the financial statements and notes thereto
included in this Report on Form 10-K.
Years Ended December 31,
2001
2000
1999
1998
1997
(In thousands, except per share amounts)
$
28,916
$
20,303
$
16,812
$
17,515
$
3,685
58,836
48,176
33,625
25,549
13,452
9,355
9,271
7,849
8,661
6,012
68,191
57,447
41,474
34,210
19,464
(39,275
)
(37,144
)
(24,662
)
(16,695
)
(15,779
)
1,324
3,110
1,947
1,754
1,329
(1,081
)
(1,528
)
(888
)
(513
)
(234
)
(39,032
)
(35,562
)
(23,603
)
(15,454
)
(14,684
)
6,675
—
—
—
—
$
(32,357
)
$
(35,562
)
$
(23,603
)
$
(15,454
)
$
(14,684
)
(10,722
)
—
—
—
—
$
(43,079
)
$
(35,562
)
$
(23,603
)
$
(15,454
)
$
(14,684
)
$
(2.28
)
$
(2.07
)
$
(1.66
)
$
(1.32
)
$
(1.43
)
0.30
—
—
—
—
$
(1.98
)
$
(2.07
)
$
(1.66
)
$
(1.32
)
$
(1.43
)
21,792
17,196
14,216
11,682
10,280
$
71,164
$
44,381
$
31,259
$
31,036
$
24,305
48,308
19,862
22,797
16,483
15,999
132,100
71,371
50,790
44,949
30,294
2,727
6,230
9,609
4,570
2,139
30,735
—
—
—
—
(153,535
)
(110,441
)
(74,904
)
(51,279
)
(35,827
)
71,149
37,785
24,157
21,660
18,659
| (1) | See Note 1 of Notes to Financial Statement for an explanation of shares used in computing basic and diluted net loss per share. |
22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion below contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to management. Our future results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements as a result of certain factors, including, but not limited to, those discussed in this section as well as in the section entitled “Risk Factors.” This discussion should be read in conjunction with the financial statements and notes to financial statements.
Overview
Since our inception in 1991, we have been engaged in the development of pulmonary drug delivery systems. As of December 31, 2001, we had an accumulated deficit of $153.6 million. We have not been profitable since inception and expect to incur additional operating losses over the next several years as research and development efforts, preclinical and clinical testing activities and manufacturing scale-up efforts expand and as we plan and build our late-stage clinical and early commercial production capabilities. To date, we have not had any material product sales and do not anticipate receiving any revenue from the sale of products during 2002. The sources of working capital have been equity financings, equipment lease financings, contract revenues and interest earned on investments.
We have performed initial feasibility work on a number of compounds and have been compensated for expenses incurred while performing this work in several cases pursuant to feasibility study agreements with third parties. Once feasibility is demonstrated with respect to a potential product, we seek to enter into development contracts with pharmaceutical corporate partners. We currently have such agreements pursuant to which we are developing pulmonary delivery systems with Novo Nordisk A/ S, to manage diabetes using insulin and other blood glucose regulating compounds, and with GlaxoSmithKline plc, to manage acute and breakthrough pain using opioid analgesics.
The collaborative agreement with Novo Nordisk provides for reimbursement of research and development expenses as well as additional payments to us as we achieve certain significant milestones. We also expect to receive royalties from this development partner based on revenues from sales of product and to receive revenue from the manufacturing of unit dose packets and hand-held devices. We recognize revenues under the terms of our collaborative agreement as the research and development expenses are incurred, to the extent they are reimbursable. During 2001, this partner-funded program has contributed approximately 90% of our total contract revenues.
During December 2000, GlaxoSmithKline and we amended the product development and commercialization agreement whereby we assumed full control and responsibility for conducting and financing the remainder of all development activities. Under the amendment, unless we have terminated the agreement, GlaxoSmithKline can restore its rights to participate in development and commercialization of the product under the amended agreement upon payment of a restoration fee to us. We anticipate that GlaxoSmithKline will review its restoration election upon the delivery of Phase 2b trial results, which will be made available to them in the first half of 2002, but there can be no assurance that GlaxoSmithKline will elect to restore its rights. If we elect to terminate the agreement and continue or intend to continue any development activities, either alone or in collaboration with a third party, we will be obligated to pay an exit fee to GlaxoSmithKline. If we elect to pay the exit fee it will not have a material impact on our financial position or operating results. This development program is currently being funded through existing working capital.
In February 2001, we announced that Genentech had discontinued the development of dornase alfa using our proprietary AERx Respiratory Management System. We also entered into a new agreement allowing Genentech to evaluate the feasibility of using the AERx Pulmonary Drug Delivery System for pulmonary delivery of other Genentech compounds. Under the terms of the agreement, Genentech did not require us to repay the loan of funds required to conduct product development under the discontinued program. Forgiveness of the loan and accrued interest resulted in an extraordinary gain during the first quarter of 2001 of approximately $6.7 million. During 2001, we reimbursed Genentech $773,000 for unspent project prepayments.
23
In addition to the diabetes and pain management programs, we have three additional partner-funded programs and a gene therapy effort, which is funded through the National Institutes of Health. It is our policy not to disclose the partner or the drug until we have entered into long-term development agreements with a partner.
Critical Accounting Policies
We consider certain accounting policies related to revenue recognition, impairment of long-lived assets and the use of estimates to be critical accounting policies that require the use of significant judgements and estimates relating to matters that are inherently uncertain and may result in materially different results under different assumptions and conditions.
Revenue Recognition
Contract revenues consist of revenue from collaboration agreements and feasibility studies. We recognize revenue under the agreements as costs are incurred. Deferred revenue represents the portion of all refundable and nonrefundable research payments received that have not been earned. In accordance with contract terms, milestone payments from collaborative research agreements are considered reimbursements for costs incurred under the agreements and, accordingly, are generally recognized as revenue either upon the completion of the milestone effort when payments are contingent upon completion of the effort or are based on actual efforts expended over the remaining term of the agreements when payments precede the required efforts. Costs of contract revenues approximate such revenue and are included in research and development expenses. Refundable development and license fee payments are deferred until the specified performance criteria are achieved. Refundable development and license fee payments are generally not refundable once the specific performance criteria are achieved.
Impairment of Long-Lived Assets
We review for impairment whenever events or changes in circumstances indicates that the carrying amount of property and equipment may not be recoverable under the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of. If it is determined that an impairment loss has occurred based on expected future cash flows, the loss is recognized on the Statements of Operations.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting principles
requires us to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes to the financial statements. These estimates include
useful lives for property and equipment and related depreciation
calculations, estimated amortization period for payments
received from product development and license agreements as they
relate to the revenue recognition of deferred revenue and
assumptions for valuing options and warrants. Actual results
could differ from these estimates.
Results of Operations
Years Ended
December 31, 2001, 2000 and 1999
Contract Revenues.
We reported revenues from
collaborative contracts of $28.9 million in 2001, compared
to $20.3 million in 2000 and $16.8 million in 1999.
The revenue increase in 2001 and 2000 results primarily from an
increase in partner-funded project development revenue from Novo
Nordisk, which was $26 million in 2001 compared to
$15.4 million in 2000 and $8.7 million in 1999. The
revenue increase in 2001 and 2000 was partially offset by a
reduction in partner-funded project development revenue
principally from GlaxoSmithKline, which was $1.5 million in
2001 compared to $3.4 million in 2000 and $5.2 million
in 1999. Costs associated with contract research revenue are
included in research and development expenses.
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Research and Development Expenses.
Research and development expenses have
increased each year since our inception. These expenses were
$58.8 million in 2001 compared to $48.2 million in
2000 and $33.6 million in 1999. Research and development
expenses as a percentage of total operating expenses were 86% in
2001, 84% in 2000 and 81% in 1999. Research and development
expenses in 2001 increased by $10.7 million or 22% over
2000, which was primarily due to the expansion of development
efforts to support the ongoing program with Novo Nordisk and, to
a lessor extent, increases in development efforts for other
funded and unfunded development areas including manufacturing
scale-up efforts. Research and development expenses in 2000
increased by $14.6 million or 43% over 1999, which was due
to the expansion of research and development efforts to support
the ongoing programs with Novo Nordisk and Genentech including
an expansion of manufacturing scale-up efforts. Research and
development expenses associated with collaborative agreements
approximate contract revenue as these expenses are incurred
under the program agreements.
These expenses represent proprietary research
expenses as well as the costs related to contract research
revenue and include salaries and benefits of scientific and
development personnel, laboratory supplies, consulting services
and the expenses associated with the development of
manufacturing processes. We expect research and development
spending will increase over the next few years if we continue to
expand our development activities to support current and
potential future collaborations and initiate commercial
manufacturing of the AERx systems. The increase in research and
development expenditures cannot be predicted accurately as it
depends in part upon continued future success and funding levels
supported by our existing development collaborations, as well as
obtaining new collaborative agreements.
Currently, our lead development program is
developing pulmonary delivery systems to manage diabetes using
insulin and other blood glucose regulating compounds with our
partner Novo Nordisk. During November 2001, Novo Nordisk and we
successfully completed a Phase 2b clinical trial using the AERx
insulin Diabetes Management System. We are now focused on
preparing for Phase 3 clinical trials, which Novo Nordisk
intends to commence during the summer of 2002.
Our next major program is with our partner
GlaxoSmithKline pursuant to our development agreement, as
amended, which covers the use of the AERx Pain Management System
for the delivery of narcotic analgesics. During December 2001,
we successfully completed Phase 2b clinical trials for the AERx
morphine Pain Management System. We will be working with
GlaxoSmithKline to determine the next steps for the AERx
morphine program. Future progress for this program is contingent
on either GlaxoSmithKline recommitting to this program or our
entering into another development agreement with a new partner.
We continue to move forward with this program for a Phase 3
start, which could occur in early 2003.
We have three other partner-funded programs and a
gene therapy effort, which is funded through the National
Institutes of Health, that are all in early Phase 1 clinical
trials. Though Phase 1 clinical trials are expected to be
completed in 2002, future research and development efforts for
these partner-funded programs are difficult to predict at this
time due to their early stage of development.
General and Administrative Expenses.
General and administrative expenses
were $9.4 million in 2001 compared to $9.3 million in
2000 and $7.8 million in 1999. General and administrative
expenses remained relatively unchanged in 2001 compared to 2000.
General and administrative expenses increased by approximately
$1.4 million or 18% in 2000 compared to 1999, as a result
of additional personnel and leased facilities to support our
expansion of research, development and manufacturing activities
and increased efforts to develop collaborative relationships
with new corporate partnerships.
Interest Income.
Interest income was $1.3 million
in 2001 compared to $3.1 million in 2000 and
$1.9 million in 1999. The decrease in 2001 was primarily
due a combination of interest income being earned on lower
average cash and investment balances and a decrease in interest
rates earned on invested cash balances. The contribution to
interest income due to the funds received from the preferred
stock financing in December 2001 was not material. The increase
in 2000 was primarily due to us maintaining larger average cash
and investment balances, which resulted from the receipt of
research development funding and milestone payments from
collaborative partners and the completion of a follow-on public
offering in April 2000 and the initial sale of common stock
under an existing common stock equity line in December 2000.
25
Interest Expense and Other.
Interest expense was $1.1 million
in 2001 compared to $1.5 million in 2000 and
$0.9 million in 1999. The decrease in 2001 is primarily due
to the cancellation of the loan made by Genentech in connection
with product development that had been funded by them. The
increase in 2000 is due to higher outstanding capital lease and
equipment loan balances under various equipment and lease lines
of credit and interest expense accrued on increasing loan
balances made by Genentech in connection with the product
development agreement that had been funded by them.
Extraordinary Gain.
During 2001, we reported an
extraordinary gain of approximately $6.7 million. The
extraordinary gain resulted from the cancellation of outstanding
loans and accrued interest required to conduct product
development with the program that had been funded by Genentech.
Net Loss.
We
reported a net loss of $32.4 million in 2001, compared to
$35.6 million in 2000 and $23.6 million in 1999. The
decrease in net loss for 2001 is primarily due to the
$6.7 million extraordinary gain resulting from the
cancellation of outstanding loans and accrued interest required
to conduct product development under the program that had been
funded by Genentech offset by an increase in net loss from
operations, which was $39.3 million in 2001 and
$37.1 million in 2000 and a decrease in interest income,
which was $1.3 million in 2001 and $3.1 million in
2000. The increase in net loss for 2000 was primarily due to
increased research and development activities relating primarily
to the Genentech program, unfunded programs and activities for
our commercial scale-up efforts.
Deemed Dividend.
We
reported a deemed dividend of $10.7 million in 2001, which
related to the Series A redeemable convertible preferred
stock financing completed in December 2001. The deemed dividend
represents the discounted conversion price of the financing
compared to the fair market value of our common stock on the
issuance date of the preferred stock resulting in a beneficial
conversion to the preferred stockholders. The value of the
beneficial conversion feature is reported as a deemed dividend
and is included in the calculation of net loss applicable to the
common shareholders.
Net Loss Applicable to Common Shareholders.
We reported a net loss applicable to
common shareholders of $43.1 million in 2001, which
included a deemed dividend to the Series A redeemable
convertible preferred stock financing completed in December
2001. The net loss applicable to common shareholders is used in
the calculation for basic and diluted loss per share applicable
to common shareholders.
Liquidity and Capital Resources
Since inception, we have financed our operations
primarily through private placements and public offerings of our
capital stock, proceeds from equipment lease financings,
contract research funding and interest earned on investments. As
of December 31, 2001, we had cash, cash equivalents and
short-term investments of approximately $71.2 million.
Net cash used in operating activities in 2001 was
$29.1 million compared to $25.8 million in 2000 and
$27.0 million in 1999. The increase in net cash used in
2001 resulted primarily from an increase in net loss before
extraordinary gain combined with an increase in receivables
offset by an increase in deferred revenue. The decrease in net
loss was primarily due to the forgiveness of outstanding loans
and accrued interest under the cancellation of the development
agreement with Genentech. The increase in receivables was due to
invoiced, but unpaid, amounts due from partners for development
activities. The increase in deferred revenue is due to payments
received from our major partner to fund future program
development. The decrease in net cash used in 2000 resulted
primarily from increases in accounts payable and accrued
liabilities combined with a decrease in receivables, partially
offset by an increase in net loss and a decrease in deferred
revenue. The increase in accounts payable and accrued
liabilities is due to increased activity associated with our
development programs including capital expenditures. The
decrease in receivables is due to us receiving payments from our
partners for all billable activities associated with the
development programs. The decrease in deferred revenue is due
primarily to our partners funding future development activity
soon after year-end. The increase in net loss was primarily due
to accelerated activity with several development programs
including manufacturing commercial scale-up.
26
Net cash used in investing activities in 2001 was
$14.7 million compared to $16.1 million in 2000 and
$6.0 million in 1999. The increase in cash used in 2001
resulted primarily from higher capital expenditures offset by a
net increase in proceeds from investments. The increase in cash
used in 2000 resulted primarily from higher capital expenditures.
Net cash provided by financing activities in 2001
was $93.0 million compared to $53.3 million in 2000
and $31.6 million in 1999. The increase in net cash
provided by financing activities in 2001 consisted primarily of
proceeds from the exercise of two put options during the year
from two of our partners, which raised net proceeds of
approximately $10 million, the sale of common stock during
the year using a common stock equity line, which raised net
proceeds of approximately $5.5 million, the sale of common
stock through a private placement in August 2001, which raised
net proceeds of approximately $13.8 million, the sale of
common stock to a major partner in October 2001, which raised
net proceeds of approximately $19.9 million and the sale of
redeemable convertible preferred stock in December 2001, which
raised net proceeds of approximately $45.4 million offset
by payments on equipment loans. The increase in net cash
provided by financing activities in 2000 consisted primarily of
proceeds from the completion of a follow-on public offering in
April 2000, which raised net proceeds of $42.6 million, the
initial sale of common stock under a common stock equity line in
December 2000, which raised proceeds of $2.2 million, the
sale of common stock through our employee benefit plans, which
raised proceeds of $4.0 million, notes payable supporting
loans received under a collaborative development agreement with
Genentech and proceeds from equipment loans.
The development of our technology and proposed
products will require a commitment of substantial funds to
conduct the costly and time-consuming research and preclinical
and clinical testing activities necessary to develop and refine
such technology and proposed products and to bring any such
products to market. Our future capital requirements will depend
on many factors, including continued progress and the results of
the research and development of our technology and drug delivery
systems, our ability to establish and maintain favorable
collaborative arrangements with others, progress with
preclinical studies and clinical trials and the results thereof,
the time and costs involved in obtaining regulatory approvals,
the cost of development and the rate of scale-up of our
production technologies, the cost involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims, and the
need to acquire licenses or other rights to new technology.
We continue to review our planned operations
through the end of 2002, and beyond. We particularly focus on
capital spending requirements to ensure that capital outlays are
not expended sooner than necessary. We expect our total capital
outlays for 2002 will be approximately $25 million and for
2003 will be approximately $20 million. Thereafter, we
would anticipate that annual capital expenditures would decrease
significantly. Currently, we are contractually committed to less
than $5 million of the anticipated 2002 capital outlays. We
believe that our existing cash balances at December 31,
2001, together with the $25 million unused common stock
purchase commitment from Novo Nordisk, funding commitments from
corporate development partners and interest earned on our
investments should be sufficient to meet our needs for at least
the next twelve months. The sale of additional common stock to
Novo Nordisk is subject to certain conditions. In addition,
there can be no assurance that our funding commitments from
corporate development partners will not be amended or
terminated. If we cannot exercise our option to sell additional
shares of common stock to Novo Nordisk or if our current funding
commitments from corporate development partners are amended or
terminated, we will need to obtain additional sources of capital.
If we continue to make good progress in our
development programs, we would expect our cash requirements for
capital spending and operations to increase in future periods.
We will need to raise additional capital to fund our capital
spending and operations before we become profitable. We may seek
additional funding through collaborations, borrowing
arrangements or through public or private equity financings.
There can be no assurance that additional financing can be
obtained on acceptable terms, or at all. Dilution to
shareholders may result if funds are raised by issuing
additional equity securities. If adequate funds are not
available, we may be required to delay, to reduce the scope of,
or to eliminate one or more of our research and development
programs, or to obtain funds through arrangements with
collaborative partners or other sources that may require us to
relinquish rights to certain of our technologies or products
that we would not otherwise relinquish.
27
The following summarizes our contractual
obligations at December 31, 2001, and the effect such
obligations are expected to have on our liquidity and cash flows
in future periods (In thousands):
Recent Financial Accounting
Pronouncements
In July 2001, the Financial Accounting Standards
Board issued Statements of Financial Standards
(SFAS) No. 141, “Business Combinations”, and
SFAS No. 142, “Goodwill and Other Intangible
Assets”. The new rules require business combinations
initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and goodwill acquired after this
date will no longer be amortized, but will be subject to annual
impairment tests. All other intangible assets will continue to
be amortized over their estimated useful lives. Companies are
required to adopt SFAS No. 142 for fiscal years beginning
after December 31, 2001. The Company did not complete any
business combinations through the twelve months ended
December 31, 2001, as a result these standards did not have
a material impact on its financial position or operating results.
In August 2001, the FASB issued FASB Statement
No. 144 (FAS 144), “Accounting for the Impairment
or Disposal of Long-lived Assets”. FAS 144 supercedes
FASB Statement No. 121, Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of,
and the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations —
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business (as
previously defined in that Opinion). This Statement also amends
ARB No. 51, Consolidated Financial Statements, to eliminate
the exception to consolidation of a subsidiary for which control
is likely to be temporary. Companies are required to adopt
FAS 144 for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years, but early
adoption is encouraged. The Company has not yet determined the
impact this standard will have on its financial position and
results of operations, although it does not anticipate that the
adoption of this standard will have a material impact on the
Company’s financial position or results of operations.
28
RISK FACTORS
Except for historical information contained
herein, the discussion in this Report on Form 10-K contains
forward-looking statements, including, without limitation,
statements regarding timing and results of clinical trials, the
establishment of corporate partnering arrangements, the
anticipated commercial introduction of our products and the
timing of our cash requirements. These forward-looking
statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in such
forward-looking statements. Potential risks and uncertainties
include, without limitation, those mentioned in this report and
in particular the factors described below.
We are an early stage company.
You must evaluate us in light of the
uncertainties and complexities present in an early stage
company. Virtually all of our potential products are in an early
stage of research or development. Our potential drug delivery
products require extensive research, development and
pre-clinical and clinical testing. Our potential products also
may involve lengthy regulatory reviews before they can be sold.
Because none of our products has yet received approval by the
Food and Drug Administration or is yet in Phase 3 clinical trial
development, we cannot assure you that our research and
development efforts will be successful, any of our potential
products will be proven safe and effective or regulatory
clearance or approval to sell any of our potential products will
be obtained. Because we have validated only one manufacturing
facility, we cannot assure you that any of our potential
products can be manufactured in commercial quantities or at an
acceptable cost or marketed successfully. Failure to achieve
commercial feasibility, demonstrate safety, achieve clinical
efficacy, obtain regulatory approval or successfully market
products will negatively impact our business.
We have a history of losses and anticipate
future losses.
We have never been profitable, and through
December 31, 2001, we have incurred a cumulative deficit of
approximately $153.6 million. We have not had any material
product sales and do not anticipate receiving any revenue from
product sales in 2002. We expect to continue to incur
substantial losses over at least the next several years as we:
To achieve and sustain profitability, we must,
alone or with others, develop, obtain regulatory approval for,
manufacture, market and sell products using our drug delivery
platform. We cannot assure investors that we will generate
sufficient product or contract research revenue to become
profitable or to sustain profitability.
We may not be able to develop our products
successfully.
Our AERx systems are at an early stage of
development and we are currently testing them using hand-held
prototypes. Before we can begin to sell the AERx systems
commercially, we will need to invest in substantial additional
development and conduct preclinical and clinical testing. In
order to further develop our AERx systems, we will need to
address engineering and design issues, which include ensuring
that the AERx systems can deliver a reproducible amount of drug
into the bloodstream and can be manufactured successfully as
hand-held systems. We cannot assure you that we will be
successful in addressing these design, engineering and
manufacturing issues. Additionally, we will need to formulate
and package drugs for delivery by our AERx systems. We cannot
assure you that we will be able to do this successfully.
29
Even if our pulmonary delivery technology is
commercially feasible, it may not be commercially acceptable
across a range of large and small molecule drugs. For the AERx
systems to be commercially viable, we will need to demonstrate
that drugs delivered by the AERx systems:
While our development efforts are at different
stages for different products, we cannot assure you that we will
successfully develop any products. We may also abandon some or
all of our proposed products. If we cannot develop potential
products in a timely manner, our business will be impaired.
We may not be able to commercialize products
successfully.
Our success in commercializing our products
depends on many factors, including acceptance by health care
professionals and patients. Their acceptance of our products
will largely depend on our ability to demonstrate our
products’ ability to compete with alternate delivery
systems with respect to:
There can be no assurance that our products will
be competitive with respect to these factors or that our
partners will be able to successfully market any of them in a
timely manner.
We depend on collaborative partners and need
additional collaborative partners.
Our commercialization strategy depends on our
ability to enter into agreements with collaborative partners. In
particular, our ability to successfully develop and
commercialize the AERx insulin Diabetes Management System
depends on our development partnership with Novo Nordisk.
Novo Nordisk has agreed to:
The development and commercialization of the AERx
insulin Diabetes Management System will be delayed if Novo
Nordisk fails to conduct these collaborative activities in a
timely manner or at all. In addition, our development partners
could terminate these agreements and we have no assurance that
we will receive any development and milestone payments. If we do
not receive development funds or achieve milestones set forth in
the agreements, or if any of our development partners breach or
terminate their agreement, our business will be impaired.
Although we have development arrangements with
other collaborative partners, our arrangement with Novo Nordisk
is our only active funded development agreement. For the year
ended December 31, 2001, this partner-funded program
contributed approximately 90% of our total contract revenues.
Our agreement with Novo Nordisk can be terminated under certain
conditions, including by either party on limited written notice,
30
We will also need to enter into agreements with
other corporate partners to conduct the clinical trials,
manufacturing, marketing and sales necessary to commercialize
other potential products. In addition, our ability to apply the
AERx system to any proprietary drugs will depend on our ability
to establish and maintain corporate partnerships or other
collaborative arrangements with the holders of proprietary
rights to such drugs. We cannot assure you that we will be able
to establish such additional corporate partnerships or
collaborative arrangements on favorable terms or at all, or that
our existing or future corporate partnerships or collaborative
arrangements will be successful. In December 2000, our agreement
with GlaxoSmithKline was amended and we assumed full control and
responsibility for conducting and financing the remainder of all
development activities. In February 2001, we mutually agreed
with Genentech to discontinue our development program for
dornase alfa. Nor can we assure you that our existing or future
corporate partners or collaborators will not pursue alternative
technologies or develop alternative products either on their own
or in collaboration with others, including our competitors. We
could have disputes with our existing or future corporate
partners or collaborators. Any such disagreements could lead to
delays in the research, development or commercialization of any
potential products or could result in time-consuming and
expensive litigation or arbitration, which may not be resolved
in our favor. If any of our corporate partners or collaborators
do not develop or commercialize any product to which it has
obtained rights from us, our business could be impaired.
We have limited manufacturing
experience.
We have only limited manufacturing experience. We
have validated only a single clinical manufacturing facility for
disposable packets for our various AERx systems. We anticipate
spending significant amounts to attempt to provide for the
high-volume manufacturing required for multiple AERx products,
and much of this spending will occur before our products are
approved. There can be no assurance that:
Failure to address these issues could delay or
prevent late-stage clinical testing and commercialization of our
products.
We are building our own manufacturing
capabilities for the production of key components of our AERx
drug delivery systems. We plan to internally produce the
disposable nozzles, assemble the disposable unit-dose packets
and fill the drug into the unit-dose packets. We have limited
experience in manufacturing disposable unit-dose packets and
there can be no assurance that we can successfully do so in high
volumes, in a timely manner, at an acceptable cost, or at all.
We intend to use contract manufacturers to
produce key components, assemblies and subassemblies in the
clinical and commercial manufacturing of our AERx devices. There
can be no assurance that we will be able to enter into or
maintain satisfactory contract manufacturing arrangements.
Certain components of our products may be available, at least
initially, only from single sources. There can be no assurance
that we could find alternate suppliers for any of these
components. A delay of or interruption in production resulting
from any supply problem could have a material adverse effect on
our business.
We will need additional capital and our
ability to find additional funding is uncertain.
Our operations to date have consumed substantial
and increasing amounts of cash. We expect the negative cash flow
from operations to continue in the foreseeable future. We will
need to commit substantial funds to develop our technology and
proposed products. We will have to continue to conduct costly
and time-
31
Since inception, we have financed our operations
primarily through private placements and public offerings of our
capital stock, proceeds from equipment lease financings,
contract research funding and interest earned on investments.
We anticipate that we will be able to maintain
current and planned operations for the next 12 months,
including capital spending requirements that will be
approximately $25 million, with proceeds from the sale of
Series A preferred stock and warrants to purchase common
stock in December 2001, committed funding from our corporate
development partners, primarily Novo Nordisk, and projected
interest; however, there can be no assurances that these sources
of funding will be sufficient or that our cash requirements will
not change.
The sale of additional common stock to Novo
Nordisk is subject to certain conditions. In addition, there can
be no assurance that our funding commitments from corporate
development partners will not be amended or terminated. If we
cannot exercise our option to sell additional shares of common
stock to Novo Nordisk or if our current funding commitments from
corporate development partners are amended or terminated, we
will need to obtain additional sources of capital.
We will need to raise additional capital to fund
our capital spending and operations before we become profitable.
We may seek additional funding through collaborations, borrowing
arrangements or through public or private equity financing. We
cannot assure you that additional financing can be obtained on
acceptable terms, or at all. Dilution to shareholders may result
if funds are raised by issuing additional equity securities. If
adequate funds are not available, we may be required to delay,
to reduce the scope of, or to eliminate one or more of our
research and development programs, or to obtain funds through
arrangements with collaborative partners or other sources that
may require us to relinquish rights to certain of our
technologies or products that we would not otherwise relinquish.
We depend upon proprietary technology and the
status of patents and proprietary technology is
uncertain.
Our business and competitive position is
dependent upon our ability to protect our proprietary technology
and avoid infringing the proprietary rights of others. We have
conducted original research on a number of aspects relating to
pulmonary drug delivery. While we cannot assure you that any of
our patents will provide a significant commercial advantage,
these patents are intended to provide protection for important
aspects of our technology, including methods for aerosol
generation, devices used to generate aerosols, breath control,
compliance monitoring certain pharmaceutical formulations,
design of dosage forms and their manufacturing, and testing
methods. In addition, we are maintaining as trade secrets some
of the key elements of our manufacturing technologies,
particularly those associated with production of disposable
unit-dose packets for the AERx systems.
Our success will depend to a significant extent
on our ability to obtain and enforce patents, maintain trade
secret protection and operate without infringing on the
proprietary rights of third parties. Because the field of
aerosolized drug delivery is crowded and a substantial number of
patents have been issued and because patent positions can be
highly uncertain and frequently involve complex legal and
factual questions, the breadth of
32
We also seek to protect some of these inventions
through foreign counterpart applications in selected other
countries. Statutory differences in patentable subject matter
may limit the protection we can obtain on some of our inventions
outside of the United States.
For example, methods of treating humans are not
patentable in many countries outside of the United States. These
and other issues may limit the patent protection we will be able
to secure outside of the United States.
The coverage claimed in a patent application can
be significantly reduced before a patent is issued, either in
the United States or abroad. Consequently, we do not know
whether any of our pending or future patent applications will
result in the issuance of patents or, to the extent patents have
been issued or will be issued, whether these patents will be
subjected to further proceedings limiting their scope, will
provide significant proprietary protection or competitive
advantage, or will be circumvented or invalidated. Furthermore,
patents already issued to us or our pending applications may
become subject to dispute, and any disputes could be resolved
against us. For example, Eli Lilly and Company has brought an
action against us seeking to have one or more employees of Eli
Lilly named as co-inventors on one of our patents. In addition,
because patent applications in the United States are currently
maintained in secrecy until patents issue, and patent
applications in certain other countries generally are not
published until more than 18 months after they are first
filed, and because publication of discoveries in scientific or
patent literature often lags behind actual discoveries, we
cannot be certain that we were the first creator of inventions
covered by pending patent applications or that we were the first
to file patent applications on such inventions.
Our policy is to require our officers, employees,
consultants and advisors to execute proprietary information and
invention and assignment agreements upon commencement of their
relationships with us. We cannot assure you, however, that these
agreements will provide meaningful protection for our
inventions, trade secrets or other proprietary information in
the event of unauthorized use or disclosure of such information.
We also execute confidentiality agreements with
outside collaborators and consultants. However, disputes may
arise as to the ownership of proprietary rights to the extent
that outside collaborators or consultants apply technological
information developed independently by them or others to our
projects, or apply our technology to other projects, and we
cannot assure you that any such disputes would be resolved in
our favor.
We may incur substantial costs if we are required
to defend ourselves in patent suits brought by third parties.
These legal actions could seek damages and seek to enjoin
testing, manufacturing and marketing of the accused product or
process. In addition to potential liability for significant
damages, we could be required to obtain a license to continue to
manufacture or market the accused product or process and we
cannot assure you that any license required under any such
patent would be made available to us on acceptable terms, if at
all. Litigation may also be necessary to enforce our patents
against others or to protect our know-how or trade secrets. Such
litigation could result in substantial expense, and we cannot
assure you that any litigation would be resolved in our favor.
We may not prevail in our defense of Eli
Lilly’s complaint against us.
At this time, we are involved in an outstanding
lawsuit with Eli Lilly and Company whereby Eli Lilly is making
various allegations against us, originally arising from our
decision to enter into an exclusive collaboration with Novo
Nordisk with respect to the development and commercialization of
a pulmonary delivery system for insulin and insulin analogs.
Following our motion for summary judgment directed against all
eight claims in Eli Lilly’s original complaint, Eli
Lilly’s claims for declaratory relief, unjust enrichment
and breach of contract (in part) currently remain.
The risks to us should Eli Lilly prevail in this
case are that Eli Lilly would be given the rights of an owner,
along with us, on one patent relating to pulmonary delivery of
monmeric insulin lispro and/or that Eli Lilly
33
We may not obtain regulatory approval for our
products on a timely basis, or at all.
All medical devices and new drugs, including our
products under development, are subject to extensive and
rigorous regulation by the federal government, principally the
Food and Drug Administration, or FDA, and by state and local
government agencies. Such regulations govern the development,
testing, manufacture, labeling, storage, approval, advertising,
promotion, sale and distribution of such products. Medical
devices or drug products that are marketed abroad are also
subject to regulation by foreign governments.
The process for obtaining FDA approvals for drug
products is generally lengthy, expensive and uncertain. Securing
FDA approvals often requires applicants to submit extensive
clinical data and supporting information to the FDA. Even if
granted, the FDA can withdraw product clearances and approvals
for failure to comply with regulatory requirements or upon the
occurrence of unforeseen problems following initial marketing.
The activities required before a new drug product
may be marketed in the United States includes pre-clinical and
clinical testing and submission of a new drug application with
the FDA. Preclinical tests include laboratory evaluation of
product chemistry and other characteristics and animal studies
to assess the potential safety and efficacy of the product as
formulated. Clinical testing involves the administration of the
drug to healthy human volunteers or to patients under the
supervision of a qualified principal investigator, usually a
physician, pursuant to a FDA reviewed protocol.
Human clinical trials typically are conducted in
three sequential phases, but the phases may overlap. Phase 1
trials consist of testing the product in a small number of
patients or normal volunteers, primarily for safety, at one or
more dosage levels, as well as characterization of a drug’s
pharmacokinetic and/or pharmacodynamic profile. In Phase 2
clinical trials, in addition to safety, the efficacy of the
product is usually evaluated in a patient population. Phase 3
trials typically involve additional testing for safety and
clinical efficacy in an expanded population at geographically
disperse sites. All of the phases of clinical studies must be
conducted in conformance with FDA’s bioresearch monitoring
regulations.
We cannot assure you that we will be able to
obtain necessary regulatory approvals on a timely basis, if at
all, for any of our potential products. Even if granted,
regulatory approvals may include significant limitations on the
uses for which products may be marketed. Moreover, we cannot
assure you that any required approvals, once obtained, will not
be withdrawn or that we will remain in compliance with other
regulatory requirements. If we, or manufacturers of our
components, fail to comply with applicable FDA and other
regulatory requirements, we, and they, are subject to sanctions,
including:
Manufacturers of drugs also are required to
comply with the applicable Good Manufacturing Practices, or GMP,
requirements, which relate to product testing, quality assurance
and maintaining records and documentation. We cannot assure you
that we will be able to comply with the applicable GMP and other
FDA regulatory requirements for manufacturing as we expand our
manufacturing operations, which would impair our business.
In addition, to market our products in foreign
jurisdictions, we and our partners must obtain required
regulatory approvals from foreign regulatory agencies and comply
with extensive regulations regarding safety
34
Because certain of our clinical studies involve
narcotics, we are registered with the Drug Enforcement Agency,
or DEA, and our facilities are subject to inspection and DEA
export, import, security and production quota requirements. We
cannot assure you that we will not be required to incur
significant costs to comply with DEA regulations in the future
or that such regulations will not otherwise harm our business.
The results of preclinical and clinical
testing are uncertain.
Before we can file for regulatory approval for
the commercial sale of our potential AERx products, the FDA will
require extensive preclinical and clinical testing to
demonstrate their safety and efficacy. To date, we have tested
prototype patient-operated versions of our AERx systems with
morphine, insulin and dornase alfa on a limited number of
individuals in Phase 1 and Phase 2 clinical trials. If
we do not or cannot complete these trials or progress to more
advanced clinical trials, we may not be able to commercialize
our AERx products.
Completing clinical trials in a timely manner
depends on, among other factors, the enrollment of patients. Our
ability to recruit patients depends on a number of factors,
including the size of the patient population, the proximity of
patients to clinical sites, the eligibility criteria for the
study and the existence of competitive clinical trials. Delays
in planned patient enrollment in our current or future clinical
trials may result in increased costs, program delays or both.
Although we believe the limited data we have
regarding our potential products is encouraging, the results of
initial preclinical and clinical testing do not necessarily
predict the results that we will get from subsequent or more
extensive preclinical and clinical testing. Furthermore, we
cannot assure you that clinical trials of these products will
demonstrate that these products are safe and effective to the
extent necessary to obtain regulatory approvals. Many companies
in the pharmaceutical and biotechnology industries have suffered
significant setbacks in advanced clinical trials, even after
promising results in earlier trials. If we cannot adequately
demonstrate that any therapeutic product we are developing is
safe and effective, regulatory approval of that product would be
delayed or prevented, which would impair our business.
We are also developing applications of our AERx
platform for the delivery of other compounds. These applications
are in early stages of development and we do not yet know the
degree of testing and development that will be needed to obtain
necessary marketing approvals from the FDA and other regulatory
agencies. We cannot assure you that these applications will
prove to be viable or that any necessary regulatory approvals
will be obtained in a timely manner, if at all.
In addition, the FDA may require us to provide
clinical data beyond what is currently planned to demonstrate
that the chronic administration of drugs delivered via the lung
for systemic effect is safe. We cannot assure you that we will
be able to present such data in a timely manner, or at all.
We are in a highly competitive market and our
competitors may develop alternative therapies.
We are in competition with pharmaceutical,
biotechnology and drug delivery companies, hospitals, research
organizations, individual scientists and nonprofit organizations
engaged in the development of alternative drug delivery systems
or new drug research and testing, as well as with entities
producing and developing injectable drugs. We are aware of a
number of companies such as Alkermes Pharmaceuticals and Inhale
Therapeutic Systems, Inc. that are currently seeking to develop
new products and non-invasive alternatives to injectable drug
delivery, including oral delivery systems, intranasal delivery
systems, transdermal systems, bucal and colonic absorption
systems. Several of these companies may have developed or are
developing dry powder devices that could be used for pulmonary
delivery. Many of these companies and entities have greater
research and development capabilities, experience,
manufacturing, marketing, financial and managerial resources
than we do. Accordingly, our competitors may succeed in
developing competing technologies, obtaining FDA approval for
products or gaining market acceptance more rapidly than we can.
35
We depend on key personnel and must continue
to attract and retain key employees.
We depend on a small number of key management and
technical personnel. Losing any of these key employees could
harm our business and operations. Our success also depends on
our ability to attract and retain additional highly qualified
marketing, management, manufacturing, engineering and research
and development personnel. We face intense competition in our
recruiting activities and may not be able to attract or retain
qualified personnel.
We may be exposed to product
liability.
Researching, developing and commercializing
medical devices and therapeutic products entail significant
product liability risks. The use of our products in clinical
trials and the commercial sale of such products may expose us to
liability claims. These claims might be made directly by
consumers or by pharmaceutical companies or others selling such
products.
Companies often address the exposure of such risk
by obtaining product liability insurance. Although we currently
have product liability insurance, there can be no assurance that
we can maintain such insurance or obtain additional insurance on
acceptable terms, in amounts sufficient to protect our business,
or at all. A successful claim brought against us in excess of
our insurance coverage would have a material adverse effect on
our business.
Third-party reimbursement for our products is
uncertain.
In both domestic and foreign markets, sales of
our potential products depend in part on the availability of
reimbursement from third-party payors such as government health
administration authorities, private health insurers and other
organizations. Third-party payors often challenge the price and
cost-effectiveness of medical products and services. Significant
uncertainty exists as to the reimbursement status of newly
approved health care products. We cannot assure you that any of
our products will be reimbursable by third-party payors. In
addition, we cannot assure you that our products will be
considered cost-effective or that adequate third-party
reimbursement will be available to enable us to maintain price
levels sufficient to realize a profit. Legislation and
regulations affecting the pricing of pharmaceuticals may change
before our products are approved for marketing and any such
changes could further limit reimbursement.
We use hazardous materials.
Our operations involve use of hazardous and toxic
materials, chemicals and various radioactive compounds that
generate hazardous, toxic and radioactive wastes. Although we
believe that our safety procedures for handling and disposing of
such materials comply with all state and federal regulations and
standards, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. In the event of
such an accident, we could be held liable for any damages that
result and such liability could exceed the resources of our
business.
Our stock price is likely to remain
volatile.
The market prices for securities of many
companies in the drug delivery industry, including ours, have
historically been highly volatile, and the market from time to
time has experienced significant price and volume fluctuations
unrelated to the operating performance of particular companies.
Prices for our common stock may be influenced by many factors,
including:
36
In the past, class action securities litigation
has often been instituted against companies following periods of
volatility in the market price of their securities. Any such
litigation instigated against us could result in substantial
costs and a diversion of management’s attention and
resources.
We have implemented certain anti-takeover
provisions.
Certain provisions of our articles of
incorporation and the California General Corporation Law could
discourage a third party from acquiring, or make it more
difficult for a third party to acquire, control of us without
approval of our board of directors. These provisions could also
limit the price that certain investors might be willing to pay
in the future for shares of our common stock. Certain provisions
allow the board of directors to authorize the issuance of
preferred stock with rights superior to those of the common
stock. We are also subject to the provisions of
Section 1203 of the California General Corporation Law
which requires a fairness opinion to be provided to our
shareholders in connection with their consideration of any
proposed “interested party” reorganization transaction.
We have adopted a shareholder rights plan,
commonly known as a “poison pill”. The provisions
described above, our poison pill and provisions of the
California General Corporation Law may discourage, delay or
prevent a third party from acquiring us.
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Payments Due by Period
Less than
1-3
After 3
Total
1 year
years
years
Contractual Obligations
$
6,586
$
4,006
$
2,580
$
—
5,000
5,000
—
—
66,537
4,925
15,725
45,887
$
78,123
$
13,931
$
18,305
$
45,887
Table of Contents
•
expand our research and development efforts;
•
expand our preclinical and clinical testing
activities;
•
expand our manufacturing efforts; and
•
plan and build our commercial production
capabilities.
Table of Contents
•
are safe and effective;
•
will not be subject to physical or chemical
instability over time and under differing storage conditions; and
•
do not suffer from other problems that would
affect commercial viability.
•
safety;
•
efficacy;
•
ease of use; and
•
price.
•
undertake certain collaborative activities with
us;
•
design and conduct advanced clinical trials;
•
fund research and development activities with us;
•
pay us fees upon achievement of certain
milestones; and
•
purchase product at a defined premium, pay
royalties and/or share gross profits if and when we
commercialize a product.
Table of Contents
•
the design requirements of the AERx system will
make it feasible for us to develop it beyond the current
prototype;
•
manufacturing and quality control problems will
not arise as we attempt to scale-up; or
•
any scale-up can be achieved in a timely manner
or at a commercially reasonable cost.
Table of Contents
•
progress in researching and developing our
technology and drug delivery systems;
•
our ability to establish and maintain favorable
collaborative arrangements with others;
•
progress with preclinical studies and clinical
trials;
•
time and costs to obtain regulatory approvals;
•
costs of development and the rate at which we
expand our production technologies;
•
costs of preparing, filing, prosecuting,
maintaining and enforcing patent claims; and
•
our need to acquire licenses or other rights to
technology.
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•
warning letters;
•
fines;
•
product recalls or seizures;
•
injunctions;
•
refusals to permit products to be imported into
or exported out of the United States;
•
withdrawals of previously approved marketing
applications; and
•
criminal prosecutions.
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•
investor perception of us;
•
analyst recommendations;
•
fluctuations in our operating results;
•
market conditions relating to the drug delivery
industry;
•
announcements of technological innovations or new
commercial products by us or our competitors;
Table of Contents
•
publicity regarding actual or potential
developments relating to products under development by us or our
competitors;
•
failure to establish new collaborative
relationships;
•
developments or disputes concerning patent or
proprietary rights;
•
delays in the development or approval of our
product candidates;
•
regulatory developments in both the United States
and foreign countries;
•
public concern as to the safety of drug delivery
technologies;
•
period-to-period fluctuations in financial
results;
•
future sales of substantial amounts of common
stock by shareholders; or
•
economic and other external factors.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Market Risk Disclosure
In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk associated with interest rate movement. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.
As of December 31, 2001, we had cash, cash equivalents and short-term investments of $71.2 million consisting of cash and highly liquid, short-term investments. Our short-term investments will decline by an immaterial amount if market interest rates increase, and therefore, our exposure to interest rate changes has been immaterial. Declines of interest rates over time will, however, reduce our interest income from our short-term investments. Our outstanding equipment lease lines and capital lease obligations are all at fixed interest rates and, therefore, have minimal exposure to changes in interest rates.
37
Item 8.
Financial
Statements and Supplementary Data
REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS
The Board of Directors and Shareholders
We have audited the accompanying balance sheets
of Aradigm Corporation as of December 31, 2001 and 2000,
and the related statements of operations, redeemable convertible
preferred stock and shareholders’ equity, and cash flows
for each of the three years in the period ended
December 31, 2001. These 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
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 financial
position of Aradigm Corporation at December 31, 2001 and
2000, and the results of its operations and its cash flows for
each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally
accepted in the United States.
Palo Alto, California
38
/s/ ERNST & YOUNG LLP
Table of Contents
ARADIGM CORPORATION
BALANCE SHEETS
December 31,
2001
2000
Assets
$
69,965
$
20,732
1,199
23,649
1,349
70
145
—
812
735
73,470
45,186
57,940
25,323
160
119
530
743
$
132,100
$
71,371
$
5,297
$
4,894
703
517
1,761
1,246
11,115
6,622
2,760
2,234
—
6,712
3,526
3,099
25,162
25,324
2,327
2,032
2,727
6,230
30,735
—
224,738
148,573
—
(131
)
(54
)
(216
)
(153,535
)
(110,441
)
71,149
37,785
$
132,100
$
71,371
See accompanying notes.
39
ARADIGM CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31,
2001
2000
1999
$
28,916
$
20,303
$
16,812
58,836
48,176
33,625
9,355
9,271
7,849
68,191
57,447
41,474
(39,275
)
(37,144
)
(24,662
)
1,324
3,110
1,947
(1,081
)
(1,528
)
(888
)
(39,032
)
(35,562
)
(23,603
)
6,675
—
—
(32,357
)
(35,562
)
(23,603
)
(10,722
)
—
—
$
(43,079
)
$
(35,562
)
$
(23,603
)
$
(2.28
)
$
(2.07
)
$
(1.66
)
0.30
—
—
$
(1.98
)
$
(2.07
)
$
(1.66
)
21,792
17,196
14,216
See accompanying notes.
40
ARADIGM CORPORATION
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND SHAREHOLDERS’ EQUITY
Redeemable
Convertible
Preferred Stock
Common Stock
Shareholder
Total
Notes
Deferred
Accumulated
Shareholders’
Shares
Amount
Shares
Amount
Receivable
Compensation
Deficit
Equity
—
$
—
12,163,616
$
73,768
$
(288
)
$
(541
)
$
(51,279
)
$
21,660
—
—
2,428,338
24,798
—
—
—
24,798
—
—
98,860
713
—
—
—
713
—
—
58,963
324
—
—
—
324
—
—
—
—
125
—
—
125
—
—
—
—
—
162
—
162
—
—
—
—
—
—
(23,603
)
(23,603
)
—
—
—
—
—
—
(22
)
(22
)
—
—
—
—
—
—
(23,625
)
(23,625
)
—
—
14,749,777
99,603
(163
)
(379
)
(74,904
)
24,157
—
—
2,989,795
44,676
—
—
—
44,676
—
—
129,414
1,058
—
—
—
1,058
—
—
318,676
2,940
—
—
—
2,940
—
—
728
3
—
—
—
3
—
—
—
293
—
—
—
293
—
—
78,565
—
—
—
—
—
—
—
—
—
32
—
—
32
—
—
—
—
—
163
—
163
—
—
—
—
—
—
(35,562
)
(35,562
)
—
—
—
—
—
—
25
25
—
—
—
—
—
—
(35,537
)
(35,537
)
—
—
18,266,955
148,573
(131
)
(216
)
(110,441
)
37,785
—
—
10,881,733
49,189
—
—
—
49,189
—
—
357,146
1,326
—
—
—
1,326
—
—
30,549
204
—
—
—
204
2,001,236
30,735
—
14,724
—
—
—
14,724
—
—
—
10,722
—
—
(10,722
)
—
—
—
—
—
131
—
—
131
—
—
—
—
—
162
—
162
—
—
—
—
—
—
(32,357
)
(32,357
)
—
—
—
—
—
—
(15
)
(15
)
—
—
—
—
—
—
(32,372
)
(32,372
)
2,001,236
$
30,735
29,536,383
$
224,738
$
—
$
(54
)
$
(153,535
)
$
71,149
See accompanying notes.
41
ARADIGM CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31,
2001
2000
1999
$
(32,357
)
$
(35,562
)
$
(23,603
)
4,500
3,213
2,356
(6,675
)
—
—
—
—
15
48
296
—
162
163
162
(1,279
)
3,816
(3,112
)
(77
)
278
(421
)
213
(401
)
(126
)
403
2,654
261
515
(29
)
14
675
2,129
(902
)
4,788
(2,370
)
(1,649
)
(29,084
)
(25,813
)
(27,005
)
(37,117
)
(14,376
)
(4,349
)
—
—
14
(5,732
)
(26,764
)
(30,841
)
28,167
25,052
29,178
(14,682
)
(16,088
)
(5,998
)
50,671
48,674
25,835
45,459
—
—
—
2,756
3,956
131
32
125
(186
)
11
5
—
4,051
3,294
(3,076
)
(2,238
)
(1,630
)
92,999
53,286
31,585
49,233
11,385
(1,418
)
20,732
9,347
10,765
$
69,965
$
20,732
$
9,347
$
899
$
855
$
820
$
48
$
296
$
—
$
979
$
—
$
—
$
10,722
$
—
$
—
See accompanying notes
42
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of
Significant Accounting Policies
Organization
and Basis of Presentation
Aradigm Corporation (the “Company”) is
a California corporation engaged in the development and
commercialization of non-invasive pulmonary drug delivery
systems. The Company does not anticipate receiving significant
revenue from the sale of products in the upcoming year.
Principal activities to date have included obtaining financing,
recruiting management and technical personnel, securing
operating facilities, conducting research and development, and
expanding commercial production capabilities. These factors
indicate that the Company’s ability to continue its
research, development and commercialization activities are
dependent upon the ability of management to obtain additional
financing as required.
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. These estimates include useful lives for
property and equipment and related depreciation calculations,
estimated amortization period for payments received from product
development and license agreements as they relate to the revenue
recognition of deferred revenue and assumptions for valuing
options, warrants and deemed dividend. Actual results could
differ from these estimates.
Cash
Equivalents and Investments
The Company considers all highly liquid
investments purchased with an original maturity of three months
or less to be cash equivalents. The Company places its cash and
cash equivalents in money market funds, commercial paper and
corporate notes. The Company’s short-term investments
consist of commercial paper and corporate notes with maturities
ranging from three to twelve months.
The Company classifies its investments as
available-for-sale. Available-for-sale investments are recorded
at fair value with unrealized gains and losses reported as other
comprehensive income (loss) in a separate component of the
statements of redeemable convertible preferred stock and
shareholders’ equity until realized. Fair values of
investments are based on quoted market prices, where available.
Realized gains and losses, which have been immaterial to date,
are included in interest and other income and are derived using
the specific identification method for determining the cost of
investments sold. Dividend and interest income is recognized
when earned.
Depreciation
and Amortization
The Company records property and equipment at
cost and calculates depreciation using the straight-line method
over the estimated useful lives of the respective assets.
Leasehold improvements are amortized over the shorter of the
term of the lease or useful life of the improvement. The
estimated useful lives of property and equipment are as follows:
Impairment of
Long-Lived Assets
The Company reviews for impairment whenever
events or changes in circumstances indicates that the carrying
amount of property and equipment may not be recoverable under
the provisions of Statement of
43
NOTES TO FINANCIAL STATEMENTS
(Continued)
Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long
Lived Assets to be Disposed Of. If it is determined that an
impairment loss has occurred based on expected future cash
flows, the loss is recognized on the Statements of Operations.
Revenue
Recognition
Contract revenues consist of revenue from
collaboration agreements and feasibility studies. The Company
recognizes revenue under the agreements as costs are incurred.
Deferred revenue represents the portion of all refundable and
nonrefundable research payments received that have not been
earned. In accordance with contract terms, milestone payments
from collaborative research agreements are considered
reimbursements for costs incurred under the agreements and,
accordingly, are generally recognized as revenue either upon the
completion of the milestone effort when payments are contingent
upon completion of the effort or are based on actual efforts
expended over the remaining term of the agreements when payments
precede the required efforts. Costs of contract revenues
approximate such revenue and are included in research and
development expenses. Refundable development and license fee
payments are deferred until the specified performance criteria
are achieved. Refundable development and license fee payments
are generally not refundable once the specific performance
criteria are achieved.
Research and
Development
Research and development expenses consist of
costs incurred for company-sponsored, collaborative and
contracted research and development activities. These costs
include direct and research-related overhead expenses. Research
and development expenses under collaborative and government
grants approximate the revenue recognized under such agreements.
The Company expenses research and development costs as such
costs are incurred.
Stock Based
Compensation
The Company has elected to follow Accounting
Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” (APB 25), and related
interpretations in accounting for its employee stock options.
This election was made because the alternative fair value
accounting provided for under Statement of Financial Accounting
Standards No. 123, “Accounting for Stock-Based
Compensation” (SFAS 123), requires the use of option
valuation models that were not developed for use in valuing
employee stock options.
The Company accounts for options and warrants
issued to nonemployees under SFAS 123 and Emerging Issues
Task Force Issue No. 96-18. The value of options and
warrants are periodically remeasured over their vesting terms.
Income
Taxes
The Company uses the liability method to account
for income taxes as required by Statement of Financial
Accounting Standards No. 109, “Accounting for Income
Taxes”. Under this method, deferred income taxes reflect
the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Net Loss Per
Share
Historical net loss per share has been calculated
under Statement of Financial Accounting Standards No. 128,
“Earnings Per Share.” Basic net loss per share on a
historical basis is computed using the weighted average number
of shares of common stock outstanding less the weighted average
number of shares subject to repurchase. In the years ended
December 31, 2001, 2000 and 1999, the weighted average
number of shares subject to repurchase were zero, zero and
48,000, respectively. No diluted loss per share information has
been
44
NOTES TO FINANCIAL STATEMENTS
(Continued)
presented in the accompanying statements of
operations since potential common shares from stock options,
warrants and redeemable convertible preferred stocks are
antidilutive. For the years ended December 31, 2001, 2000
and 1999, the total number of shares excluded from diluted loss
per share relating to these securities was 10,038,525, 2,232,633
and 899,319 shares, respectively.
Employee
Benefit Plans
The Company has a 401(k) Plan which stipulates
that all full-time employees with at least three months of
employment can elect to contribute to the 401(k) Plan, subject
to certain limitations, up to 20% of salary on a pretax basis.
The Company’s option to provide matching contributions had
not been done to date. During December 2000, the Company
approved a change to the employment qualification period from
three months to one month of employment and approved an employer
match program that became effective during 2001. Subject to a
maximum dollar match contribution, the Company will match 50% of
the first 6% of the employee’s contribution on a pretax
basis, but not to exceed $5,250 per year. During 2001, the
Company expensed total employer matching contributions of
$273,000.
Significant
Concentrations
Although the Company has had development
arrangements with other collaborative partners, the arrangement
with Novo Nordisk is our only active, funded development
agreement. For the year ended December 31, 2001, this
partner-funded program contributed approximately 90% of total
contract revenues. The agreement with Novo Nordisk can be
terminated under certain conditions, including by either party
on limited written notice, by Novo Nordisk by limited prior
written notice upon the occurrence of certain events, and by
either party upon 30 days’ written notice in the event
that the other party commits a material breach under the
agreement and fails to remedy such breach within
60 days’ notice of such breach.
Comprehensive
Income (Loss)
Statement of Financial Accounting Standards
No. 130, “Reporting Comprehensive Income”
(SFAS 130), requires unrealized gains or losses on the
Company’s available-for-sales securities to be recorded in
other comprehensive income (loss). Total comprehensive loss has
been disclosed in the statement of redeemable convertible
preferred stock and shareholders’ equity.
Recent
Accounting Pronouncements
In July 2001, the Financial Accounting Standards
Board issued Statements of Financial Standards (SFAS)
No. 141, “Business Combinations”, and SFAS
No. 142, “Goodwill and Other Intangible Assets”.
The new rules require business combinations initiated after
June 30, 2001 to be accounted for using the purchase method
of accounting and goodwill acquired after this date will no
longer be amortized, but will be subject to annual impairment
tests. All other intangible assets will continue to be amortized
over their estimated useful lives. Companies are required to
adopt SFAS No. 142 for fiscal years beginning after
December 31, 2001. The Company did not complete any
business combinations through the twelve months ended
December 31, 2001, as a result these standards did not have
a material impact on its financial position or operating results.
In August 2001, the FASB issued FASB Statement
No. 144 (FAS 144), “Accounting for the Impairment or
Disposal of Long-lived Assets”. FAS 144 supercedes
FASB Statement No. 121, Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of,
and the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations —
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business (as
previously defined in that Opinion). This Statement also amends
ARB No. 51, Consolidated Financial Statements, to eliminate
the exception to
45
NOTES TO FINANCIAL STATEMENTS
(Continued)
consolidation of a subsidiary for which control
is likely to be temporary. Companies are required to adopt
FAS 144 for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years, but early
adoption is encouraged. The Company has not yet determined the
impact this standard will have on its financial position and
results of operations, although it does not anticipate that the
adoption of this standard will have a material impact on the
Company’s financial position or results of operations.
Reclassifications
Certain reclassifications of prior year amounts
have been made to conform with current year presentation.
2. Financial
Instruments
Cash
Equivalents and Short-term Investments
The following summarizes the Company’s fair
value of cash equivalents and investments (amounts in thousands):
As of December 31, 2001 and 2000, the
difference between the fair value and the amortized cost of
available-for-sale securities was $15,000 and $25,000 for 2001
and 2000, respectively. As of December 31, 2001, the
average portfolio duration was approximately nine days, and the
contractual maturity of any single investment did not exceed
46 days from the balance sheet date.
46
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. Property and
Equipment
Property and equipment consist of the following
(amounts in thousands):
At December 31, 2001 and 2000, property and
equipment include assets under capitalized leases of
approximately $13,080,000 and $13,675,000, respectively.
Accumulated depreciation related to leased assets at
December 31, 2001 and 2000, was approximately $7,864,000
and $5,209,000, respectively.
4. Leases and
Commitments
Amounts borrowed under the Company’s
equipment lease lines of credit bear interest at rates from 9.8%
to 14.6% and are collateralized by the related equipment. Under
the terms of the lease agreements, the Company has the option to
purchase the leased equipment at a negotiated price at the end
of each lease term. In March 2001, the Company amended its
warehouse facility lease to reduce the leased space by 36,640
square feet. The Company leases its office, laboratory and
manufacturing facilities under several operating leases expiring
through the year 2016.
Future minimum lease payments under noncancelable
operating and capital leases at December 31, 2001 are as
follows (amounts in thousands):
47
NOTES TO FINANCIAL STATEMENTS
(Continued)
Certain of the Company’s operating leases
have rent escalation clauses and accordingly, the Company
recognizes rent expense on a straight-line basis. At
December 31, 2001, the Company had $300,000 deferred rent
expense, which is included in capital lease obligations on the
balance sheet.
For the years ended December 31, 2001, 2000
and 1999, rent expense under operating leases totaled
$5,476,000, $3,896,000 and $2,449,000, respectively.
5. Contingencies
In June 1998, Eli Lilly and Company
(“Lilly”) filed a complaint against the Company in the
United States District Court for the Southern District of
Indiana. The complaint made various allegations against the
Company, arising from the Company’s decision to enter into
an exclusive collaboration with Novo Nordisk with respect to the
development and commercialization of a pulmonary delivery system
for insulin and insulin analogs. The Company has sponsored
various studies of the pulmonary delivery of insulin and insulin
analogs using materials supplied by Lilly under a series of
agreements dating from January 1996. The Company and Lilly had
also conducted negotiations concerning a long-term supply
agreement under which Lilly would supply bulk insulin to the
Company for commercialization in the Company’s AERx insulin
Diabetes Management System, and a separate agreement under which
the Company would license certain intellectual property to
Lilly. These negotiations were terminated after the Company
proceeded with its agreement with Novo Nordisk. The complaint
sought a declaration that Lilly scientists were co-inventors of
a patent application filed by the Company relating to pulmonary
delivery of an insulin analog or, in the alternative,
enforcement of an alleged agreement to grant Lilly a
nonexclusive license under such patent application. The
complaint also contained allegations of misappropriation of
trade secrets, breach of fiduciary duty, conversion and unjust
enrichment and seeks unspecified damages and injunctive relief.
The Company filed an answer denying all material allegations of
the complaint and a motion for summary judgment directed against
all claims in Lilly’s complaint. The Court has issued two
written rulings on the Company’s motion substantially
limiting the claims against the Company. Specifically, the Court
granted the Company’s motion as to Lilly’s claim to
enforce an alleged license agreement, for misappropriation of
trade secrets, breach of fiduciary duty, conversion, estoppel
and breach of contract (in part) and dismissed those claims from
the case. The Court denied the Company’s motion as to
Lilly’s claims for declaratory relief, unjust enrichment
and breach of contract (in part), based on factual disputes
between the parties, and those issues remain to be resolved. The
Company recently filed a motion asking the Court to reconsider
summary judgment on the inventorship and unjust enrichment
claims, based on evidence recently produced by Lilly; the Court
denied the Company’s motion, but the Company may raise
those issues again. Lilly filed a motion seeking to add several
new patents to the case; Lilly withdrew that motion after the
Company filled its opposition papers and after discussion with
the Court. Trial was set for November 2001, but has been
continued to April 22, 2002 due to a conflict on the
Court’s calendar. The risks to the Company should Lilly
prevail in this case are that Lilly would be given rights of an
owner, along with the Company, on one of the Company’s
patents relating to pulmonary delivery of monomeric insulin
lispro and/or that Lilly would be awarded damages on its
remaining claims for breach of contract and unjust enrichment.
Lilly also contends that factual findings made in any trial of
this case would have some effect on other patents relating to
pulmonary delivery of monomeric insulin lispro. Management
believes that it has meritorious defenses against each of Eli
Lilly’s remaining claims and that this litigation will not
have a material adverse effect on the Company’s financial
position, results of operations or cash flows. However, there
can be no assurance that the Company will prevail in this case.
6. Redeemable
Convertible Preferred Stock
Redeemable
Convertible Preferred Stock and Common Stock
Warrants
During December 2001, the Company completed a
$48.4 million Series A redeemable convertible
preferred stock (“preferred stock”) financing. Under
the terms of the financing, the Company sold to a group
48
NOTES TO FINANCIAL STATEMENTS
(Continued)
of investors 2,001,236 shares of preferred stock
at a purchase price of $24.20 per share. Each share of preferred
stock is convertible into four shares of common stock. The
Company also issued warrants to the investors to purchase
5,203,212 shares of common stock at an exercise price of $6.97
per share. Issuance costs of approximately $3.0 million
were accounted for as a reduction to proceeds from the preferred
stock financing.
During the first two years, the preferred stock
is entitled to cumulative dividends, which shall accrue at an
annual rate of 6%, payable only when and if declared by the
Board of Directors. At the option of the Company, dividends may
be paid in either cash or in shares of common stock, which will
be valued at a price equal to the then current market price. The
current market price of the common stock on any dividend payment
date shall be based on the closing price of the Company’s
common stock as quoted on the Nasdaq Stock Market. There were no
dividends declared as of December 31, 2001.
Each share of preferred stock, together with
accrued and unpaid dividends, is convertible, at the option of
the holder, into four shares of common stock. The conversion
rate is fixed and not subject to any adjustments except for
stock splits, stock dividends, combinations, reorganizations,
mergers or other similar events. Each share of outstanding
preferred stock will automatically convert into common stock
upon either the closing of a registered underwritten public
offering covering the offer and sale of common stock with gross
proceeds to the Company exceeding $25 million or the date
on which the common stock closing bid price has been above
$10.59 per share for at least twenty consecutive trading days.
Upon any liquidation, dissolution, redemption or
winding up of the Company, whether voluntary or involuntary, the
holders of outstanding preferred stock will be entitled to a
liquidation preference, equal to the original issue price plus
all accrued and unpaid dividends (as adjusted for any stock
dividends, combinations, splits, recapitalizations and other
similar events) to the preferred holders. Any remaining assets
will be available for distribution to holders of common stock.
Each holder of preferred stock shall have a
number of votes equal to the number of shares of common stock
issuable upon conversion of such holder’s shares of
preferred stock and shall have voting rights and powers equal to
the voting rights and powers of the Company’s common stock.
Summary of
Preferred Stock and Warrant Accounting
The net proceeds of the preferred stock offering
were reduced by approximately $14.7 million, representing
the value assigned to the common stock warrants issued with the
preferred stock. The warrants were valued using the Black
Scholes option pricing model with the following assumptions:
estimated volatility of 87%, risk-free interest rate of 4.71%,
no dividend yield, and an expected life of 5 years. After
reducing the $48.4 million proceeds by the value of the
warrants, the remaining proceeds were used to compute a
discounted conversion price in accordance with EITF 00-27,
“Application of EITF Issue No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios to Certain Convertible
Instruments.” The discounted conversion price is compared
to the fair market value of the Company’s common stock on
the issuance date of the preferred stock resulting in a
beneficial conversion feature of approximately
$10.7 million, which represents the difference between the
fair market value of the Company’s common stock and the
discounted conversion price. The value of the beneficial
conversion feature is reported on the Statements of Operations
as a deemed dividend and is included in the calculation of net
loss applicable to the common shareholders.
In July 2001, the SEC staff made a staff
announcement, “Classification and Measurement of Redeemable
Securities”, (EITF D-98) which clarifies
Rule 5-02.28 of Regulation S-X, which was previously
adopted in accounting series Release No. 268,
“Presentation in Financial Statements of Redeemable
Preferred Stock”. This announcement addresses financial
statement classification and measurement of securities subject
to mandatory redemption requirements or whose redemption is
outside of the control of the issuer. Rule 5-02.28 requires
preferred securities that are redeemable for cash or other
assets to be classified outside of permanent
49
NOTES TO FINANCIAL STATEMENTS
(Continued)
equity if they are redeemable (1) at a fixed
or determinable price on a fixed or determinable date
(2) at the option of the holder, or (3) upon the
occurrence of an event that is not solely within the control of
the issuer.
The preferred stock agreement provides that a
mandatory redemption is triggered if a change in control occurs.
Accordingly the Company has classified the preferred stock
outside of permanent equity.
7. Shareholders’
Equity
In January 2001, the Company raised
$5 million through the sale of 339,961 common shares at a
price of $14.71 per share to GlaxoSmithKline plc
(“GlaxoSmithKline”). The sale was made pursuant to the
exercise of a put option by the Company under the terms of the
collaboration agreement with GlaxoSmithKline.
In June 2001, the Company raised $5 million
through the sale of 708,216 shares of common stock at a price of
$7.06 per share to Novo Nordisk A/S (“Novo Nordisk”).
The sale was made pursuant to the exercise of a put option by
the Company under the terms of the collaboration agreement with
Novo Nordisk.
In August 2001, the Company completed a private
placement of shares of common stock for gross proceeds of
$14.6 million to a group of institutional investors. Under
the terms of the private placement, the Company sold 3,639,316
shares of common stock at a price of $4.00 per share.
In October 2001, the Company entered into a
common stock purchase agreement with Novo Nordisk
Pharmaceuticals, Inc., an affiliate of Novo Nordisk A/S. Under
the terms of the agreement, Novo Nordisk Pharmaceuticals has
committed to purchase up to $45 million of the
Company’s common stock, in which the initial shares of
$20 million (“initial purchase price”) was
purchased ten business days after the effective date of the
agreement. The number of initial shares was calculated by
dividing the initial purchase price by the greater of
(a) the average of the closing prices of the Company’s
common stock on the Nasdaq for the thirty trading days
immediately prior to the effective date, and (b) the
average of such closing prices for the five trading days
immediately prior to the effective date. In addition, the
Company may elect to sell at its option, subject to certain
conditions, between $5 million and $10 million of
additional shares to Novo Nordisk Pharmaceuticals once every
three months beginning December 1, 2001 until the aggregate
amount of $25 million has been reached. The number of
additional shares shall be calculated by dividing the additional
purchase price by the average closing price of the
Company’s common stock on the Nasdaq for the thirty trading
days immediately prior to the date of written notice by the
Company to Novo Nordisk Pharmaceuticals. Novo Nordisk
Pharmaceuticals will hold the shares to be purchased under the
agreement for at least two years from the effective date of each
purchase, subject to certain conditions including, among other
things, Novo Nordisk not owning more than 45% of the
Company’s common stock and the accuracy of certain
representations. During October 2001, the Company raised
$20 million through the sale of 5,665,723 shares of common
stock at a price of $3.53 per in accordance with terms of
the agreement.
In April 2000, the Company completed a follow-on
public offering of common stock, which raised approximately
$42.6 million in net proceeds with the issuance of
2,875,000 shares of common stock.
In November 2000, the Company entered into a
common stock purchase agreement (“Acqua Agreement”)
with Acqua Wellington North American Equities Fund, Ltd
(“Acqua”), a Bahamas based company, establishing a
common stock equity line. Pursuant to the equity line, Acqua,
subject to the Company’s satisfaction of certain
conditions, has committed to purchase up to $50 million of
the Company’s common stock over a period not to exceed
20 months, at a discount to a 20-day weighted average
trading price ranging from 5% to 7%. The amount that the Company
may draw down for any draw down pricing period is dependent upon
a number of factors, including the Company’s stock price,
trading volume and threshold price set during the draw down
pricing period. The Company has filed a registration statement
with the Securities and Exchange Commission in November 2000
related to the common stock available for sale under the equity
agreement. During December 2000, the Company raised
approximately $2,172,000 through the sale of 114,795 shares of
common stock at an average price of $18.92 per share under the
terms of the Acqua
50
NOTES TO FINANCIAL STATEMENTS
(Continued)
Agreement. The fair market value of the
Company’s common stock on the closing date was $15.50 per
share. During February 2001, the Company raised $5 million
through the sale of 436,110 shares of common stock at an average
price of $11.46 per share under the terms of the Acqua
Agreement. The fair market value of the Company’s common
stock on the closing date was $13.25 per share. During July
2001, the Company raised $539,000 through the sale of 92,407
shares of common stock at an average price of $5.84 per share
under the terms of the Acqua Agreement. The fair market value of
the Company’s common stock on the closing date was $4.80
per share. In August 2001, the Company committed not to use the
equity line.
Reserved
Shares
At December 31, 2001, the Company had
5,835,798 shares of its common stock reserved for issuance upon
exercise of common stock warrants and 4,713,458 shares for
issuance upon exercise of options under all plans.
Other Common
Stock Warrants
In August 2001, the Company issued warrants in
connection with the private placement of common stock that
entitles investors to purchase 363,929 shares of common stock at
an exercise price of $5.41 per share or a 15% premium to the
Nasdaq National Market price on the closing date. The Company
valued the warrants using the Black-Scholes option pricing model
using the following assumptions: estimated volatility of 0.78,
risk-free interest rate of 6.2%, no dividend yield, and an
expected life of 4 years, and recorded approximately
$978,969 as issuance costs related to the private placement.
These warrants are exercisable through August 21, 2005.
During September 2000, the Company issued a
warrant in connection with an operating lease agreement that
entitles the holder to purchase 25,000 shares of common stock at
an exercise price of $21.72. This warrant is fully vested,
nonforfeitable and is exercisable through September 2007. The
Company valued the warrant using the Black-Scholes option
pricing model at $293,000 and is amortizing the warrant over the
term of the operating lease agreement, which is 15 years.
In January 1999, the Company issued a warrant to
the placement agent of the private placement of common stock
that entitles the holder to purchase 36,425 shares of common
stock at an exercise price of $10.50 per share. The Company
valued the warrant using the Black-Scholes option pricing model
and recorded approximately $221,500 as issuance costs related to
the private placement. This warrant is exercisable through June
2004.
In January and December 1998, the Company issued
warrants in connection with an operating lease agreement that
entitles the holder to purchase 50,000 and 60,000 shares of
common stock at an exercise price of $10.94 and $10.16 per
share, respectively. These warrants are fully vested,
nonforfeitable and are exercisable through December 2005. The
Company valued the warrants using the Black-Scholes option
pricing model and is amortizing the warrants over the term of
the operating lease agreement, which is 17 years.
In April 1998, the Company issued warrants to the
placement agents of the private placement of common stock that
entitles the holders to purchase 166,665 shares of common stock
at an exercise price of $12.42 per share. The Company valued the
warrants using the Black-Scholes option pricing model and
recorded approximately $765,000 as issuance costs related to the
private placement. These warrants are exercisable through June
2003. During November 2000, one of the placement agents
exercised 69,433 shares of common stock using a provision of the
warrant that allows the holder to purchase common stock in lieu
of cash or net issue exercise whenever the fair market value of
the Company’s common stock exceeds the exercise price of
the warrant. The placement agent received a net issue exercise
of 32,931 shares of common stock.
51
NOTES TO FINANCIAL STATEMENTS
(Continued)
1996
Non-Employee Directors’ Stock Option Plan
The 1996 Non-Employee Directors’ Stock
Option Plan (the “Directors’ Plan”) authorized
225,000 shares of common stock for issuance under the plan.
Options granted under the Directors’ Plan expire no later
than ten years from date of grant. The option price shall be at
100% of the fair value on the date of grant as determined by the
Board of Directors. The options generally vest quarterly over a
period of one year. During 2000, the Board of Directors approved
the termination of the Directors’ Plan. No more options can
be granted under the plan after its termination. The termination
of the Directors’ Plan will have no effect on the options
already outstanding.
The following is a summary of activity under the
Directors’ Plan:
1996 Equity
Incentive Plan
In April 1996, the Company’s Board of
Directors adopted and the Company’s shareholders approved
the 1996 Equity Incentive Plan (the “Plan”), which
amended and restated the 1992 Stock Option Plan. Options granted
under the Plan may be either incentive or non-statutory stock
options. As of December 31, 2001, the Company had 5,953,312
shares of common stock authorized for issuance under the Plan.
Options granted under the Plan expire no later than ten years
from the date of grant. For incentive and non-statutory stock
option grants, the option price shall be at least 100% and 85%,
respectively, of the fair value on the date of grant, as
determined by the Board of Directors. If at any time the Company
grants an option, and the optionee directly or by attribution
owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, the option price
shall be at least 110% of the fair value and shall not be
52
NOTES TO FINANCIAL STATEMENTS
(Continued)
exercisable more than five years after the date
of grant. During May 2001, the Company’s shareholders
approved an amendment to the Plan to include an evergreen
provision. The evergreen provision will automatically increase
the number of shares reserved under the Plan, subject to certain
limitations, by 6% of the issued and outstanding Common Stock of
the Company or such lessor number of shares as determined by the
Board of Directors on the date of the annual meeting of
shareholders of each fiscal year beginning 2001 and ending 2005.
The aggregate increase in the number of shares reserved under
the evergreen provision will not exceed 8,000,000 shares.
Options granted under the 1996 Equity Incentive
Plan are immediately exercisable subject to repurchase
provisions, and the shares acquired generally vest over a period
of four years from the date of grant. The Plan also provides for
a transition from employee to consultant status without
termination of the vesting period as a result of such
transition. Under the Plan, employees may exercise options in
exchange for a note payable to the Company. As of
December 31, 2001 and 2000, notes receivable from
shareholders were outstanding of zero dollars and $131,000,
respectively. These notes generally bear interest at 6% and are
due and payable in regular installments over a five-year period.
Any unvested stock issued is subject to repurchase agreements
whereby the Company has the option to repurchase unvested shares
upon termination of employment at the original issue price. The
common stock has voting rights but does not have resale rights
prior to vesting. The full amount of the notes receivable from
shareholders are secured by a pledge of shares of the
Company’s common stock. The Company has repurchased a total
of 38,294 shares in accordance with these agreements. During
2001, the Company granted options to purchase 1,960,310 shares
of common stock, none of which were exercised subject to
repurchase agreements.
The following is a summary of activity under the
Plan:
53
NOTES TO FINANCIAL STATEMENTS
(Continued)
The Company has elected to follow Accounting
Principles Board Opinion No. 25, “Accounting for
Stock-Based Compensation” (“APB 25”), which
requires use of option pricing valuation models that were not
developed for use in valuing employee stock options. Under APB
25, the Company has generally recognized no compensation expense
with respect to such awards.
The Company recorded deferred compensation of
approximately $704,000 for the difference between the grant
price and the fair value of certain of the Company’s common
stock options granted in 1998. This amount is being amortized
over the vesting period of the individual options. There were no
such grants in 2001, 2000 and 1999. Amortization of deferred
compensation recognized in the years ended December 31,
2001, 2000 and 1999 was approximately $162,000, $163,000 and
$162,000, respectively. The weighted average fair value of
options granted during 2001, 2000 and 1999 with an exercise
price equal to the fair value of the Company’s common stock
on the date of grant was $3.59, $11.08 and $4.98, respectively.
Pro forma information regarding net loss and
basic and diluted net loss per share is required by SFAS 123,
which also requires that the information be determined as if the
Company had accounted for its employee and non-employee director
stock options granted subsequent to December 31, 1994 under
the fair value method prescribed by this statement. The fair
value of options was estimated at the date of grant using the
Black-Scholes option pricing model with the following
assumptions: a risk-free interest rate of 4.2%, 6.2% and 5.2%
for the years ended December 31, 2001, 2000 and 1999,
respectively; a dividend yield of 0.0%; the annual volatility
factor of the expected market price of the Company’s common
stock for 2001, 2000 and 1999 are 87.0%, 78.0% and 64.1%,
respectively; and a weighted average expected option life of
four years.
For purposes of pro forma disclosure, the
estimated fair value of the options is amortized to expense over
the vesting period of the options using the straight-line
method. Pro forma information on the above basis is as follows
(amounts in thousands, except per share amounts):
54
NOTES TO FINANCIAL STATEMENTS
(Continued)
The pro forma impact of options on the net less
applicable to common shareholders for the years ended
December 31, 2001, 2000 and 1999 is not representative of
the effects on the pro forma net income (loss) for future years,
as future years will include the effects of additional years of
stock option grants.
Employee
Stock Purchase Plan
At the Annual Meeting of shareholders held in May
2001, the number of shares under the Employee Stock Purchase
Plan (the “Purchase Plan”) increased by 250,000 shares
to 750,000 shares of common stock. Shares may be purchased under
the Purchase Plan at 85% of the lesser of the fair market value
of the common stock on the grant date or purchase date. As of
December 31, 2001 a total of 695,131 shares have been
issued under the Purchase Plan.
8. Collaborative
Agreements
Novo
Nordisk
In June 1998, the Company executed a development
and commercialization agreement with Novo Nordisk to jointly
develop a pulmonary delivery system for administering insulin by
inhalation. In addition, the agreement provides Novo Nordisk
with an option to develop the technology for delivery of other
compounds. Under the terms of the agreement, Novo Nordisk has
been granted exclusive rights to worldwide sales and marketing
rights for any products developed under the terms of the
agreement.
Through December 31, 2001, the Company
received from Novo Nordisk approximately $68.3 million in
product development and milestone payments and, of this amount,
the Company has recognized approximately $55.4 million as
contract revenue. In future periods, the Company could receive
up to $120 million in additional product development and
nonrefundable milestone payments. In 1998, the Company raised
$5.0 million through the sale of common stock to Novo
Nordisk at a 25% premium to the fair market price. In June 2001,
the Company raised an additional $5 million through the
sale of common stock to Novo Nordisk at the fair market price.
In October 2001, the Company entered into a new common stock
purchase agreement with Novo Nordisk Pharmaceuticals, Inc., an
affiliate of Novo Nordisk A/ S. Under the new agreement, Novo
Nordisk Pharmaceuticals has committed to purchase up to
$45 million of the Company’s common stock. In October
2001, the Company entered into a common stock purchase agreement
with Novo Nordisk Pharmaceuticals, Inc., an affiliate of Novo
Nordisk A/ S. Under the terms of the agreement, Novo Nordisk
Pharmaceuticals has committed to purchase up to $45 million
of the Company’s common stock, in which the initial shares
of $20 million was purchased at fair market value. In
addition, the Company may elect to sell at its option, subject
to certain conditions including among other things, Novo Nordisk
not owning more than 45% of the Company’s common stock and
the accuracy of certain representations, between $5 million
and $10 million of additional shares to Novo Nordisk
Pharmaceuticals once every three months beginning
December 1, 2001 until the aggregate amount of
$25 million has been reached. Novo Nordisk will fund all
product development costs incurred by the Company, while Novo
Nordisk and the Company will co-fund final development of the
AERx device. The Company will be the initial manufacturer of all
the products covered by the agreement and will receive a share
of the overall gross profits resulting from Novo Nordisk’s
sales of the products. For the years ended December 31,
2001, 2000 and 1999, the Company recognized contract revenues of
$26.0 million, $15.4 million and $8.7 million,
respectively.
Glaxo
SmithKline
The Company executed a development and
commercialization agreement with GlaxoSmithKline in September
1997. The agreement covered the use of the AERx Pain Management
System for the delivery of narcotic analgesics and the companies
intended to collaborate on the development of the products
within this field. Under the terms of the agreement,
GlaxoSmithKline was granted exclusive worldwide sales and
marketing rights to the AERx Pain Management System for use with
such analgesics, and the Company
55
NOTES TO FINANCIAL STATEMENTS
(Continued)
retained all manufacturing rights. If the system
received regulatory approval, the Company intended to sell
devices and drug packets to GlaxoSmithKline and would receive
royalties on developed product sold by GlaxoSmithKline.
During December 2000, the Company and
GlaxoSmithKline amended the product development and
commercialization agreement whereby the Company assumed full
control and responsibility for conducting and financing the
remainder of all development activities. Under the amendment,
unless GlaxoSmithKline or the Company terminate the agreement
for other reasons, GlaxoSmithKline can restore its rights and
obligations to participate in and fund development and
commercialization of product under the amended agreement upon
payment of a restoration fee to the Company. In the event
GlaxoSmithKline elects to restore its rights under the amended
agreement, revenue will be recognized for the portion of the
restoration fee that represents reimbursement of development
costs not previously reimbursed by GlaxoSmithKline, but incurred
by the Company through the date of the election. Any remaining
fees will be deferred and amortized over the estimated remaining
development period of the amended development agreement. The
Company anticipates that GlaxoSmithKline will review its
restoration election upon the delivery of Phase 2b trial
results, which will be made available to them in the first half
of 2002, but there can be no assurance that GlaxoSmithKline will
elect to restore its rights. If the Company elects to terminate
the agreement and continues or intends to continue any
development activities, either alone or in collaboration with a
third party, then the Company is required to pay an exit fee to
GlaxoSmithKline. The payment of the exit fee would not have a
material impact on the Company’s financial position or
operating results.
Through December 31, 2001, the Company had
received from GlaxoSmithKline and recognized as contract revenue
approximately $23.7 million in product development and
milestone payments. No product development and milestone
payments were received during 2001. In 1997, the Company raised
$5 million through the sale of common stock to
GlaxoSmithKline at a 25% premium to the fair market price. In
January 2001, the Company raised an additional $5 million
through the sale of common stock to GlaxoSmithKline at the fair
market price. For the years ended December 31, 2001, 2000
and 1999, the Company recognized contract revenue of
$1.5 million, $3.4 million and $5.2 million,
respectively.
Genentech
The Company entered into an agreement with
Genentech in May 1999. The agreement was to develop the drug
dornase alfa in the AERx system. Dornase alfa is the active
ingredient in the currently marketed Genentech product,
Pulmozyme. The agreement provided that development expenses
incurred by Aradigm would be reimbursed by Genentech in the form
of loans supported by promissory notes bearing interest at two
percent over the prime rate, which was 11.5% at
December 31, 2000. Principal and unpaid accrued interest
was due at the earlier of 15 days after FDA approval or
seven years after the effective date of the collaborative
agreement or May 21, 2006. The Company would also receive
certain milestone payments at various points of product
development. In September 2000, the Company received a milestone
payment of $500,000 for the successful completion of a U.S.
Phase 2a clinical trial of the AERx Pulmonary Drug Delivery
System for the delivery of dornase alfa to patients with cystic
fibrosis.
In February 2001, the Company announced that it
has mutually agreed with Genentech to discontinue the
development of dornase alfa using the Company’s proprietary
AERx system. The companies also announced that they would be
entering into a new agreement allowing Genentech to evaluate
feasibility of using the AERx Pulmonary Drug Delivery System for
pulmonary delivery of other Genentech compounds. Under the terms
of the agreement, Genentech would not require the Company to
repay the loan of funds required to conduct product development
under the discontinued program. Forgiveness of the loan and
accrued interest resulted in an extraordinary gain during the
first quarter of 2001 of approximately $6,675,000. During 2001,
the Company refunded Genentech approximately $773,000 for
unspent project prepayments.
56
NOTES TO FINANCIAL STATEMENTS
(Continued)
The Company receives revenue from other
partner-funded programs. These programs are generally early
stage feasibility programs and may not necessarily develop into
long-term development agreements with the partners.
Significant partner payments, contract and
milestone revenues and deferred revenue are as follows (amounts
in thousands):
9. Income
Taxes
Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting and the amounts used for
tax purposes.
Significant components of the Company’s
deferred tax assets are as follows (amounts in thousands):
Realization of deferred tax assets is dependent
upon future earnings, if any, the timing and amount of which are
uncertain. Accordingly, the net deferred tax assets have been
fully offset by a valuation allowance. The valuation allowance
increased by $12,939,000 and $17,033,000 during 2001 and 2000,
respectively.
Deferred tax assets related to carryforwards at
December 31, 2001 include approximately $1,600,000
associated with stock option activity for which any subsequently
recognized tax benefits will be credited directly to
stockholders’ equity.
57
NOTES TO FINANCIAL STATEMENTS
(Continued)
As of December 31, 2001, the Company had net
operating loss carryforwards for federal income tax purposes of
approximately $121,000,000 which expire in the years 2006
through 2021, and federal research and development tax credits
of approximately $4,600,000, which expire in the years 2006
through 2021.
Utilization of the Company’s net operating
loss may be subject to substantial annual limitation due to
ownership change limitations provided by the Internal revenue
Code and similar state provisions. Such an annual limitation
could result in the expiration of the net operating loss before
utilization.
10. Quarterly
Results of Operations (Unaudited)
Following is a summary of the quarterly results
of operations for the years ended December 31, 2001 and
2000 (amounts in thousands):
58
NOTES TO FINANCIAL STATEMENTS
(Continued)
11. Subsequent
Events
Increase in Authorized Shares
On February 8, 2002, the Shareholders of
Aradigm Corporation approved an amendment of the Company’s
Articles of Incorporation to increase the authorized number of
shares of Common Stock from 40 million to 100 million
shares, and approved the Company’s Employee Stock Purchase
Plan, as amended, to increase the aggregate number of shares of
Common Stock authorized for issuance under such plan by
500,000 shares.
Options Granted to Officers and
Directors
During February 2002, the Board of Directors
approved granted under the 1996 Equity Incentive Plan (the
“Plan”) with an exercise price of $4.82 per share to
several directors and executive officers in an aggregate amount
of 140,000 shares and 1,000,000 shares, respectively.
Options granted under the Plan expire no later than ten years
from the date of grant. The option price was at 100% of the fair
value on the date of grant as determined by the Board of
Directors. Options granted to the directors will vest quarterly
over a period of one year. Options granted to the executive
officers will vest quarterly over a period of four years.
59
5 to 7 years
5 to 7 years
5 to 7 years
3 to 5 years
5 to 17 years
Table of Contents
Table of Contents
Table of Contents
December 31,
2001
2000
$
2,845
$
3,343
67,068
17,168
$
69,913
$
20,511
$
—
$
9,522
1,199
14,127
$
1,199
$
23,649
Table of Contents
December 31,
2001
2000
$
14,053
$
11,259
1,653
1,489
3,428
2,480
5,073
3,095
5,055
4,848
29,262
23,171
(13,186
)
(8,686
)
16,076
14,485
41,864
10,838
$
57,940
$
25,323
Operating
Capital
Leases
Leases
$
4,925
$
4,006
5,081
2,067
5,241
513
5,403
—
45,887
—
$
66,537
6,586
(633
)
5,953
(3,526
)
$
2,427
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Shares Available for
Number
Weighted Average
Grant of Options
of Shares
Price Per Share
Exercise Price
150,000
75,000
$6.00 - $14.25
$
9.30
(21,568
)
21,568
$8.25 - $8.44
$
8.35
—
(22,500
)
$6.00
$
6.00
—
—
—
—
128,432
74,068
$6.00 - $14.25
$
10.03
(84,356
)
84,356
$6.13 - $24.13
$
20.43
—
(27,500
)
$6.00 - $14.25
$
7.53
(44,076
)
(2,500
)
$14.25
$
14.25
—
128,424
$6.00 - $24.13
$
17.31
—
—
—
—
—
—
—
—
—
—
—
—
—
128,424
$6.00 - $24.13
$
17.31
Options Outstanding and Exercisable
Weighted Average Remaining
Weighted Average
Contractual Life
Exercise Price Range
Number
Exercise Price
(in years)
34,068
$
7.82
5.8
22,500
$
14.25
2.3
71,856
$
22.77
8.4
128,424
$
17.31
6.7
Table of Contents
Shares Available for
Number
Weighted Average
Grant of Options
of Shares
Price Per Share
Exercise Price
251,039
1,719,371
$0.10 - $14.63
$
9.77
1,820,000
—
—
—
(475,347
)
475,347
$6.19 - $12.00
$
9.42
—
(36,463
)
$0.37 - $12.25
$
5.19
60,349
(60,349
)
$5.33 - $14.63
$
11.03
1,656,041
2,097,906
$0.10 - $14.63
$
9.72
(1,308,325
)
1,308,325
$10.50 - $24.13
$
17.29
—
(291,176
)
$0.10 - $23.56
$
9.16
394,577
(394,577
)
$5.33 - $22.50
$
12.24
742,293
2,720,478
$0.33 - $24.13
$
13.05
1,152,812
—
—
—
(1,960,310
)
1,960,310
$3.34 - $12.94
$
5.36
—
(30,549
)
$5.33 - $10.63
$
6.70
561,215
(561,215
)
$3.44 - $23.00
$
10.77
496,010
4,089,024
$0.33 - $24.13
$
9.74
Table of Contents
Options Outstanding and Exercisable
Weighted Average Remaining
Weighted Average
Contractual Life
Exercise Price Range
Number
Exercise Price
(in years)
34,125
$
0.37
2.2
5,874
$
0.57
4.1
3,450
$
2.00
4.2
824,850
$
3.74
9.7
1,105,752
$
6.27
8.6
1,091,675
$
10.85
5.9
703,050
$
15.55
8.1
320,248
$
22.20
7.6
4,089,024
$
9.72
7.9
Years ended December 31,
2001
2000
1999
$
(43,079
)
$
(35,562
)
$
(23,603
)
$
(49,314
)
$
(39,587
)
$
(26,087
)
$
(1.98
)
$
(2.07
)
$
(1.66
)
$
(2.26
)
$
(2.30
)
$
(1.85
)
Table of Contents
Table of Contents
Table of Contents
December 31,
2001
2000
1999
$
8,654
$
11,024
$
12,673
32,054
13,879
9,482
—
2,617
2,040
1,650
1,437
3,641
33,704
17,933
15,163
26,030
15,411
8,692
1,524
3,379
5,187
1,362
1,513
2,933
28,916
20,303
16,812
13,442
8,654
11,024
(2,327
)
(2,032
)
(3,663
)
$
11,115
$
6,622
$
7,361
December 31,
2001
2000
$
48,000
$
38,600
4,400
3,461
6,500
3,980
700
620
59,600
46,661
(59,600
)
(46,661
)
$
—
$
—
Table of Contents
March 31,
June 30,
September 30,
December 31,
2001
2001
2001
2001
$
6,687
$
8,520
$
6,889
$
6,820
14,160
15,298
14,890
14,488
2,328
2,322
2,233
2,472
16,488
17,620
17,123
16,960
(9,801
)
(9,100
)
(10,234
)
(10,140
)
668
299
167
190
(262
)
(364
)
(216
)
(239
)
(9,395
)
(9,165
)
(10,283
)
(10,189
)
6,675
—
—
—
(2,720
)
(9,165
)
(10,283
)
(10,189
)
—
—
—
(10,722
)
$
(2,720
)
$
(9,165
)
$
(10,283
)
$
(20,911
)
$
(0.50
)
$
(0.47
)
$
(0.48
)
$
(0.77
)
0.36
—
—
—
$
(0.14
)
$
(0.47
)
$
(0.48
)
$
(0.77
)
18,838
19,338
21,581
27,319
Table of Contents
March 31,
June 30,
September 30,
December 31,
2000
2000
2000
2000
$
5,700
$
4,804
$
4,715
$
5,084
10,896
11,509
11,974
13,797
2,073
2,453
2,399
2,346
12,969
13,962
14,373
16,143
(7,269
)
(9,158
)
(9,658
)
(11,059
)
395
969
936
810
(321
)
(367
)
(413
)
(427
)
$
(7,195
)
$
(8,556
)
$
(9,135
)
$
(10,676
)
$
(0.48
)
$
(0.48
)
$
(0.51
)
$
(0.59
)
14,846
17,810
17,967
18,141
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers Of The Registrant
Identification of Directors
The information required by this Item concerning the Company’s directors is incorporated by reference from the section captioned “Proposal 1: Election of Directors” contained in the Company’s Definitive Proxy Statement related to the Annual Meeting of Shareholders to be held May 17, 2002, to be filed by the Company with the Securities and Exchange Commission (the “Proxy Statement”).
Identification of Executive Officers
The information required by this Item concerning our executive officers is set forth in Part I of this Report.
Section 16(a) Compliance
The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, required by this Item is incorporated by reference from the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the section captioned “Executive Compensation” contained in the Proxy Statement.
Item 12. Security Ownership Of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference from the section captioned “Security Ownership of Certain Beneficial Owners and Management” contained in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the sections captioned “Certain Transactions” and “Executive Compensation” contained in the Proxy Statement.
60
PART IV
| Item 14. | Exhibits, Financial Statements Schedules, And Reports On Form 8-K |
(a)(1) Financial Statements.
Included in Part II of this Report:
(2) Financial Statement
Schedules.
None.
Page in
Form 10-K
38
39
40
41
42
43
(3) Exhibits.
3.1
(1)
Amended and Restated Articles of Incorporation of
the Company.
3.2
(5)
Bylaws of the Company, as amended.
3.3
Certificate of Determination of Series A
Junior Participating Preferred Stock.
3.4
(14)
Certificate of Determination and Preferences of
Series A Convertible Preferred Stock.
3.5
Certificate of Amendment of Amended and Restated
Articles of Incorporation of Aradigm Corporation.
3.6
Certificate of Amendment of Certificate of
Determination of Series A Junior Participating Preferred
Stock.
4.1
Reference is made to Exhibits 3.1, 3.2, 3.3,
3.4, 3.5 and 3.6.
4.2
(1)
Specimen common stock certificate.
10.1
(1)(2)
Form of Indemnity Agreement between the
Registrant and each of its directors and officers.
10.2
(2)(11)
Equity Incentive Plan, as amended (the
“Equity Incentive Plan”).
10.3
(1)(2)
Form of the Company’s Incentive Stock Option
Agreement under the Equity Incentive Plan.
10.4
(1)(2)
Form of the Company’s Non-statutory Stock
Option Agreement under the Equity Incentive Plan.
10.5
(1)(2)
Form of the Company’s Non-Employee
Directors’ Stock Option Plan.
10.6
(1)(2)
Form of the Company’s Non-statutory Stock
Option Agreement under the Non-Employee Directors’ Stock
Option Plan.
10.7
(2)(11)
Employee Stock Purchase Plan, as amended.
10.8
(1)(2)
Form of the Company’s Employee Stock
Purchase Plan Offering Document.
10.9
(1)
Master Lease Agreement and Warrant, between the
Company and Comdisco, Inc., dated June 9, 1995.
10.10
(4)*
Product Development and Commercialization
Agreement between the Company and SmithKline Beecham PLC.
10.11
(3)
Lease Agreement for the property located at 3911
Trust Way, Hayward, California, dated March 17, 1997,
between the Company and Hayward Point Eden I Limited Partnership.
61
10.11
a(3)
First Amendment to Lease, dated December 22,
1997, between the Company and Hayward Point Eden I Limited
Partnership.
10.11
b(3)
Second Amendment to Lease, dated January 28,
1998, between the Company and Hayward Point Eden I Limited
Partnership.
10.12
(3)
Lease Agreement for the property located in Phase
V of the Britannia Point Eden Business Park in Hayward,
California, dated January 28, 1998, between the Company and
Britannia Point Eden, LLC.
10.13
(5)
Common Stock Purchase Agreement, dated
April 3, 1998, between the Company and the purchasers named
therein.
10.14
(5)*
Development and License Agreement, dated
June 2, 1998, between the Company and Novo Nordisk A/ S.
10.15
(6)
Rights Agreement, dated as of August 31,
1998, between the Company and Bank Boston, N.A.
10.15
a
Amendment to Rights Agreement, dated as of
October 22, 2001, by and between the Company and Fleet
National Bank.
10.15
b
Amendment to Rights Agreement, dated as of
December 6, 2001, by and between the Company and EquiServe
Trust Company.
10.16
(7)
Common Stock Purchase Agreement, dated
January 27, 1999, between the Company and the purchasers
named therein.
10.17
(8)
Lease Agreement for the property located at 2704
West Winton Avenue, Hayward, California, dated
September 11, 2000, between the Company and Winton
Industrial Center, Inc.
10.17
a(12)
Amendment No. 1 to Standard Office/
Warehouse Lease, dated March 1, 2001, by and between the
Company and Winton Industrial Center, Inc.
10.18
(8)
Lease Agreement for the property located at 3930
Point Eden Way, Hayward, California, dated July 1, 2000,
between the Company and Hayward Point Eden I Limited Partnership.
10.19
(9)
Common Stock Purchase Agreement, dated as of
November 3, 2000, by and between the Company and Acqua
Wellington North American Equities Fund, Ltd.
10.20
(10)*
Amendment to GlaxoSmithKline agreement executed
in December 2000.
10.21
(13)
Securities Purchase Agreement, dated as of
August 21, 2001, by and among the Company and the
purchasers named therein.
10.22
Stock Purchase Agreement, dated as of
October 22, 2001, by and between the Company and Novo
Nordisk Pharmaceuticals, Inc.
10.23
*
First Amendment to Development and License
Agreement, dated as of October 22, 2001, between the
Company and Novo Nordisk A/ S.
10.24
(14)
Securities Purchase Agreement, dated as of
December 11, 2001, by and among the Company and the
purchasers named therein.
23.1
Consent of Ernst & Young LLP, Independent
Auditors.
24.1
Power of Attorney. Reference is made to page 54.
| * | The Company has sought confidential treatment for portions of the referenced exhibit. |
| (1) | Incorporated by reference to the indicated exhibit in the Company’s Registration Statement on Form S-1 (No. 333-4236), as amended. |
| (2) | Represents a management contract or compensatory plan or arrangement. |
| (3) | Incorporated by reference to Company’s Annual Report on Form 10-K for the year ended December 31, 1997, as amended. |
| (4) | Incorporated by reference to the Company’s Form 8-K filed on November 7, 1997. |
| (5) | Incorporated by reference to the Company’s Form 10-Q filed on August 14, 1998. |
| (6) | Incorporated by reference to the Company’s 8-K filed on September 2, 1998. |
62
| (7) | Incorporated by reference to the indicated exhibit in the Company’s Registration Statement on Form S-3 (No. 333-72037), as amended. |
| (8) | Incorporated by reference to the Company’s Form 10-Q filed on November 13, 2000. |
| (9) | Incorporated by reference to the Company’s Form 8-K filed on December 11, 2000. |
| (10) | Incorporated by reference to the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2000. |
| (11) | Incorporated by reference to the Company’s definitive proxy statement filed on April 11, 2001. |
| (12) | Incorporated by reference to the Company’s Form 10-Q filed on August 13, 2001. |
| (13) | Incorporated by reference to the Company’s Form S-3 (No. 333-69614), as amended. |
| (14) | Incorporated by reference to the Company’s Form S-3 (No. 333-76584). |
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three month period ended December 31, 2001.
(c) Index to Exhibits.
See Exhibits listed under Item 14(a)(3).
(d) Financial Statement Schedules.
63
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Hayward,
State of California, on the 28th day of March, 2002.
KNOWN ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints,
jointly and severally, Richard P. Thompson and Michael
Molkentin, and each one of them, attorneys-in-fact for the
undersigned, each with power of substitution, for the
undersigned in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said
attorneys-in-fact, or their substitutes, may do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has
executed this Power of Attorney as of the date indicated
opposite his name.
Pursuant to the requirements of the Securities
and Exchange Act of 1934, this Report has been signed below by
the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
64
ARADIGM CORPORATION
By: /s/ RICHARD P. THOMPSON
Richard P. Thompson
President and Chief Executive
Officer
Signature
Title
Date
/s/ RICHARD P. THOMPSON
Richard P. Thompson
President, Chief Executive
Officer and Director
(Principal Executive Officer)
March 28, 2002
/s/ MICHAEL MOLKENTIN
Michael Molkentin
Acting Chief Financial Officer
(Principal Financial and
Accounting Officer)
March 28, 2002
/s/ FRANK H. BARKER
Frank H. Barker
Director
March 28, 2002
/s/ STAN M. BENSON
Stan M. Benson
Director
March 28, 2002
/s/ IGOR GONDA
Igor Gonda
Director
March 28, 2002
/s/ JOHN M. NEHRA
John M. Nehra
Director
March 28, 2002
/s/ WAYNE L. ROE
Wayne L. Roe
Director
March 28, 2002
/s/ VIRGIL D. THOMPSON
Virgil D. Thompson
Director
March 28, 2002
Table of Contents
EXHIBIT INDEX
Exhibit
Number
Description
Amended and Restated Articles of Incorporation of
the Company.
Bylaws of the Company, as amended.
Certificate of Determination of Series A
Junior Participating Preferred Stock.
Certificate of Determination and Preferences of
Series A Convertible Preferred Stock.
Certificate of Amendment of Amended and Restated
Articles of Incorporation of Aradigm Corporation.
Certificate of Amendment of Certificate of
Determination of Series A Junior Participating Preferred
Stock.
Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4,
3.5 and 3.6.
Specimen common stock certificate.
Form of Indemnity Agreement between the
Registrant and each of its directors and officers.
Equity Incentive Plan, as amended (the
“Equity Incentive Plan”).
Form of the Company’s Incentive Stock Option
Agreement under the Equity Incentive Plan.
Form of the Company’s Non-statutory Stock
Option Agreement under the Equity Incentive Plan.
Form of the Company’s Non-Employee
Directors’ Stock Option Plan.
Form of the Company’s Non-statutory Stock
Option Agreement under the Non-Employee Directors’ Stock
Option Plan.
Employee Stock Purchase Plan, as amended.
Form of the Company’s Employee Stock
Purchase Plan Offering Document.
Master Lease Agreement and Warrant, between the
Company and Comdisco, Inc., dated June 9, 1995.
Product Development and Commercialization
Agreement between the Company and SmithKline Beecham PLC.
Lease Agreement for the property located at 3911
Trust Way, Hayward, California, dated March 17, 1997,
between the Company and Hayward Point Eden I Limited Partnership.
First Amendment to Lease, dated December 22,
1997, between the Company and Hayward Point Eden I Limited
Partnership.
Second Amendment to Lease, dated January 28,
1998, between the Company and Hayward Point Eden I Limited
Partnership.
Lease Agreement for the property located in Phase
V of the Britannia Point Eden Business Park in Hayward,
California, dated January 28, 1998, between the Company and
Britannia Point Eden, LLC.
Common Stock Purchase Agreement, dated
April 3, 1998, between the Company and the purchasers named
therein.
Development and License Agreement, dated
June 2, 1998, between the Company and Novo Nordisk A/ S.
Rights Agreement, dated as of August 31,
1998, between the Company and Bank Boston, N.A.
Amendment to Rights Agreement, dated as of
October 22, 2001, by and between the Company and Fleet
National Bank.
Amendment to Rights Agreement, dated as of
December 6, 2001, by and between the Company and EquiServe
Trust Company.
Common Stock Purchase Agreement, dated
January 27, 1999, between the Company and the purchasers
named therein.
Table of Contents
Exhibit
Number
Description
Lease Agreement for the property located at 2704
West Winton Avenue, Hayward, California, dated September 11,
2000, between the Company and Winton Industrial Center, Inc.
Amendment No. 1 to Standard Office/
Warehouse Lease, dated March 1, 2001, by and between the
Company and Winton Industrial Center, Inc.
Lease Agreement for the property located at 3930
Point Eden Way, Hayward, California, dated July 1, 2000,
between the Company and Hayward Point Eden I Limited Partnership.
Common Stock Purchase Agreement, dated as of
November 3, 2000, by and between the Company and Acqua
Wellington North American Equities Fund, Ltd.
Amendment to GlaxoSmithKline agreement executed
in December 2000.
Securities Purchase Agreement, dated as of
August 21, 2001, by and among the Company and the
purchasers named therein.
Stock Purchase Agreement, dated as of
October 22, 2001, by and between the Company and Novo
Nordisk Pharmaceuticals, Inc.
First Amendment to Development and License
Agreement, dated as of October 22, 2001, between the
Company and Novo Nordisk A/ S.
Securities Purchase Agreement, dated as of
December 11, 2001, by and among the Company and the
purchasers named therein.
Consent of Ernst & Young LLP,
Independent Auditors.
Power of Attorney. Reference is made to
page 54.
*
The Company has sought confidential treatment for
portions of the referenced exhibit.
(1)
Incorporated by reference to the indicated
exhibit in the Company’s Registration Statement on
Form S-1 (No. 333-4236), as amended.
(2)
Represents a management contract or compensatory
plan or arrangement.
(3)
Incorporated by reference to Company’s
Annual Report on Form 10-K for the year ended
December 31, 1997, as amended.
(4)
Incorporated by reference to the Company’s
Form 8-K filed on November 7, 1997.
(5)
Incorporated by reference to the Company’s
Form 10-Q filed on August 14, 1998.
(6)
Incorporated by reference to the Company’s
8-K filed on September 2, 1998.
(7)
Incorporated by reference to the indicated
exhibit in the Company’s Registration Statement on
Form S-3 (No. 333-72037), as amended.
(8)
Incorporated by reference to the Company’s
Form 10-Q filed on November 13, 2000.
(9)
Incorporated by reference to the Company’s
Form 8-K filed on December 11, 2000.
(10)
Incorporated by reference to the Company’s
Annual Report on Form 10-K for the year ended
December 31, 2000.
(11)
Incorporated by reference to the Company’s
definitive proxy statement filed on April 11, 2001.
(12)
Incorporated by reference to the Company’s
Form 10-Q filed on August 13, 2001.
(15)
Incorporated by reference to the Company’s
Form S-3 (No. 333-69614), as amended.
(16)
Incorporated by reference to the Company’s
Form S-3 (No. 333-76584).
EXHIBIT 3.3
CERTIFICATE OF DETERMINATION
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
ARADIGM CORPORATION
(Pursuant to Section 401 of the
California General Corporation Law)
The undersigned, Richard P. Thompson and Reid M. Rubsamen hereby certify that:
1. They are the duly elected and acting Chief Executive Officer and President, and Secretary, respectively, of Aradigm Corporation (the "Corporation").
2. Pursuant to authority given by the Corporation's Articles of Incorporation, the Board of Directors of the Corporation has duly adopted the following resolutions at a meeting duly called and held on August 4, 1998:
RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of the Corporation in accordance with the provisions of its Restated Articles of Incorporation, the Board of Directors hereby creates a series of Preferred Stock, without par value, of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences, privileges and restrictions thereof (in addition to the provisions set forth in the Restated Articles of Incorporation of the Corporation, which are applicable to the Preferred Stock of all classes and series), as follows:
Series A Junior Participating Preferred Stock:
SECTION 1. DESIGNATION AND AMOUNT. Two Hundred Thirty Thousand (230,000) shares of Preferred Stock, without par value, are designated "Series A Junior Participating Preferred Stock" with the rights, preferences, privileges and restrictions specified herein (the "Junior Preferred Stock"). Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Junior Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding
options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Junior Preferred Stock.
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Junior Preferred Stock with respect to dividends, the holders of shares of Junior Preferred Stock, in preference to the holders of Common Stock, without par value (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Junior Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise) declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Junior Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Junior Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Junior Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Junior Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares of Junior Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Junior Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Junior Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Junior Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof.
SECTION 3. VOTING RIGHTS. The holders of shares of Junior Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each share of Junior Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Junior Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Certificate of Determination of Preferences creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Junior Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by law, holders of Junior Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.
SECTION 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Junior Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
Junior Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Junior Preferred Stock, except dividends paid ratably on the Junior Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Junior Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any shares of Junior Preferred Stock, or any shares of stock ranking on a parity with the Junior Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.
SECTION 5. REACQUIRED SHARES. Any shares of Junior Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Restated Articles of Incorporation, or in any other Certificate of Determination of Preferences creating a series of Preferred Stock or any similar stock or as otherwise required by law.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Junior Preferred Stock unless, prior thereto, the holders of shares of Junior Preferred Stock shall have received the greater of: (A) $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment; or (B) an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Junior Preferred Stock, except distributions made ratably on the Junior Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Junior Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
SECTION 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Junior Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Junior Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
SECTION 8. NO REDEMPTION. The shares of Junior Preferred Stock shall not be redeemable.
SECTION 9. RANK. The Junior Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all other series of the Corporation's Preferred Stock.
SECTION 10. AMENDMENT. The Restated Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Junior Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Junior Preferred Stock, voting together as a single class.
3. The authorized number of shares of Preferred Stock of this corporation is 5,000,000, and the number of shares of Preferred Stock constituting Series A Junior Preferred Stock, none of which has been issued, is 230,000.
IN WITNESS WHEREOF, the undersigned have executed this certificate on August 31, 1998.
/s/ Richard P. Thompson -------------------------------------------- RICHARD P. THOMPSON CHIEF EXECUTIVE OFFICER AND PRESIDENT /s/ Reid M. Rubsamen -------------------------------------------- REID M. RUBSAMEN SECRETARY |
The undersigned Richard P. Thompson, Chief Executive Officer and President of Aradigm Corporation and Reid M. Rubsamen, Secretary of said corporation, each certifies under penalty of perjury that the matters set forth in the foregoing Certificate of Determination are true of their own knowledge.
Executed at Hayward, California on August 31, 1998.
/s/ Richard P. Thompson -------------------------------------------- RICHARD P. THOMPSON CHIEF EXECUTIVE OFFICER AND PRESIDENT |
Executed at Hayward, California on August 31, 1998.
/s/ Reid M. Rubsamen -------------------------------------------- REID M. RUBSAMEN SECRETARY |
EXHIBIT 3.5
CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
ARADIGM CORPORATION
The undersigned certify that:
1. They are the President and Chief Executive Officer, and Acting Chief Financial Officer, respectively, of Aradigm Corporation, a California corporation.
2. Article III of the Amended and Restated Articles of Incorporation (the "Articles of Incorporation") of this corporation is amended to read in full as follows:
"This corporation is authorized to issue two classes of stock to
be designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares that the corporation is authorized to issue is
One Hundred Five Million (105,000,000) shares. One Hundred Million
(100,000,000) shares shall be Common Stock. Five Million (5,000,000)
shares shall be Preferred Stock.
The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to determine and alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any such series of Preferred Stock and the designation of any such series of Preferred Stock. The Board of Directors within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issuance of shares of that series."
3. The foregoing amendment of the Articles of Incorporation has been duly approved by the Board of Directors.
4. The foregoing amendment of the Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California Corporations Code. The total number of outstanding shares of the corporation is 29,536,383 shares of Common Stock and 2,001,236 shares of Series A Convertible Preferred Stock. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding shares of Common Stock as a class and more than 50% of the outstanding shares of Common Stock and Series A Preferred Stock voting together.
We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.
Date: February 8, 2002
/s/ Richard P. Thompson
--------------------------------------------
RICHARD P. THOMPSON
President and Chief Executive Officer
/s/ Michael Molkentin
--------------------------------------------
MICHAEL MOLKENTIN
Acting Chief Financial Officer
|
EXHIBIT 3.6
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF DETERMINATION OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
ARADIGM CORPORATION
The undersigned certify that:
1. They are the President and Chief Executive Officer, and Acting Chief Financial Officer, respectively, of Aradigm Corporation, a California corporation (the "Corporation").
2. Section 1 of the Certificate of Determination of Series A Junior Participating Preferred Stock is amended to read in full as follows:
"SECTION 1. DESIGNATION AND AMOUNT. One Million (1,000,000) shares of Preferred Stock, without par value, are designated "Series A Junior Participating Preferred Stock" with the rights, preferences, privileges and restrictions specified herein (the "Junior Preferred Stock"). Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Junior Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Junior Preferred Stock."
3. The foregoing amendment of the Certificate of Determination of Preferences of Series A Junior Participating Preferred Stock has been duly approved by the Board of Directors pursuant to authority given by the Corporation's Amended and Restated Articles of Incorporation.
We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.
Date: February 8, 2002
/s/ Richard P. Thompson
--------------------------------------------
RICHARD P. THOMPSON
President and Chief Executive Officer
/s/ Michael Molkentin
--------------------------------------------
MICHAEL MOLKENTIN
Acting Chief Financial Officer
|
Exhibit 10.15a
AMENDMENT TO RIGHTS AGREEMENT
BETWEEN ARADIGM CORPORATION AND
BANKBOSTON, N.A.
THIS AMENDMENT TO RIGHTS AGREEMENT (this "Amendment") is made as of October 22, 2001, by and between ARADIGM CORPORATION, a California corporation (the "Company"), and FLEET NATIONAL BANK (F/K/A BANKBOSTON, N.A.), a national banking association, as rights agent (the "Rights Agent").
WHEREAS, the Company has entered into a Stock Purchase Agreement (the "Novo Purchase Agreement") by and between the Company and Novo Nordisk Pharmaceuticals, Inc. ("Novo Nordisk"), pursuant to which the Company will sell shares of its Common Stock to Novo Nordisk.
WHEREAS, the Company and the Rights Agent are parties to that certain Rights Agreement, dated as of August 31, 1998 (the "Rights Agreement");
WHEREAS, the Company and the Rights Agent desire to amend the Rights Agreement to appoint EquiServe Trust Company, N.A. as the successor rights agent under the Rights Agreement.
WHEREAS, the Company desires to amend the Rights Agreement in connection with the execution and delivery of the Novo Purchase Agreement; and
WHEREAS, the Board of Directors of the Company has approved this Amendment and authorized its appropriate officers to execute and deliver the same to the Rights Agent.
NOW, THEREFORE, in accordance with the procedures for amendment of the Rights Agreement set forth in Section 27 thereof, and in consideration of the foregoing and the mutual agreements herein set forth, the parties hereby agree as follows:
1. Capitalized terms that are not otherwise defined herein shall have the meanings ascribed to them in the Rights Agreement.
2. The definition of "Acquiring Person" set forth in Section 1(a) of the Rights Agreement is amended by adding the following sentence to the end of that section:
Notwithstanding the foregoing, none of Novo Nordisk A/S, its Affiliates and Associates (collectively, "Novo Nordisk") shall be deemed to be an "Acquiring Person" for the purposes of this Agreement; provided, that the foregoing exemption shall cease to apply if Novo Nordisk becomes the Beneficial Owner of any additional Common Shares after the date hereof without the approval of a majority of the independent members of the Board of Directors of the Company other than in connection with the Stock Purchase Agreement dated as of October 22, 2001 (the "Novo Purchase Agreement") by and between the Company and Novo Nordisk Pharmaceuticals, Inc.
3. The definition of "Shares Acquisition Date" in Section l(n) of the Rights Agreement is hereby deleted in its entirety and replaced with the following:
1.
"SHARES ACQUISITION DATE" shall mean the first date of public announcement by the Company or an Acquiring Person that an Acquiring Person has become such provided, however that, if such Person is determined not to have become an Acquiring Person pursuant to clause (y) of Subsection 1(a)(B) hereof or the last sentence of Section 1(a) hereof, then no Shares Acquisition Date shall be deemed to have occurred.
4. Section 21 of the Rights Agreement is hereby deleted in its entirety and replaced with the following:
Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent for the Common Shares or Preferred Shares by registered or certified mail and to the holders of the Right Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent for the Common Shares or Preferred Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit such holder's Right Certificate for inspection by the Company), then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation, trust company or limited liability company organized and doing business under the laws of the United States, in good standing, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has individually or combined with an affiliate at the time of its appointment as Rights Agent a combined capital and surplus of at least $100 million dollars. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent for the Common Shares or Preferred Shares, and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be.
2.
5. The Rights Agreement, as amended by this Amendment, shall remain in full force and effect in accordance with its terms.
6. All the covenants and provisions of this Amendment by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder.
7. Nothing in this Amendment shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares) any legal or equitable right, remedy or claim under this Amendment; but this Amendment shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares).
8. If any term, provision, covenant or restriction of this Amendment is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Amendment shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
9. This Amendment shall be deemed to be a contract made under the laws of the State of California and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State.
10. This Amendment may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.
11. The Company hereby certifies to the Rights Agent that this Amendment is in compliance with Section 27 of the Rights Agreement.
3.
SIGNATURE PAGE TO RIGHTS AGREEMENT AMENDMENT
IN WITNESS WHEREOF, the parties herein have caused this Amendment to be duly executed and attested, all as of the date and year first above written.
ARADIGM CORPORATION
By: /s/ Igor Gonda
-------------------------------
Name: Igor Gonda
-----------------------------
Title: Chief Scientific Officer
----------------------------
Attest:
/s/ Michael Molkentin
--------------------------------
Michael Molkentin
Acting Chief Financial Officer
|
FLEET NATIONAL BANK
By: /s/ Margaret Prentice
------------------------------
Name: Margaret Prentice
-----------------------------
Title: Managing Director
----------------------------
|
SIGNATURE PAGE TO RIGHTS AGREEMENT AMENDMENT
EXHIBIT 10.15b
AMENDMENT TO RIGHTS AGREEMENT
BETWEEN ARADIGM CORPORATION AND
BANKBOSTON, N.A.
THIS AMENDMENT TO RIGHTS AGREEMENT (this "Amendment") is made as of December 6, 2001, by and between ARADIGM CORPORATION, a California corporation (the "Company"), and EQUISERVE TRUST COMPANY, N.A. (F/K/A FLEET NATIONAL BANK), a national banking association, as rights agent (the "Rights Agent").
WHEREAS, the Company is entering into a Securities Purchase Agreement (the "Purchase Agreement") by and among the Company and the purchasers named therein, pursuant to which the Company will sell shares of its Series A Convertible Preferred Stock and warrants to purchase shares of its Common Stock to New Enterprise Associates 10, Limited Partnership ("NEA") and the other purchasers;
WHEREAS, the Company and the Rights Agent are parties to that certain Rights Agreement, dated as of August 31, 1998, as amended on October 22, 2001 (as so amended, the "Rights Agreement");
WHEREAS, the Company desires to amend the Rights Agreement in connection with the execution and delivery of the Purchase Agreement; and
WHEREAS, the Board of Directors of the Company has approved this Amendment and authorized its appropriate officers to execute and deliver the same to the Rights Agent.
NOW, THEREFORE, in accordance with the procedures for amendment of the Rights Agreement set forth in Section 27 thereof, and in consideration of the foregoing and the mutual agreements herein set forth, the parties hereby agree as follows:
1. Capitalized terms that are not otherwise defined herein shall have the meanings ascribed to them in the Rights Agreement.
2. The definition of "Acquiring Person" set forth in Section 1(a) of the Rights Agreement is amended by adding the following sentence to the end of that section:
Notwithstanding the foregoing, none of New Enterprise Associates 10, its Affiliates and Associates (collectively, "NEA") shall be deemed to be an "Acquiring Person" for the purposes of this Agreement; provided, that the foregoing exemption shall cease to apply if NEA becomes the Beneficial Owner of any additional Common Shares after the date hereof without the approval of a majority of the independent members of the Board of Directors of the Company other than in connection with the Securities Purchase Agreement dated as of December 14, 2001 (the "Purchase Agreement") by and among the Company and the purchasers named therein and the exercise or conversion into Common Shares of any securities purchased thereunder.
3. The definition of "Shares Acquisition Date" in Section l(n) of the Rights Agreement is hereby deleted in its entirety and replaced with the following:
1.
"SHARES ACQUISITION DATE" shall mean the first date of public announcement by the Company or an Acquiring Person that an Acquiring Person has become such provided, however that, if such Person is determined not to have become an Acquiring Person pursuant to clause (y) of Subsection 1(a)(B) hereof or the last two sentences of Section 1(a) hereof, then no Shares Acquisition Date shall be deemed to have occurred.
4. The Rights Agreement, as amended by this Amendment, shall remain in full force and effect in accordance with its terms.
5. All the covenants and provisions of this Amendment by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder.
6. Nothing in this Amendment shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares) any legal or equitable right, remedy or claim under this Amendment; but this Amendment shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares).
7. If any term, provision, covenant or restriction of this Amendment is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Amendment shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
8. This Amendment shall be deemed to be a contract made under the laws of the State of California and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State.
9. This Amendment may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.
10. The Company hereby certifies to the Rights Agent that this Amendment is in compliance with Section 27 of the Rights Agreement.
2.
IN WITNESS WHEREOF, the parties herein have caused this Amendment to be duly executed and attested, all as of the date and year first above written.
ARADIGM CORPORATION
By: /s/ Thomas M. Speace
-------------------------------
Name: Thomas M. Speace
-----------------------------
Title: Senior VP, Business
Development and Marketing
----------------------------
Attest:
/s/ Michael Molkentin
-----------------------------------
Michael Molkentin
Acting Chief Financial Officer
|
EQUISERVE TRUST COMPANY, N.A.
By: /s/ Margaret Prentice
-------------------------------
Name: Margaret Prentice
-----------------------------
Title: Managing Director
----------------------------
|
SIGNATURE PAGE TO RIGHTS AGREEMENT AMENDMENT
EXHIBIT 10.22
STOCK PURCHASE AGREEMENT
ARADIGM CORPORATION
OCTOBER 22, 2001
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into as of October 22, 2001 (the "EFFECTIVE DATE"), by and between ARADIGM CORPORATION, a California corporation ("ARADIGM"), and NOVO NORDISK PHARMACEUTICALS, INC. a Delaware corporation ("NOVO NORDISK").
RECITALS
A. Aradigm and Novo Nordisk are parties to that certain Development and License Agreement dated June 2, 1998 (the "Development Agreement").
B. In connection with the Development Agreement, Aradigm desires to sell and issue to Novo Nordisk, and Novo Nordisk desires to buy, shares of Aradigm's common stock, no par value (the "Common Stock") as provided herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. PURCHASE AND SALE.
Subject to the terms and conditions hereof, and in reliance upon the representations, warranties and agreements contained herein, Aradigm hereby agrees to issue and sell to Novo Nordisk, and Novo Nordisk hereby agrees to purchase from Aradigm, the aggregate number of shares of Aradigm's Common Stock (the "SHARES") determined in accordance with Sections 1.1 and 1.4 hereof.
1.1 INITIAL SHARES. On the First Closing Date (as defined in Section
1.2), Aradigm shall issue and sell to Novo Nordisk, and Novo Nordisk shall
purchase from Aradigm for twenty million dollars ($20,000,000) (the "INITIAL
PURCHASE PRICE"), the number of shares of Aradigm's Common Stock (the "INITIAL
SHARES") equal to the quotient of twenty million dollars ($20,000,000) divided
by the First Market Price (as hereinafter defined). In the event the number of
Initial Shares includes a fraction of a share, the number of Initial Shares
shall be increased to the nearest whole number of shares and the Initial
Purchase Price shall be increased to equal the First Market Price times such
whole number of Initial Shares. The "FIRST MARKET PRICE" shall be the greater of
(a) the average of the closing prices of Aradigm's Common Stock on the NASDAQ
National Market, as reported by The Wall Street Journal, Western Edition, for
the thirty (30) trading days immediately prior to the Effective Date, and (b)
the average of such closing prices for the five (5) trading days immediately
prior to the Effective Date.
1.2 FIRST CLOSING DATE. The closing of the sale and purchase of the Initial Shares (the "FIRST CLOSING") shall take place on the date (the "FIRST CLOSING DATE") that is ten (10) business days after the Effective Date, subject to fulfillment of the closing conditions set forth in Article 6.
1.3 DELIVERY. At the First Closing, Aradigm will deliver to Novo Nordisk a certificate registered in the name of Novo Nordisk, representing the Initial Shares to be
purchased by Novo Nordisk from Aradigm, dated the First Closing Date, against payment of the Initial Purchase Price by wire transfer, a check made payable to the order of Aradigm, or any combination thereof.
1.4 ADDITIONAL SHARES.
(a) At any time following the First Closing Date, Aradigm shall have the right, but not the obligation, to sell to Novo Nordisk the Additional Shares, as provided below. Such right shall be effected by Aradigm's delivery to Novo Nordisk of a written notice specifying its election to sell to Novo Nordisk such Additional Shares (a "SHARES SALE NOTICE"). Notwithstanding the foregoing, Novo Nordisk may cancel such right by written notice to Aradigm on or before November 14, 2001 in the event the board of directors of Novo Nordisk A/S does not approve Novo Nordisk's agreement to purchase such Additional Shares. Effective immediately upon such cancellation, the Patent Agreement and the Supply Agreement, each of even date herewith by and between Aradigm and Novo Nordisk, shall automatically terminate and be of no further force or effect.
(b) Provided that Aradigm has delivered to Novo Nordisk a Shares
Sale Notice in compliance with subsection 1.4(a) and subject to the provisions
of subsections 1.4(c) and 1.4(d), on each Additional Closing Date (as defined in
Section 1.5), Aradigm shall issue and sell to Novo Nordisk, and Novo Nordisk
shall purchase from Aradigm for an amount specified in such Shares Sale Notice,
which amount shall be no less than five million dollars ($5,000,000) and no more
than ten million dollars ($10,000,000) (such amount, the "ADDITIONAL PURCHASE
PRICE"), the number of shares of Aradigm's Common Stock (the "ADDITIONAL
SHARES") equal to the quotient of such Additional Purchase Price divided by the
Additional Market Price (as hereinafter defined); provided, however, that the
aggregate Additional Purchase Price for all Additional Shares purchased
hereunder shall not exceed twenty-five million dollars ($25,000,000) (the
"MAXIMUM AMOUNT"). The "ADDITIONAL MARKET PRICE" for each Additional Closing
shall be the average of the closing prices of Aradigm's Common Stock on the
NASDAQ National Market, as reported by The Wall Street Journal, Western Edition
for the thirty (30) trading days immediately prior to the date of the Shares
Sale Notice. In the event the number of Additional Shares issuable pursuant to
this Section 1.4 includes a fractional share, the number of Additional Shares
shall be increased to the nearest whole number of shares, and the Additional
Purchase Price shall be increased to equal the Additional Market Price times
such whole number of Additional Shares.
(c) Aradigm shall not deliver a Shares Sale Notice if it would result in (i) the aggregate Below Market Shares (as defined below) being greater than or equal to nineteen and nine-tenths percent (19.9%) of the then currently outstanding Common Stock or (ii) Novo Nordisk beneficially owning forty-five percent (45%) or more of the then currently outstanding Common Stock, based upon the number of shares of Common Stock currently beneficially owned by Novo Nordisk plus any Shares purchased by Novo Nordisk or any of its affiliates pursuant to this Agreement, less any shares of Common Stock sold or otherwise disposed of by Novo Nordisk or any of its affiliates. During the period that Aradigm has the right to sell Additional Shares to Novo Nordisk, Novo Nordisk hereby agrees to promptly notify Aradigm of any sale or disposition of any shares of Common Stock held by it or any or its affiliates. "BELOW
MARKET SHARES" shall be any Additional Shares sold at an Additional Market Price that is less than the First Market Price.
(d) Aradigm shall not deliver a Shares Sale Notice at any time when the representation set forth in Section 2.8 would not be true as of the date of delivery of the Shares Sale Notice.
(e) Aradigm may deliver a Shares Sale Notice no more than once every three (3) months beginning December 1, 2001 until the Maximum Amount has been exhausted.
1.5 ADDITIONAL CLOSING DATES. Each closing of the sale and purchase of Additional Shares (each, an "ADDITIONAL CLOSING") shall take place no later than fifteen (15) business days after the date of delivery of a Share Sales Notice to Novo Nordisk (each, an "ADDITIONAL CLOSING DATE"), subject to the fulfillment of the closing conditions set forth in Article 7.
1.6 DELIVERY. At each Additional Closing, Aradigm will deliver to Novo Nordisk a certificate registered in the name of Novo Nordisk, representing the Additional Shares to be purchased by Novo Nordisk from Aradigm, dated the Additional Closing Date, against payment of the Additional Purchase Price by wire transfer, a check made payable to the order of Aradigm, or any combination of the above.
1.7 RULE 144 REPORTING. With a view to making available to Novo Nordisk the benefits of certain rules and regulations of the Securities and Exchange Commission (the "SEC") which may permit the sale of the Shares to the public without registration, Aradigm agrees to use its best efforts to:
(a) Comply with the current public information requirement, as those terms are understood and defined in Rule 144 ("RULE 144") under the Securities Act of 1933, as amended (the "1933 ACT") or any similar or analogous rule promulgated under the 1933 Act, as long as the Shares are outstanding; and
(b) File with the SEC, in a timely manner, all reports and other documents required of Aradigm under the 1933 Act and the Securities Act of 1934, as amended (the "1934 ACT").
1.8 "MARKET STAND-OFF" AGREEMENTS. Subject to the last sentence of this
Section 1.8, Novo Nordisk hereby agrees that (a) prior to the second anniversary
of the Effective Date or until its ownership interest has been diluted to less
than five percent (5%) of the Common Stock outstanding, if earlier, it shall not
sell or otherwise transfer or dispose of any of the shares of Common Stock held
by it, and (b) prior to the second anniversary of each Additional Closing Date
or until its ownership interest has been diluted to less than five percent (5%)
of the Common Stock outstanding, if earlier, it shall not sell or otherwise
transfer or dispose of any of the Additional Shares purchased at such Additional
Closing (the periods described in clauses (a) and (b) being hereinafter referred
to as the "MARKET-STAND OFF PERIODS"). Aradigm may impose stop-transfer
instructions with respect to securities subject to the foregoing restriction
until the end of the applicable period. The foregoing notwithstanding, Novo
Nordisk (or any of its affiliates) may at any time sell shares of Common Stock
owned by it in any sale, transfer or other disposition made (i) to an affiliate
of Novo Nordisk that agrees to be
bound by the provisions of this Agreement, (ii) in connection with the acquisition of all, or substantially all, of the Company's outstanding Common Stock by a third party, (iii) no later than six (6) months after the completion of any transaction or series of related transactions in which shareholders of Aradigm other than Novo Nordisk have transferred in excess of thirty percent (30%) of the outstanding Common Stock of Aradigm to a third party acquiror, of up to the percentage of shares of Common Stock then owned by Novo Nordisk that equals the percentage of the outstanding shares of Common Stock held by shareholders other than Novo Nordisk that have been so acquired or (vi) after termination of the Development Programme (as defined in the Development Agreement).
1.9 PUBLIC OFFERING LOCK-UP. In addition, Novo Nordisk hereby agrees that during the time period recommended by the underwriter not to exceed one hundred eighty (180) days following the effective date of a registration statement of Aradigm filed under the 1933 Act, it shall not, to the extent requested by the underwriter, sell or otherwise transfer or dispose of any Common Stock of Aradigm held by it at any time during such period (except Common Stock included in such registration or any sale, transfer or other disposition of Shares made to an affiliate of Novo Nordisk that agrees to be bound by the provisions of this Agreement); provided, however, that:
(a) Such agreement shall be applicable only to registration statements of Aradigm which cover Common Stock (or other securities) to be sold on its behalf to the public;
(b) Such agreement shall be applicable only if Novo Nordisk holds at least five percent (5%) of the Common Stock of Aradigm then outstanding; and
(c) All officers and directors of Aradigm and any other stockholders owning at least five percent (5%) of the Common Stock of Aradigm then outstanding (excluding stockholders that acquired their positions in the public market) enter into similar agreements.
During the period in which this Section 1.9 remains in effect, if Novo Nordisk is requested to enter into such a lock-up agreement in connection with a public offering of Aradigm Common Stock in which any other shareholders of Aradigm are allowed to sell shares held by them, Novo Nordisk shall have a "piggyback" right at its option to include shares then held by it in such offering on a pro rata basis with such other selling shareholders.
1.10 DEMAND REGISTRATION. (a) If Novo Nordisk desires to effect the registration on Form S-3 under the 1933 Act of any of the shares of Common Stock owned by it or any of its affiliates ("REGISTRABLE SHARES"), it may make one (1) written request, subject to adjustment under Section 1.10(b) below (the "DEMAND REQUEST"), that Aradigm effect such registration; provided that such request is made no earlier than (i) sixty (60) days prior to the expiration of the Market Stand-Off Period relating to such Shares or (ii) sixty (60) days prior to the expiration of any "lock-up" period required by the underwriters in connection with a public offering by Aradigm. The Demand Request will specify the number of Registrable Shares proposed to be sold and will also specify the intended method of disposition thereof. Upon receipt of such Demand Request, Aradigm shall, at its own expense (which expense shall include all fees and expenses of counsel, public accountants or other advisors or experts retained by Aradigm, all reasonable fees and expenses of counsel for Novo Nordisk (which counsel shall be selected by
Novo Nordisk) in an amount which shall not exceed fifty thousand dollars
($50,000), all filing fees, all fees and expenses incurred to comply with blue
sky or other securities laws, all printing expenses and all internal expenses of
Aradigm, but shall not include underwriting fees, discounts or commissions
attributable to the sale of the Registrable Shares, out-of-pocket expenses of
Novo Nordisk or any of its affiliates, transfer taxes or the fees and expenses
of underwriter's counsel) prepare and file with the SEC a registration statement
on Form S-3 (the "RESALE REGISTRATION STATEMENT") under the 1933 Act to provide
for the resale by Novo Nordisk and its affiliates of the number of Registrable
Shares specified in the Demand Request. In the event Novo Nordisk delivers to
Aradigm a Demand Request prior to the end of a Market Stand-Off Period or a
"lock-up" period, Aradigm shall use its reasonable efforts to file and cause the
Resale Registration Statement to be effective prior to the expiration of such
Market Stand-Off Period or "lock-up" period, as the case may be. In all other
cases, Aradigm will use its reasonable efforts to cause the Resale Registration
Statement to be filed and become effective as soon as reasonably practicable
after receipt of the Demand Request. Aradigm shall cause the Resale Registration
Statement filed pursuant to this Section 1.10 to remain effective for no less
than six (6) months (or, if earlier, until the date all of the Registrable
Shares covered by the Resale Registration Statement have been sold); provided,
however, Aradigm may suspend the use of, or delay the effective date of, any
Resale Registration Statement by giving written notice to Novo Nordisk, if
Aradigm shall have determined, in its good faith reasonable judgment, that such
suspension or delay in the effective date of the Resale Registration Statement
is advisable because the filing or effectiveness of the Resale Registration
Statement would be detrimental to Aradigm and its shareholders; and provided
further that Aradigm suspends the use of or delays the effective date of all
other registration statements of Aradigm that register the securities of Aradigm
being or to be resold by the holders thereof. Any suspension or delay in the
effective date of the Resale Registration Statement by Aradigm pursuant to this
Section 1.10 shall be for the shortest reasonable period of time (but not
exceeding one hundred twenty (120) days).
(a) Novo Nordisk shall have the right to make one (1) additional Demand Request in accordance with this Section 1.10 for each Additional Closing that occurs hereunder.
(b) The Demand Request may not relate to an underwritten offering, unless Novo Nordisk proposes to sell Registered Shares for a minimum aggregate amount of twenty million dollars ($20,000,000). In the event of an underwritten offering pursuant to this Section 1.10(c), the managing underwriters of any offering effected pursuant to this Section 1.10(c) shall be selected by Novo Nordisk, and the price, terms and provisions of the offering shall be subject to approval by Novo Nordisk In order to facilitate any underwritten offering pursuant to this Section 1.10(c), Aradigm agrees to enter into customary agreements (including an underwriting agreement in customary form and an agreement with Novo Nordisk containing customary indemnification provisions and provisions regarding the registration procedures to be followed in effecting any offering under this Section 1.10(c)) and take such other actions as are reasonably required in order to facilitate the disposition of the Registrable Shares. In order to participate in an underwritten offering effected pursuant to this Section 1.10(c), Novo Nordisk agrees that it shall (and shall cause any of its affiliates participating in such offering to) (i) sell the Registrable Shares subject to such offer on the basis provided in the underwriting arrangements approved by Novo Nordisk and (ii) complete and execute all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements.
2. REPRESENTATIONS AND WARRANTIES OF ARADIGM.
Except as otherwise set forth on the Schedule of Exceptions attached hereto as Exhibit A, Aradigm hereby represents and warrants to Novo Nordisk as of the date hereof and as of the First Closing Date as follows:
2.1 ORGANIZATION AND STANDING; ARTICLES AND BYLAWS. Aradigm is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and has full power and authority to own and operate its properties and assets and to carry on its business as presently conducted and as proposed to be conducted. Aradigm is qualified as a foreign corporation to do business in each jurisdiction in the United States in which the ownership of its property or the conduct of its business requires such qualification, except where any statutory fines or penalties or any corporate disability imposed for the failure to qualify would not materially adversely affect Aradigm, its assets, financial condition or operations. True and correct copies of Aradigm's Amended and Restated Articles of Incorporation and Bylaws currently in effect have been delivered to Novo Nordisk.
2.2 AUTHORIZATION. All corporate action on the part of Aradigm, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the performance of all Aradigm's obligations hereunder, and for the authorization, issuance, sale and delivery of the Initial Shares and the Additional Shares has been taken or will be taken prior to each of the First Closing and each Additional Closing, respectively. This Agreement, when executed and delivered, shall constitute a valid and legally binding obligation of Aradigm in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors, and subject to general equity principles.
2.3 VALIDITY OF SHARES. The sale of the Shares is not subject to any preemptive rights or rights of first refusal that have not been waived and, when issued, sold and delivered in compliance with the provisions of this Agreement, the Shares will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances created by Aradigm; provided, however, that the Shares may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed.
2.4 OFFERING. Assuming the accuracy of the representations and warranties of Novo Nordisk contained in Article 3 hereof, the offer, issue, and sale of Shares are exempt from the registration and prospectus delivery requirements of the 1933 Act, and the Initial Shares have been and the Additional Shares will be registered or qualified (or are exempt from registration and qualification) under the registration, permit, or qualification requirements of all applicable state securities laws.
2.5 FULL DISCLOSURE.
(a) As of the First Closing, Aradigm has furnished to Novo Nordisk the following documents, and the information contained in such documents, as of their respective dates (or if amended prior to the date of the First Closing, as of the date of such amendment), did not contain any untrue statement of a material fact, did not omit to state any material fact
necessary to make any statement, in light of the circumstances under which such statement was made, not misleading, and complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder:
Aradigm's annual report on Form 10-K as amended by Form 10-K/A for the fiscal
year ended December 31, 2000; and Aradigm's quarterly reports on Form 10-Q for
the quarters ended March 31, 2001 and June 30, 2001, and any additional
quarterly report on Form 10-Q or current reports on Form 8-K filed after the
Effective Date but prior to the First Closing Date (the "CURRENT SEC
DOCUMENTS").
The financial statements of Aradigm included in the Current SEC Documents (the "FINANCIAL STATEMENTS") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto. The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied and fairly present the consolidated financial position of Aradigm and any subsidiaries at the dates thereof and the consolidated results of their operations and consolidated cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, recurring adjustments or to the extent that such unaudited statements do not include footnotes).
(b) As of each Additional Closing, Aradigm shall have furnished to Novo Nordisk the following documents, and the information contained in such documents, as of their respective dates (or if amended prior to the date of the relevant Additional Closing, as of the date of such amendment), will not contain any untrue statement of a material fact, or omit to state any material fact necessary to make any statement, in light of the circumstances under which such statement is made, not misleading, and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder:
Aradigm's annual report on Form 10-K for the most recent fiscal year prior to such Additional Closing Date for which such document is publicly available; and Aradigm's quarterly reports on Form 10-Q for, and any current reports on Form 8-K filed during, the quarters after such fiscal year, to the extent publicly available (the "ADDITIONAL SEC DOCUMENTS" and together with the Current SEC Documents, the "SEC DOCUMENTS").
The financial statements of Aradigm included in the Additional SEC Documents (the "ADDITIONAL FINANCIAL STATEMENTS") will comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto. The Additional Financial Statements will have been prepared in accordance with generally accepted accounting principles consistently applied and will fairly present the consolidated financial position of Aradigm and any subsidiaries at the dates thereof and the consolidated results of their operations and consolidated cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, recurring adjustments or to the extent that such unaudited statements do not include footnotes).
2.6 NO CONFLICT; NO VIOLATION. The execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby will not (a) conflict with any provisions of the Amended and Restated Certificate of Incorporation or Bylaws of Aradigm;
(b) result in any material violation or default of, or permit the acceleration of any obligation under (in each case, upon the giving of notice, the passage of time, or both), any material mortgage, indenture, lease, agreement or other instrument, permit, franchise, license, judgment, order, decree, law, ordinance, rule or regulation applicable to Aradigm or its properties.
2.7 CONSENTS AND APPROVALS. All consents, approvals, orders, or authorizations of, or registrations, qualifications, designations, declarations, or filings with, any governmental authority, required on the part of Aradigm in connection with the valid execution and delivery of this Agreement, the offer, sale or issuance of the Shares, or the consummation of any other transaction contemplated hereby have been obtained, or will be effective at the First Closing or each Additional Closing, as applicable, other than compliance with any applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and except for notices required or permitted to be filed with certain state and federal securities commissions after the First Closing or each Additional Closing, as the case may be, which notices will be filed on a timely basis.
2.8 ABSENCE OF CERTAIN DEVELOPMENTS. Except as disclosed in previously filed SEC Documents, with respect to the First Closing, since June 30, 2001, and with respect to each Additional Closing, since the end of the last fiscal quarter prior to such Additional Closing for which Aradigm's filing on Form 10-Q is publicly available, Aradigm has not (a) incurred or become subject to any material liabilities (absolute or contingent) except current liabilities incurred, and liabilities under contracts entered into, in the ordinary course of business, consistent with past practices; (b) mortgaged, pledged or subjected to lien, charge or any other encumbrance any of its material assets, tangible or intangible; (c) sold, assigned or transferred any of its material assets or canceled any material debts or obligations except in the ordinary course of business, consistent with past practices; (d) suffered any extraordinary losses, or waived any rights of substantial value; (e) entered into any material transaction other than in the ordinary course of business, consistent with past practices; or (f) otherwise had any material change in its condition, financial or otherwise, except for changes in the ordinary course of business, consistent with past practices, none of which individually or in the aggregate has been materially adverse to Aradigm.
3. REPRESENTATIONS AND WARRANTIES OF NOVO NORDISK.
Novo Nordisk hereby represents and warrants to Aradigm as of the date hereof and as of the First Closing Date as follows:
3.1 LEGAL POWER. It has the requisite legal power to enter into this Agreement, to purchase the Shares hereunder, and to carry out and perform its obligations under the terms of this Agreement.
3.2 DUE EXECUTION. This Agreement has been duly authorized, executed and delivered by it, and, upon due execution and delivery by Aradigm, this Agreement will be a valid and binding agreement of it.
3.3 INVESTMENT REPRESENTATIONS.
(a) It is acquiring the Shares for its own account, not as nominee or agent, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the 1933 Act.
(b) It understands that (i) the Shares have not been registered under the 1933 Act by reason of a specific exemption therefrom, that they may be resold only in accordance with the rules and regulations under the 1933 Act and subject to Section 1.8 and 1.9 and that it must, therefore, bear the economic risk of such investment indefinitely, unless a subsequent disposition there of is registered under the 1933 Act or is exempt from such registration; (ii) each certificate representing the Initial Shares and the Additional Shares will be endorsed with the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS (A) PURSUANT TO RULE 144 PROMULGATED UNDER THE 1933 ACT OR (B) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT COVERING SUCH SECURITIES OR (C) ARADIGM RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO ARADIGM, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE 1933 ACT."
and (iii) Aradigm will instruct any transfer agent not to register the transfer of any of the Shares unless one of the conditions specified in the foregoing legend are satisfied.
Novo Nordisk shall have the right to require removal of the foregoing legend with respect to any or all of the Shares if it delivers an opinion of counsel reasonably acceptable to Aradigm that removal of such legend is permitted by the rules and regulations of the SEC.
(c) It has been furnished with such materials and has been given access to such information relating to Aradigm as it or its qualified representative has requested and it has been afforded the opportunity to ask questions regarding Aradigm and the Shares, all as it has found necessary to make an informed investment decision.
(d) It is an "accredited investor" within the meaning of Regulation D under the 1933 Act.
(e) It was not formed for the specific purpose of acquiring the Shares offered hereunder.
4. COVENANTS OF ARADIGM
4.1 UPDATING OF SCHEDULE OF EXCEPTIONS. Aradigm shall update the Schedule of Exceptions prior to each Additional Closing by delivering (i) a draft of such updated Schedule of Exceptions (which draft shall highlight any deletions or additions made since the last Schedule of Exceptions was delivered to Novo Nordisk) to Novo Nordisk no later than five (5) days after delivery of the relevant Shares Sale Notice and (ii) a final copy of such revised Schedule of Exceptions (which copy shall highlight any deletions or additions made since the delivery of the draft Schedule of Exceptions pursuant to clause (i) above) to Novo Nordisk no later than the day prior to such Additional Closing.
4.2 ACCESS TO INFORMATION. So long as Novo Nordisk owns at least five percent (5%) of the Common Stock outstanding, Aradigm will afford promptly to Novo Nordisk and its authorized agents reasonable access to the properties, books, records, employees and auditors of Aradigm to the extent reasonably related to Novo Nordisk's holding of Shares. Without limiting the generality of the foregoing, Aradigm agrees to make its auditors and appropriate employees available to Novo Nordisk to discuss the accounting practices and policies of Aradigm with respect to certain items in order allow Novo Nordisk to properly account for such items in its books and records as may be necessary.
4.3 DELIVERY OF CERTAIN INFORMATION. (a) So long as Novo Nordisk is required to report its share of Aradigm's earnings or loss from its investment in Aradigm under the equity method of accounting, Aradigm shall cause to be prepared and delivered to Novo Nordisk the following information, which, in the case of financial information, shall be prepared in accordance with generally accepted accounting principles consistently applied:
(i) no later than thirty (30) business days after the end of each fiscal month, an unaudited consolidated balance sheet of Aradigm as of the end of such fiscal month and the related unaudited consolidated statements of income and cash flows for such fiscal month and for the elapsed portion of the fiscal year ended with the last day of such month, and where Aradigm prepares such financial information, setting forth in comparative form the figures for the corresponding periods in the previous fiscal year for the periods in such fiscal year and providing corresponding information indicating the total number of shares of Common Stock issued and outstanding, the total number of shares of Common Stock issuable upon exercise of issued and outstanding incentive stock options, the total changes reflected in the consolidated statements of income due to the grant or exercise of incentive stock options (if any) and a summary narrative explaining the reason for and the financial impact of changes in accounting principles having a material impact on Aradigm's operations (if any); provided that if Aradigm believes that the financial information required to be delivered to Novo Nordisk pursuant to this Section 4.3(a) will not be available for delivery within the time prescribed by this Section 4.3(a), then Aradigm shall (i) promptly (but in no event later than thirty (30) business days after the end of the relevant fiscal month) deliver to Novo Nordisk an estimated unaudited consolidated balance sheet of Aradigm as of the end of such fiscal month and the related estimated unaudited consolidated statements of income and cash flows for such fiscal month and for the elapsed portion of the fiscal year ended with the last day of such month (in each case clearly indicating that such financial information represents estimates) and (ii) deliver to Novo Nordisk the final
version of such financial information no later than five (5) business days after Aradigm prepares the final version of the estimated financial information; and
(ii) within ten (10) days of receipt, any notice or other communication from any lender, bank or other person to whom Aradigm is indebted, alleging the existence of any facts or circumstances that, individually or in the aggregate, constitute or with the passing of time would constitute, a default under, or give rise to any termination, cancellation or acceleration of any right or obligation of Aradigm or to a loss of any benefit to which Aradigm is entitled under any provision of any note, loan, credit or similar instrument or agreement.
(b) Aradigm agrees to provide to Novo Nordisk a condensed forecasted statement of income representing one (1) quarterly forecast for a three (3) month period only once every three (3) months beginning January 1, 2002 no later than thirty (30) days after the beginning of each such three month period; provided, that Aradigm will provide such information to Novo Nordisk only as long as Novo Nordisk is required to report its share of Aradigm's earnings or loss from its investment in Aradigm under the equity method of accounting.
5. COVENANTS OF NOVO NORDISK.
5.1 VOTING AGREEMENT.
(a) Novo Nordisk agrees that at each election of directors of Aradigm in which the shareholders are entitled to elect directors of Aradigm, Novo Nordisk will not nominate, and will not vote any of the shares of Common Stock held by it so as to elect, any individual person who is employed by Novo Nordisk or any of its affiliates, including without limitation any of their respective current and past directors and officers, and current employees, advisors and sales agents.
(b) Novo Nordisk understands that each certificate representing the Initial Shares and the Additional Shares will be endorsed with the following restrictive legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A VOTING AGREEMENT WHICH PLACES CERTAIN RESTRICTIONS ON THE VOTING OF THE SHARES REPRESENTED HEREBY. ANY PERSON ACCEPTING ANY INTEREST IN SUCH SHARES SHALL BE DEEMED TO AGREE AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SUCH AGREEMENT. A COPY OF SUCH VOTING AGREEMENT WILL BE FURNISHED TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS."
(c) The provisions of this Section 5.1 shall not be binding upon successors in interest to any of the Shares who are not affiliates of Novo Nordisk.
6. CONDITIONS TO FIRST CLOSING.
6.1 CONDITIONS TO OBLIGATIONS OF NOVO NORDISK. Novo Nordisk's obligation to purchase the Initial Shares at the First Closing is subject to the fulfillment, at or prior to the First Closing, of all of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by Aradigm in Section 2 hereof shall be true and correct in all material respects on and as of the First Closing Date with the same force and effect as if they had been made on and as of said date; and Aradigm shall have performed all obligations and conditions herein required to be performed by it on or prior to the First Closing.
(b) OPINION OF ARADIGM'S COUNSEL. Novo Nordisk shall have received from Cooley Godward LLP, counsel to Aradigm, an opinion letter substantially in the form attached hereto as Exhibit B, addressed to it, dated the First Closing Date.
(c) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the First Closing hereby and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to Novo Nordisk, and Novo Nordisk shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request.
(d) QUALIFICATIONS, LEGAL INVESTMENT. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Initial Shares pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the First Closing. No stop order or other order enjoining the sale of the Initial Shares shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of Aradigm, threatened by the SEC or any commissioner of corporations or similar officer of any other state having jurisdiction over this transaction. At the time of the First Closing, the sale and issuance of the Initial Shares shall be legally permitted by all laws and regulations to which Novo Nordisk and Aradigm are subject.
(e) NO TERMINATION OF DEVELOPMENT AGREEMENT. A termination of the Development Agreement pursuant to Section 9.2 or Section 9.6 thereof by Novo Nordisk shall not have become effective.
(f) COMPLIANCE CERTIFICATE. Aradigm shall have delivered to Novo Nordisk a Certificate, executed by the President of Aradigm, dated the date of the First Closing, certifying to the fulfillment of the conditions specified in paragraphs (a) and (d) of this Section 6.1.
(g) NO ACTION. There shall not be threatened, instituted or pending any action or proceeding by any person before any court or governmental authority or agency, domestic or foreign, (i) seeking to impose or confirm limitations that would materially impair the ability of Novo Nordisk to exercise full rights of ownership of any Shares or (ii) seeking to require divestiture by Novo Nordisk of any Shares, nor shall there by any action taken, or any statute, rule, regulation, injunction, order or decree proposed, enacted, enforced, promulgated, issued or deemed applicable to the purchase of the Shares, by any court, government or governmental
authority or agency, domestic or foreign, other than the application of the waiting period provisions of the HSR Act to the purchase of the Shares, that, in the reasonable judgment of Novo Nordisk could, directly or indirectly, result in any of the consequences referred to in clause (i) or (ii) above.
6.2 CONDITIONS TO OBLIGATIONS OF ARADIGM. Aradigm's obligation to issue and sell the Initial Shares at the First Closing is subject to the fulfillment to Aradigm's satisfaction, on or prior to the First Closing, of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties made by Novo Nordisk in Section 3 hereof shall be true and correct in all material respects on and as of the First Closing Date with the same force and effect as if they had been made on and as of said date.
(b) PERFORMANCE OF OBLIGATIONS. Novo Nordisk shall have performed and complied with all agreements and conditions herein required to be performed or complied with by it on or before the First Closing.
(c) QUALIFICATIONS, LEGAL INVESTMENT. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Initial Shares pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the First Closing. No stop order or other order enjoining the sale of the Initial Shares shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of Aradigm, threatened by the SEC or any commissioner of corporations or similar officer of any other state having jurisdiction over this transaction. At the time of the First Closing, the sale and issuance of the Initial Shares shall be legally permitted by all laws and regulations to which Novo Nordisk and Aradigm are subject.
7. CONDITIONS TO ADDITIONAL CLOSINGS.
7.1 CONDITIONS TO OBLIGATIONS OF NOVO NORDISK. Novo Nordisk's obligation to purchase Additional Shares at each Additional Closing is subject to the fulfillment, at or prior to the Additional Closing, of all of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by Aradigm in Section 2 hereof, as updated pursuant to Section 4.1 hereof, shall be true and correct in all material respects on and as of the Additional Closing Date with the same force and effect as if they had been made on and as of said date; and Aradigm shall have performed all obligations and conditions herein required to be performed by it on or prior to the Additional Closing.
(b) OPINION OF ARADIGM'S COUNSEL. Novo Nordisk shall have received from Cooley Godward LLP, counsel to Aradigm, an opinion letter substantially in the form attached hereto as Exhibit B, addressed to it, dated the Additional Closing Date.
(c) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Additional Closing hereby and all
documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to Novo Nordisk, and Novo Nordisk shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request.
(d) QUALIFICATIONS, LEGAL INVESTMENT. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Additional Shares pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the Additional Closing. No stop order or other order enjoining the sale of the Additional Shares shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of Aradigm, threatened by the SEC or any commissioner of corporations or any similar officer of any state having jurisdiction over this transaction. At the Additional Closing, the sale and issuance of the Additional Shares shall be legally permitted by all laws and regulations to which Novo Nordisk and Aradigm are subject.
(e) COMPLIANCE CERTIFICATE. Aradigm shall have delivered to Novo Nordisk a Certificate, executed by the President of Aradigm, dated the date of the Additional Closing, certifying to the fulfillment of the conditions specified in paragraphs (a) and (d) of this Section 7.1.
(f) NO TERMINATION OF DEVELOPMENT AGREEMENT; NO BREACH. A termination of the Development Agreement pursuant to Section 9.2 or Section 9.6 thereof (by Novo Nordisk) shall not have become effective. In addition, Aradigm shall not have committed a material breach of the Development Agreement as to which Novo Nordisk has provided Aradigm with written notice pursuant to Section 9.4 thereof, unless such breach has been cured by Aradigm or waived by Novo Nordisk.
(g) NO INSOLVENCY. Aradigm shall not have (i) filed in any court or agency pursuant to any statute or regulation of any state or country, a petition in bankruptcy or insolvency or for reorganization or for an arrangement or for the appointment of a receiver or trustee of the party or of its assets, or (ii) been served with an involuntary petition against it, filed in any insolvency proceeding, which petition has not been dismissed as of the Additional Closing Date.
(h) CERTAIN AGREEMENTS. The Patent Agreement, the Supply Agreement and the Amendment to the Development Agreement, each of even date herewith by and between Aradigm and Novo Nordisk, as amended from time to time, shall each be in full force and effect.
(i) NO ACTION. There shall not be threatened, instituted or pending any action or proceeding by any person before any court or governmental authority or agency, domestic or foreign, (i) seeking to impose or confirm limitations that would materially impair the ability of Novo Nordisk to exercise full rights of ownership of any Shares or (ii) seeking to require divestiture by Novo Nordisk of any Shares, nor shall there by any action taken, or any statute, rule, regulation, injunction, order or decree proposed, enacted, enforced, promulgated, issued or deemed applicable to the purchase of the Shares, by any court, government or governmental authority or agency, domestic or foreign, other than the application of the waiting period provisions of the HSR Act to the purchase of the Shares, that, in the reasonable judgment of
Novo Nordisk could, directly or indirectly, result in any of the consequences referred to in clause (i) or (ii) above.
(j) NO MATERIAL ADVERSE CHANGE. Since the date of the First Closing or the latest Additional Closing, if later, no change, event, effect or set of circumstances, which has not been disclosed in a publicly available document filed by Aradigm with the SEC, shall have occurred or exist that has had or is reasonably likely to have a material adverse effect on the condition (financial or otherwise), business, assets or results of operations of Aradigm.
(k) NO APPARENT BUSINESS FAILURE. No event, fact or circumstance has occurred or exists which makes it likely in the reasonable judgment of Novo Nordisk that Aradigm (i) is no longer viable and that its business operations will need to be discontinued or reorganized in a bankruptcy proceeding or (ii) will no longer be able to continue to operate its pulmonary drug delivery business in generally the same fashion as it currently anticipates operating such business, taking into account the ordinary course of development of biotechnology and medical device companies; provided, however, that the need for additional capital shall not in and of itself constitute an event, fact or circumstance described in clauses (i) and (ii).
(l) GOOD PROGRESS DETERMINATION. Within ten (10) business days after Aradigm's delivery of the applicable Shares Sale Notice to Novo Nordisk, Novo Nordisk's Executive Committee shall have determined that the Development Programme is making good progress and shall have delivered written notice of such determination to Aradigm, such determination not to be unreasonably withheld or delayed.
7.2 CONDITIONS TO OBLIGATIONS OF ARADIGM. Aradigm's obligation to issue and sell the Additional Shares at each Additional Closing is subject to the fulfillment to Aradigm's satisfaction, on or prior to each Additional Closing, of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties made by Novo Nordisk in Section 3 hereof shall be true and correct in all material respects on and as of the Additional Closing Date, with the same force and effect as if they had been made on and as of said date.
(b) PERFORMANCE OF OBLIGATIONS. Novo Nordisk shall have performed and complied with all agreements and conditions herein required to be performed or complied with by it on or before the Additional Closing.
(c) QUALIFICATIONS, LEGAL INVESTMENT. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Additional Shares pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the Additional Closing. No stop order or other order enjoining the sale of the Additional Shares shall have been issued and no proceedings for such purpose shall be pending of, to the knowledge of Aradigm, threatened by the SEC or any commissioner of corporations or similar officer of any other state having jurisdiction over this transaction. At the time of each Additional
Closing, the sale and issuance of the Additional Shares shall be legally permitted by all laws and regulations to which Novo Nordisk and Aradigm are subject.
8. MISCELLANEOUS.
8.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents, made and to be performed entirely within the State of California.
8.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. The foregoing not withstanding, no party may assign its rights or obligations hereunder to any other person, except that Novo Nordisk may assign its right to purchase any or all of the Shares to be purchased by it hereunder to one or more of its affiliates; provided, that such affiliate(s) agree to be bound by the provisions of this Agreement.
8.3 ENTIRE AGREEMENT. This Agreement and the Exhibits hereto, and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof, and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein.
8.4 SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, it shall, to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
8.5 AMENDMENT AND WAIVER. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance, either retroactively or prospectively, and either for
a specified period of time or indefinitely), with the written consent of Aradigm
and Novo Nordisk. Any amendment or waiver effected in accordance with this
Section shall be binding upon Novo Nordisk, each future holder of the Shares,
and Aradigm.
8.6 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to Novo Nordisk or any subsequent holder of any Shares upon any breach, default or noncompliance of Aradigm under this Agreement, shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on Novo Nordisk's part of any breach, default or noncompliance under this Agreement or any waiver on Novo Nordisk's part of any provisions or conditions of this Agreement must be
in writing and shall be effective only to the extent specifically set forth in such writing, and that all remedies, either under this Agreement, by law, or otherwise afforded to Novo Nordisk, shall be cumulative and not alternative.
8.7 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed effectively given
(a) upon personal delivery, (b) on report of successful transmission by
facsimile machine that automatically generates a printed report indicating
whether transmission was completed successfully, at the conclusion of each
transmission, (c) on the first business day after receipted delivery to a
courier service which guarantees next business-day delivery, under circumstances
in which such guaranty is applicable, or (d) on the earlier of delivery or five
(5) business days after mailing by United States certified by mail, postage and
fees prepaid, to the appropriate party at the address set forth below or to such
other address as the part so notifies the other in writing:
(a) if to Aradigm, to:
ARADIGM CORPORATION
3929 Point Eden Way
Hayward, California 94545
Telephone: (510) 265-8850
Facsimile: (510) 265-0277
Attention: President and Chief Executive Officer
with a copy to:
COOLEY GODWARD LLP
5 Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attention: James C. Kitch, Esq.
Facsimile: (650) 849-7400
(b) if to Novo Nordisk, to:
NOVO NORDISK PHARMACEUTICALS, INC.
100 College Road
Princeton, New Jersey 08540
Attention: Martin Soeters
Telephone: (609) 989-5800
Telefax: (609) 987-2792
or to such other addresses and telecopier numbers as may from time to time be notified by either party to the other hereunder.
8.8 FINDER'S FEES.
(a) Aradigm (i) represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement and (ii) hereby agrees to
indemnify and to hold Novo Nordisk harmless of and from any liability for any commission or compensation in the nature of a finder's fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) for which Aradigm or any of its employees or representatives is responsible.
(b) Novo Nordisk (i) represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement, and (ii) hereby agrees to indemnify and to hold Aradigm harmless of and from any liability for any commission or compensation in the nature of a finder's fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) for which Novo Nordisk or any of its employees or representatives are responsible.
8.9 INFORMATION CONFIDENTIAL. Novo Nordisk acknowledges that any non-public information received by it pursuant hereto is confidential and for Novo Nordisk's use only, and it will refrain from using such information or reproducing, disclosing, or disseminating such information to any other person (other than its employees, affiliates, agents, or partners having a need to know the contents of such information and its attorneys, in each case who agree to be bound by this Section 8.9), except in connection with the exercise of rights under this Agreement, unless such information becomes available to the public generally or it is required by a governmental body to disclose such information.
8.10 SPECIFIC PERFORMANCE. The parties hereto hereby declare that it is impossible to measure in money the damages which will accrue to a party hereto or to its successors or assigns by reason of a failure to perform any of the obligations under Article 5 of this Agreement and agree that the terms of Article 5 of this Agreement shall be specifically enforceable. If any party hereto or its successors or assigns institutes any action or proceeding to specifically enforce the provisions of Article 5 hereof, any party against whom such action or proceeding is brought hereby waives the claim or defense therein that such party or such successor or assign has an adequate remedy at law, and such party shall not offer in any such action or proceeding the claim or defense that such remedy at law exists.
8.11 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.
8.12 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.
The foregoing Agreement is hereby executed as of the date first above written.
October 22, 2001 October 22, 2001
ARADIGM CORPORATION NOVO NORDISK PHARMACEUTICALS, INC.
By: /s/ Richard P. Thompson By: /s/ Martin Soeters
------------------------------- -------------------------------
Richard P. Thompson Martin Soeters
Chairman, President and President, North America
Chief Executive Officer
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EXHIBIT A
SCHEDULE OF EXCEPTIONS
This is the Schedule of Exceptions to that certain Stock Purchase Agreement, dated as of October 22, 2001, by and between Aradigm Corporation and Novo Nordisk Pharmaceuticals, Inc.
NO EXCEPTIONS
EXHIBIT B
OPINION OF ARADIGM'S COUNSEL
[Letterhead of Cooley Godward LLP]
November ___, 2001
Novo Nordisk Pharmaceuticals, Inc.
100 College Road
Princeton, New Jersey 08540
Attention: Martin Soeters
Re: Aradigm Corporation
Dear Ladies and Gentlemen:
We have acted as counsel to Aradigm Corporation, a California corporation (the "Company"), in connection with the issuance and sale to you of the Initial Shares (as defined in the Stock Purchase Agreement between you and the Company, dated as of October 22, 2001 (the "Purchase Agreement")), such issuance and sale to take place pursuant to the terms and conditions of the Purchase Agreement. We are rendering this opinion pursuant to Section 6.1(b) of the Purchase Agreement. Except as otherwise defined herein, capitalized terms used but not defined herein have the respective meanings given to them in the Purchase Agreement.
In connection with this opinion, we have examined and relied upon the representations and warranties as to factual matters contained in and made pursuant to the Purchase Agreement by the various parties and originals or copies certified to our satisfaction, of such records, documents, certificates, opinions, memoranda and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below. Where we render an opinion "to the best of our knowledge" or concerning an item "known to us" or our opinion otherwise refers to our knowledge, it is based solely upon (i) an inquiry of attorneys within this firm who perform legal services for the Company, (ii) receipt of a certificate executed by an officer of the Company covering such matters, and (iii) such other investigation, if any, that we specifically set forth herein.
In rendering this opinion, we have assumed the genuineness and authenticity of all signatures on original documents; the authenticity of all documents submitted to us as originals; the conformity to originals of all documents submitted to us as copies; the accuracy, completeness and authenticity of certificates of public officials; and the due authorization, execution and delivery of all documents (except the due authorization, execution and delivery by the Company of the Purchase Agreement) where authorization, execution and delivery are prerequisites to the effectiveness of such documents. We have also assumed that all individuals executing and delivering documents in their individual capacities had the legal capacity to so execute and deliver; that you have received all documents you were to receive under the Purchase Agreement; that the Purchase Agreement is an obligation binding upon you; that you have filed any required California franchise or income tax
returns and have paid any required California franchise or income taxes; and that there are no extrinsic agreements or understandings among the parties to the Purchase Agreement that would modify or interpret the terms of the Purchase Agreement or the respective rights or obligations of the parties thereunder.
Our opinion is expressed only with respect to the federal laws of the United States of America and the laws of the State of California. We express no opinion as to whether the laws of any particular jurisdiction apply, and no opinion to the extent that the laws of any jurisdiction other than those identified above are applicable to the subject matter hereof. We are not rendering any opinion as to compliance with any antifraud law, rule or regulation relating to securities, or to the sale or issuance thereof.
With respect to the opinion in paragraph 3 hereof regarding issued and outstanding capital stock of the Company, we have examined and have relied solely on a certificate furnished by the Company's transfer agent, Boston Equiserve, LP, a copy of which has been made available to you. We have undertaken no independent verification with respect thereto.
With regard to our opinion in paragraph 4 below with respect to material defaults under any of the Material Agreements (as defined below), we have relied solely upon (i) inquiries of officers of the Company, (ii) a list supplied to us by the Company of material agreements to which the Company is a party, or by which it is bound (the "Material Agreements"), and (iii) an examination of the items on the aforementioned list; we have made no further investigation.
With regard to our opinion in paragraph 6 below, we express no opinion with respect to any required consents, approvals, authorizations, orders, filings, registrations and qualifications under any antitrust laws, rules or regulations of the United States.
On the basis of the foregoing, in reliance thereon and with the foregoing qualifications, we are of the opinion that:
1. The Company has been duly incorporated and is a validly existing corporation in good standing under the laws of the State of California. The Company has the requisite corporate power to own its property and assets and to conduct its business as, to the best of our knowledge, it is currently being conducted and, to the best of our knowledge, is qualified as a foreign corporation to do business and is in good standing in each jurisdiction in the United States in which the ownership of its property or the conduct of its business requires such qualification and where any statutory fines or penalties or any corporate disability imposed for the failure to disqualify would materially and adversely affect the Company, its assets, financial condition or operations.
2. The Purchase Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, arrangement with creditors, moratorium or other similar laws affecting creditors' rights, and subject to general equity principles and to limitations on availability of equitable relief, including specific performance.
3. As of October ___, 2001, the Company's authorized capital stock consists of forty million (40,000,000) shares of Common Stock, of which (excluding the Initial Shares) twenty-three million eight hundred seventy thousand six hundred sixty (23,870,660) shares are issued and outstanding; and five million (5,000,000) shares of Preferred Stock, of which ____________ (___________) shares have been designated Series A Junior Participating Preferred, none of which is issued and outstanding. The Initial Shares have been duly and validly authorized, and upon issuance and delivery against payment therefor in accordance with the Purchase Agreement will be validly issued, outstanding, fully paid and nonassessable. To the best of our knowledge, there are no options, warrants, conversion privileges, preemptive rights or other rights outstanding to purchase any shares of the authorized but unissued capital stock of the Company, other than rights granted under the Company's Equity Incentive Plan, Non-Employee Directors Stock Option Plan and Employee Stock Purchase Plan, for which the Company has reserved four million seven hundred seventeen thousand two hundred eight (4,717,208) shares of its Common Stock, warrants to purchase an aggregate of six hundred seventy-seven thousand nineteen (677,019) shares of Common Stock, rights created in connection with the Common Stock Purchase Agreement, dated as of November 3, 2000, by and between the Company and Acqua Wellington North American Equities Fund, Ltd., and the rights created in connection with the transactions contemplated by the Purchase Agreement.
4. The execution and delivery of the Purchase Agreement by the Company and the offer, issuance and sale of the Initial Shares pursuant thereto (a) do not constitute a material default under the provisions of any of the Material Agreements, (b) do not violate any provision of the Company's Articles of Incorporation or Bylaws, and (c) do not violate or contravene (i) any governmental statute, rule or regulation applicable to the Company or (ii) any order, writ, judgment, injunction, decree, determination or award which has been entered against the Company and of which we are aware, the violation or contravention of which would materially and adversely affect the Company, its assets, financial condition or operations.
5. To the best of our knowledge, there is no action, proceeding or investigation pending or overtly threatened against the Company before any court or administrative agency that questions the validity of the Purchase Agreement or might result, either individually or in the aggregate, in any material adverse change in the assets, financial condition or operations of the Company.
6. All consents, approvals, authorizations or orders of, and filings, registrations and qualifications with any regulatory authority or governmental body in the United States required for the issuance of the Initial Shares have been made or obtained.
7. The offer and sale of the Initial Shares is exempt from the registration requirements of the Securities Act of 1933, as amended.
This opinion is intended solely for your benefit and is not to be made available to or be relied upon by any other person, firm, or entity without our prior written consent.
Very truly yours,
COOLEY GODWARD LLP
EXHIBITS INDEX
Exhibit A - SCHEDULE OF EXCEPTIONS
Exhibit B - OPINION OF ARADIGM'S COUNSEL
Table of Contents
PAGE
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1. PURCHASE AND SALE........................................................................................1
1.1 Initial Shares..................................................................................1
1.2 First Closing Date..............................................................................1
1.3 Delivery........................................................................................1
1.4 Additional Shares...............................................................................2
1.5 Additional Closing Dates........................................................................3
1.6 Delivery........................................................................................3
1.7 Rule 144 Reporting..............................................................................3
1.8 "Market Stand-Off" Agreements...................................................................3
1.9 Public Offering Lock-Up.........................................................................4
1.10 Demand Registration.............................................................................4
2. REPRESENTATIONS AND WARRANTIES OF ARADIGM................................................................6
2.1 Organization and Standing; Articles and Bylaws..................................................6
2.2 Authorization...................................................................................6
2.3 Validity of Shares..............................................................................6
2.4 Offering........................................................................................6
2.5 Full Disclosure.................................................................................6
2.6 No Conflict; No Violation.......................................................................7
2.7 Consents and Approvals..........................................................................8
2.8 Absence of Certain Developments.................................................................8
3. REPRESENTATIONS AND WARRANTIES OF NOVO NORDISK...........................................................8
3.1 Legal Power.....................................................................................8
3.2 Due Execution...................................................................................8
3.3 Investment Representations......................................................................9
4. COVENANTS OF ARADIGM....................................................................................10
4.1 Updating of Schedule of Exceptions.............................................................10
4.2 Access to Information..........................................................................10
4.3 Delivery of Certain Information................................................................10
5. COVENANTS OF NOVO NORDISK...............................................................................11
5.1 Voting Agreement...............................................................................11
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Table of Contents
(CONTINUED)
PAGE
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6. CONDITIONS TO FIRST CLOSING.............................................................................12
6.1 Conditions to Obligations of Novo Nordisk......................................................12
6.2 Conditions to Obligations of Aradigm...........................................................13
7. CONDITIONS TO ADDITIONAL CLOSINGS.......................................................................13
7.1 Conditions to Obligations of Novo Nordisk......................................................13
7.2 Conditions to Obligations of Aradigm...........................................................15
8. MISCELLANEOUS...........................................................................................16
8.1 Governing Law..................................................................................16
8.2 Successors and Assigns.........................................................................16
8.3 Entire Agreement...............................................................................16
8.4 Severability...................................................................................16
8.5 Amendment and Waiver...........................................................................16
8.6 Delays or Omissions............................................................................16
8.7 Notices, etc...................................................................................17
8.8 Finder's Fees..................................................................................17
8.9 Information Confidential.......................................................................18
8.10 Specific Performance...........................................................................18
8.11 Titles and Subtitles...........................................................................18
8.12 Counterparts...................................................................................18
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ii.
Exhibit 10.23
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS
DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED.
FIRST AMENDMENT TO DEVELOPMENT AND LICENSE AGREEMENT
This First Amendment to the Development and License Agreement (the "First Amendment") is made and entered into effective as of October 22, 2001 (the "Effective Date"), by and between Novo Nordisk A/S, Novo Alle DK-2880 Bagsvaerd, Denmark ("Novo Nordisk"), and Aradigm Corporation, 3929 Point Eden Way, Hayward, California 94545 ("Aradigm"). Novo Nordisk and Aradigm may be referred to herein as a "Party" or, collectively, as "Parties".
RECITALS
WHEREAS, effective June 2, 1998, Novo Nordisk and Aradigm entered into a Development and License Agreement (the "Development Agreement") for the development and commercialization of a system for pulmonary delivery of insulin (and potentially other related compounds);
WHEREAS, pursuant to the Development Agreement, Aradigm granted Novo Nordisk an exclusive, worldwide license under Aradigm's Patent Rights and Know-how, to register, use, market, distribute, sell, with sublicense rights, and certain rights to package and produce products resulting from such development activities; and
WHEREAS, the Parties desire to amend the Development Agreement to correspond with the Manufacturing and Supply Agreement entered into between Novo Nordisk and Aradigm on October 22, 2001.
NOW THEREFORE, the Parties agree as follows:
AGREEMENT
1. AMENDMENT OF THE DEVELOPMENT AGREEMENT.
The Parties hereby agree to amend the terms of the Development Agreement as provided below. To the extent that the Development Agreement is explicitly amended by this Amendment, the terms of the Amendment will control where the terms of the Agreement are contrary to or conflict with the following provisions. Where the Development Agreement is not explicitly amended, the terms of the Agreement will remain in force. Capitalized terms used in this Amendment that are not otherwise defined herein shall have the meanings as such terms are defined in the Agreement.
1.1 Article 1.12 of the Development Agreement is hereby deleted in its entirety and replaced with the following:
"1.12 Fully Burdened Costs" shall mean the cost of raw materials (excluding unless otherwise stated the Programme Compound), components, labour (production), quality (labour, material and external analysis), third party royalties, freight, import duties, taxes
1.
and reasonably allocated facilities, depreciation of equipment, product and professional support, and manufacturing overheads relating to the production of the specified items."
1.2 Article 4.9(h) of the Development Agreement is hereby amended by deleting the sentence "In such case ARADIGM shall continue to be entitled to receive on an ongoing basis its [***] as specified in Article 5.2, but reduced by the [***] associated with the transfer prices, as specified in Articles 4.5 and 4.6, which shall be retained by NOVO NORDISK as compensation for being required to undertake the manufacturing function", and replacing such sentence with the following:
"In such case ARADIGM shall be entitled to, and NOVO NORDISK shall pay, all amounts owed under Articles 5.2 and 5.5 of the Development Agreement with respect to ARADIGM's [***] on Net Sales of such Packaged Product, but, for clarification purposes, Aradigm will not receive payments of the interim transfer price pursuant to Article 4.5."
1.3 Article 4.11 of the Development Agreement is hereby amended by deleting the sentence "ARADIGM shall continue to share in the Gross Profit associated with Packaged Products produced in this facility as specified by Article 5 (with the [***] of product produced at such facility to be included in the calculation of Gross Profit)", and replacing such sentence with the following:
"ARADIGM shall continue to share in the Gross Profit associated with Packaged Products produced in this facility as specified by Article 5 (with the [***] of product produced at such facility to be included in the calculation of Gross Profit), but, for clarification purposes, Aradigm will not receive payments of the interim transfer price pursuant to Article 4.5."
1.4 Article 5.2 of the Development Agreement is hereby amended by deleting the sentence "In addition to the payments referred to in Article 5.1 above, each year during the term of this Agreement NOVO NORDISK shall pay to ARADIGM [***] on Net Sales of the Packaged Products and the Devices during such year; provided, however, that a different percentage may be applicable to Packaged Products containing Other Compounds as agreed by the parties pursuant to Article 2.1", and replacing such sentence with the following:
"In addition to the payments referred to in Article 5.1 above, each year
during the term of this Agreement NOVO NORDISK shall pay to ARADIGM
[***] on Net Sales of the Packaged Products and the Devices during such
year; provided, however, that a different percentage may be applicable
to Packaged Products containing Other Compounds as agreed by the parties
pursuant to Article 2.1."
2. MISCELLANEOUS
2.1 FULL FORCE AND EFFECT. This Amendment amends the terms of the Agreement and is deemed incorporated into, and governed by all the other terms of, the Development Agreement. The provisions of the Development Agreement, as amended by this Amendment, remain in full force and effect.
2.
2.2 COUNTERPARTS; FACSIMILE. This First Amendment may be executed in counterparts and by facsimile.
IN WITNESS WHEREOF, the Parties have executed this First Amendment as of the Effective Date.
NOVO NORDISK A/S ARADIGM CORPORATION
Novo Alle DK-2880 3929 Point Eden Way
Bagsvaerd, Denmark Hayward, CA 94545
By: /s/ Kare Schultz By: /s/ Richard P. Thompson
-------------------------------- --------------------------------
Name: Kare Schultz Name: Rich Thompson
Title: Executive Vice President Title: Chairman, President and Chief
Executive Officer
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3.
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Prospectus constituting part of the Registration Statements on Form S-3 (No. 333-76584, No. 333-69614, No. 333-52081, No. 333-72037 and No. 333-48384) and the Registration Statements on Form S-8 (No. 333-63116, No. 333-15947, No. 333-62039 and No. 333-92169) of our report dated February 15, 2002, with respect to the financial statements of Aradigm Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 2001.
/s/ Ernst & Young LLP Palo Alto, California March 25, 2002 |