As filed with the Securities and Exchange Commission on March 27, 2007

Registration No. 333-140504

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

6 Christopher Columbus Avenue

Danbury, Connecticut 06810

(203) 798-3600

(Address, including zip code, and telephone number, including area code,

of registrant’s principal executive offices)

 

 

 

 

Solomon S. Steiner, Ph.D.

Chief Executive Officer and Chairman

Biodel Inc.

6 Christopher Columbus Avenue

Danbury, Connecticut 06810

(203) 798-3600

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:   As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), please check the following box.   o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same
offering.   o   _ _

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same
offering.   o   _ _

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same
offering.   o   _ _

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

TABLE OF CONTENTS

 

 

 

 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus is accurate as of the date on the front of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Until          , 2007, 25 days after the commencement of this offering, all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

PROSPECTUS SUMMARY

	•	VIAject tm , a proprietary injectable formulation of recombinant human insulin designed to be absorbed into the blood faster than the currently marketed rapid-acting insulin analogs, for which we are currently conducting pivotal Phase III clinical trials in patients with Type 1 and Type 2 diabetes; and
	•	VIAtab tm , a sublingual, or below the tongue, tablet formulation of insulin, for which we are currently conducting a Phase I clinical trial in patients with diabetes.

	•	VIAmass tm , a sublingual, rapid-acting formulation of parathyroid hormone 1-34; and
	•	VIAcal tm , a sublingual rapid-acting formulation of salmon calcitonin.

	•	obtain regulatory approval for VIAject tm ;
	•	commercialize our product candidates by self-funding clinical trials and partnering late-stage programs through strategic commercial collaborations, while seeking to retain co-commercialization rights;

	•	employ our proprietary VIAdel tm technology to reformulate approved peptide hormone drugs that address large markets;
	•	focus on the Section 505(b)(2) regulatory approval pathway, which may facilitate more rapid and less costly product development; and
	•	aggressively continue the development of our pipeline of product candidates.

 

Common stock we are offering		shares
Common stock to be outstanding after this offering		shares
Over-allotment option		shares
Net proceeds		We estimate that the net proceeds from this offering will be approximately $      million, assuming an initial public offering price of $      per share and after deducting estimated underwriting discounts and commissions and offering expenses payable by us.
Use of proceeds		We expect to use the net proceeds from this offering to fund clinical development, preclinical testing and other research and development activities and for working capital and other general corporate purposes. See “Use of Proceeds.”
Risk factors		You should read the “Risk Factors” section of this prospectus for a discussion of the factors to consider carefully before deciding to purchase any shares of our common stock.
Proposed Nasdaq Global Market symbol		BIOD

	•	1,652,697 shares of common stock issuable upon the exercise of stock options outstanding as of March 15, 2007, at a weighted average exercise price of $4.13 per share;

	•	5,251,849 shares of common stock issuable upon the exercise of warrants outstanding as of March 15, 2007, at a weighted average exercise price of $3.78 per share;

	•	3,047,303 shares of common stock reserved for future issuance upon exercise of stock options granted after March 15, 2007 under our 2004 Stock Incentive Plan, as amended and restated upon the closing of this offering;

	•	1,300,000 shares of common stock reserved for future issuance under our 2005 Employee Stock Purchase Plan upon the closing of this offering; and

	•	500,000 shares of common stock reserved for future issuance under our 2005 Non-Employee Directors’ Stock Option Plan upon the closing of this offering.

	•	no exercise of the outstanding options or warrants described above;
	•	the conversion of all outstanding shares of our preferred stock into an aggregate of 9,043,179 shares of our common stock upon the closing of this offering; and
	•	no exercise by the underwriters of their option to purchase up to           shares of our common stock to cover over-allotments.

 

SUMMARY FINANCIAL DATA

		December 3,																				December 3,
		2003																				2003
		(inception) to												Three months ended								(inception) to
		September 30,				Year ended September 30,								December 31								December 31,
		2004				2005				2006				2005				2006				2006
										(restated)
		(in thousands except share and per share data)
Statement of operations data:
Revenue		$	—			$	—			$	—			$	—			$	—			$	—
Operating expenses:
Research and development			580				2,573				5,960				923				2,493				11,606
General and administrative			193				517				1,450				395				1,264				3,424
Total operating expenses			773				3,090				7,410				1,318				3,757				15,030
Other (income) and expense:
Interest and other income			—				(9	)			(182	)			(1	)			(190	)			(381	)
Interest expense			—				—				78				3				—				78
Loss on settlement of debt			—				—				627				—				—				627
Operating loss before tax provision			(773	)			(3,081	)			(7,933	)			(1,320	)			(3,567	)			(15,354	)
Tax provision			1				2				10				3				—				13
Net loss		$	(774	)		$	(3,083	)		$	(7,943	)		$	(1,323	)		$	(3,567	)		$	(15,367	)
Net loss per share — basic and diluted		$	(0.10	)		$	(0.41	)		$	(1.05	)		$	(0.17	)		$	(0.47	)
Weighted average shares outstanding — basic and diluted			7,500,000				7,512,442				7,562,779				7,560,408				7,564,820
Pro forma net loss per share — basic and diluted (unaudited)										$	(0.68	)						$	(0.27	)
Pro forma weighted average shares outstanding — basic and diluted (unaudited)											11,647,415								13,211,736

		As of December 31,
		2006
						Pro Forma
Balance sheet data:		Actual				as Adjusted
		(in thousands)
Cash and cash equivalents		$	14,563
Working capital			11,902
Total assets			15,843
Long-term debt			—
Deficit accumulated during the development stage			(15,367	)
Total stockholders’ equity			13,160

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information included in this prospectus, including the financial statements and related notes appearing at the end of this prospectus, before deciding to invest in our common stock. If any of the following risks actually occur, they may materially harm our business, prospects, financial condition and results of operations. In this event, the market price of our common stock could decline and you could lose part or all of your investment.

 

Risks Related to Our Financial Position and Need for Additional Capital

 

We have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.

 

Since our inception in December 2003, we have incurred significant operating losses. Our net loss was $3.6 million for the three months ended December 31, 2006 and $7.9 million for the year ended September 30, 2006. As of December 31, 2006, we had a deficit accumulated during the development stage of $15.4 million. To date, we have financed our operations primarily through private placements of our preferred stock. We have devoted substantially all of our time, money and efforts to the research and development of VIAject ^tm , VIAtab ^tm and our preclinical product candidates. We have not completed development of any drugs. We expect to continue to incur significant and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we:

 

 

To become and remain profitable, we must succeed in developing and eventually commercializing drugs with significant market potential. This will require us to be successful in a range of challenging activities, including successfully completing preclinical testing and clinical trials of our product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling those products for which we may obtain regulatory approval. We are only in the preliminary stages of these activities. We may never succeed in these activities and may never generate revenues that are significant or large enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the market price of our common stock and could impair our ability to raise capital, expand our business or continue our operations. A decline in the market price of our common stock could also cause you to lose all or a part of your investment.

 

We will need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.

 

We are a development stage company with no commercial products. All of our product candidates are still being developed, and all but VIAject ^tm are in early stages of development. Our product candidates will require significant additional development, clinical development, regulatory approvals and additional investment before

they can be commercialized. We anticipate that VIAject ^tm will not be commercially available for several years, if at all.

 

We expect our research and development expenses to increase in connection with our ongoing activities, particularly as we continue our Phase III clinical trials of VIAject ^tm , commence additional clinical trials of VIAtab ^tm if our ongoing Phase I clinical trial is successful and conduct preclinical testing of VIAmass ^tm and VIAcal ^tm . In addition, subject to obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, securing commercial quantities of product from our manufacturers and distribution. We will need substantial additional funding and may be unable to raise capital when needed or on attractive terms, which would force us to delay, reduce or eliminate our research and development programs or commercialization efforts.

 

Based upon our current plans we believe that the net proceeds of this offering together with our existing cash and cash equivalents will enable us to fund our anticipated operating expenses and capital expenditures until          . However, we cannot assure you that our plans will not change or that changed circumstances will not result in the depletion of our capital resources more rapidly than we currently anticipate. Our future capital requirements will depend on many factors, including:

 

 

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through public or private equity offerings and debt financings, strategic collaborations and licensing arrangements. If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences, that are not favorable to us or our stockholders. If we raise additional funds through collaboration, strategic alliance and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies or product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

 

Our short operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

 

We commenced active operations in January 2004. Our operations to date have been limited to organizing and staffing our company, developing and securing our technology and undertaking preclinical studies and clinical trials of our most advanced product candidates, VIAject ^tm and VIAtab ^tm . We have not yet demonstrated our ability to successfully complete large-scale, pivotal clinical trials, obtain regulatory approvals, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary

for successful product commercialization. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.

 

In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition from a company with a research focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

 

Risks Related to the Development and Commercialization of Our Product Candidates

 

We depend heavily on the success of our most advanced product candidate, VIAject ^tm . VIAtab ^tm is our only other product candidate currently in clinical development. We do not expect to advance any other product candidates into clinical trials until 2008. Clinical trials of our product candidates may not be successful. If we are unable to commercialize VIAject ^tm and VIAtab ^tm , or experience significant delays in doing so, our business will be materially harmed.

 

We have invested a significant portion of our efforts and financial resources in the development of our most advanced product candidates, VIAject ^tm and VIAtab ^tm . Our ability to generate product revenues, which we do not expect will occur for at least the next several years, if ever, will depend heavily on the successful development and eventual commercialization of these product candidates. The commercial success of our product candidates will depend on several factors, including the following:

 

 

If we are not successful in completing the development and commercialization of our product candidates, or if we are significantly delayed in doing so, our business will be materially harmed.

 

The results of early stage clinical trials do not ensure success in later stage clinical trials.

 

To date we have not completed the development of any products through commercialization. VIAject ^tm is currently being tested in two Phase III clinical trials in patients with Type 1 and Type 2 diabetes. We expect to complete these two trials and, if these trials are successful, we intend to submit a new drug application, or NDA, under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, or the FFDCA, to the FDA in 2008. We are currently conducting our Phase I clinical trial of VIAtab ^tm . If this Phase I clinical trial of VIAtab ^tm is successful, we plan to initiate a Phase II clinical trial in 2008. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials. Furthermore, interim results of a clinical trial do not necessarily predict final results. For example, the interim results to date in our Phase II meal study of VIAject ^tm are based on data from only 10 patients. The study is still ongoing and we expect to enroll an additional 8-10 patients in the trial. The final results of this trial may be different from those suggested by our interim analysis. Similarly, the final safety results from our Phase III clinical trials of VIAject ^tm may be different than those suggested by the hypoglycemic events observed to date. In addition, efficacy data from our Phase III clinical trials of VIAject ^tm , which will be based on 400 Type 1 and 400 Type 2 diabetes patients, may be less favorable than the data observed to date in our Phase I and Phase II clinical trials. We cannot assure you that our clinical trials of VIAject ^tm or VIAtab ^tm will ultimately be successful. New information regarding the safety and efficacy of VIAject ^tm or VIAtab ^tm may arise from our continuing analysis of the data that may be less favorable than the data observed to date. In our clinical trials to date,

patients took VIAject ^tm for a relatively small number of treatment days. VIAject ^tm may not be found to be effective or safe when taken for longer periods, such as the six-month period of our Phase III clinical trials.

 

Even if our early phase clinical trials are successful, we will need to complete our Phase III clinical trials of VIAject ^tm and conduct Phase II and Phase III clinical trials of VIAtab ^tm in larger numbers of patients taking the drug for longer periods before we are able to seek approvals to market and sell these product candidates from the FDA and similar regulatory authorities outside the United States. If we are not successful in commercializing any of our product candidates, or are significantly delayed in doing so, our business will be materially harmed.

 

If our clinical trials are delayed or do not produce positive results, we may incur additional costs and
ultimately be unable to commercialize our product candidates.

 

Before obtaining regulatory approval for the sale of our product candidates, we must conduct, at our own expense, extensive preclinical tests to demonstrate the safety of our product candidates in animals and clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Preclinical and clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials of VIAject ^tm and VIAtab ^tm can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, preclinical testing of VIAmass ^tm and VIAcal ^tm and clinical trials of VIAject ^tm and VIAtab ^tm that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including:

 

 

In particular, the enrollment of patients with Type 1 diabetes in our Phase III clinical trials of VIAject ^tm has been somewhat slower than we expected, in part because participation in this trial would require some patients to stop their use of an insulin analog product. Accordingly, we recently initiated trial sites in Germany where the use of insulin analogs is not fully reimbursed by the government. If we continue to experience slower than anticipated enrollment of patients in our clinical trials, our development of VIAject ^tm could be delayed.

 

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

 

 

 

Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Significant preclinical or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates and may harm our business and results of operations.

 

If our product candidates are found to cause undesirable side effects we may need to delay or abandon our development and commercialization efforts.

 

Any undesirable side effects that might be caused by our product candidates could interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications. In addition, if any of our product candidates receive marketing approval and we or others later identify undesirable side effects caused by the product, we could face one or more of the following:

 

 

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent us from generating significant revenues from its sale.

 

The major safety concern with patients taking insulin is the occurrence of hypoglycemic events, which we monitor on a daily basis in our clinical trials. As of March 12, 2007, we have had a total of 113 mild and moderate hypoglycemic events in our Phase III clinical trials, 73 in patients receiving Humulin ^® R and 40 in patients receiving VIAject ^tm . As of that date, we have also had a total of four severe hypoglycemic events, three in patients receiving Humulin ^® R and one in a patient receiving VIAject ^tm .

 

The commercial success of any product candidates that we may develop, including VIAject ^tm , VIAtab ^tm , VIAmass ^tm and VIAcal ^tm will depend upon the degree of market acceptance by physicians, patients,
healthcare payors and others in the medical community.

 

Any products that we bring to the market, including VIAject ^tm , VIAtab ^tm , VIAmass ^tm and VIAcal ^tm , if they receive marketing approval, may not gain market acceptance by physicians, patients, healthcare payors and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. Physicians will not recommend our product candidates until clinical data or other factors demonstrate the safety and efficacy of our product candidates as compared to other treatments. Even if the clinical safety and efficacy of our product candidates is established, physicians may elect not to recommend these product candidates for a variety of factors, including the reimbursement policies of government and third-party payors and the effectiveness of our competitors in marketing their products.

 

The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

 

 

If we fail to enter into strategic collaborations for the commercialization of our product candidates or if our collaborations are unsuccessful, we may be required to establish our own sales, marketing, manufacturing and distribution capabilities which will be expensive and could delay the commercialization of our product candidates and have a material and adverse affect on our business.

 

A broad base of physicians, including primary care physicians, internists and endocrinologists, treat patients with diabetes. A large sales force is required to educate and support these physicians. Therefore, our current strategy for developing, manufacturing and commercializing our product candidates includes securing collaborations with leading pharmaceutical and biotechnology companies for the commercialization of our product candidates. To date, we have not entered into any collaborations with pharmaceutical or biotechnology companies. We face significant competition in seeking appropriate collaborators. In addition, collaboration agreements are complex and time-consuming to negotiate, document and implement. For all these reasons, it may be difficult for us to find third parties that are willing to enter into collaborations on economic terms that are favorable to us, or at all. If we do enter into any such collaboration, the collaboration may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. It is likely that our collaborators will have significant discretion in determining the efforts and resources that they will apply to these collaborations.

 

If we fail to enter into collaborations, or if our collaborations are unsuccessful, we may be required to establish our own direct sales, marketing, manufacturing and distribution capabilities. Establishing these capabilities can be time-consuming and expensive and we have little experience in doing so. Because of our size, we would be at a disadvantage to our potential competitors to the extent they collaborate with large pharmaceutical companies that have substantially more resources than we do. As a result, we would not initially be able to field a sales force as large as our competitors or provide the same degree of market research or marketing support. In addition, our competitors would have a greater ability to devote research resources toward expansion of the indications for their products. We cannot assure prospective investors that we will succeed in entering into acceptable collaborations, that any such collaboration will be successful or, if not, that we will successfully develop our own sales, marketing and distribution capabilities.

 

If we are unable to obtain adequate reimbursement from governments or third-party payors for any products that we may develop or if we are unable to obtain acceptable prices for those products, they may not be
purchased or used and our revenues and prospects for profitability will suffer.

 

Our future revenues and profits will depend heavily upon the availability of adequate reimbursement for the use of our approved product candidates from governmental and other third-party payors, both in the United States and in other markets. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

 

 

Obtaining reimbursement approval for a product from each government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to each payor. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement. Even when a payor determines that a product is eligible for reimbursement, the payor may impose coverage limitations that preclude payment for some uses that are approved by the FDA or comparable

authorities. In addition, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent.

 

We are subject to pricing pressures and uncertainties regarding Medicare reimbursement and reform.

 

Recent reforms in Medicare added a prescription drug reimbursement benefit beginning in 2006 for all Medicare beneficiaries. Although we cannot predict the full effects on our business of the implementation of this legislation, it is possible that the new benefit, which will be managed by private health insurers, pharmacy benefit managers, and other managed care organizations, will result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce the prices charged for prescription drugs. This could harm our ability to generate revenues.

 

Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.

 

In some countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.

 

Legislation has been introduced into Congress that, if enacted, would permit more widespread re-importation of drugs from foreign countries into the United States, which may include re-importation from foreign countries where the drugs are sold at lower prices than in the United States. Such legislation, or similar regulatory changes, could decrease the price we receive for any approved products which, in turn, could adversely affect our operating results and our overall financial condition.

 

Product liability lawsuits against us could cause us to incur substantial liabilities and to limit
commercialization of any products that we may develop.

 

We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

 

We currently carry global liability insurance in the amount of $5 million that we believe is reasonable to cover us from potential damages arising from proposed clinical trials of VIAject ^tm . We also carry local policies per clinical trial of our product candidates. The amount of insurance that we currently hold may not be adequate to cover all liabilities that we may incur. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any products. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost. If losses from product liability claims exceed our liability insurance coverage, we may ourselves incur substantial liabilities. If we are required to pay a product

liability claim, we may not have sufficient financial resources to complete development or commercialization of any of our product candidates and, if so, our business and results of operations would be harmed.

 

We face substantial competition in the development of our product candidates which may result in others developing or commercializing products before or more successfully than we do.

 

We are engaged in segments of the pharmaceutical industry that are characterized by intense competition and rapidly evolving technology. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel drugs that target endocrine disorders. We face, and expect to continue to face, intense and increasing competition as new products enter the market and advanced technologies become available. There are several approved injectable rapid-acting meal-time insulin analogs currently on the market including Humalog ^® , marketed by Eli Lilly and Company, Novolog ^® , marketed by Novo Nordisk A/S, and Apidra ^® , marketed by Sanofi-Aventis. These rapid-acting insulin analogs provide improvement over regular forms of short-acting insulin, including faster subcutaneous absorption, an earlier and greater insulin peak and more rapid post-peak decrease. In addition, Pfizer Inc.’s Exubera ^® , an inhalable insulin delivered by a device developed by Nektar Therapeutics, was recently approved by the FDA and the European Medicines Agency, or the EMEA. Emisphere Technologies, Inc. is developing oral insulin in pill form. Emisphere is still in early-stage preclinical trials of its oral tablet. Generex has developed an oral spray that is currently in Phase II development. Several companies are also developing alternative insulin systems for diabetes, including Novo Nordisk, Eli Lilly and Company in collaboration with Alkermes, Inc., MannKind Corporation, Emisphere Technologies, Inc. and Aradigm Corporation. In addition, a number of established pharmaceutical companies, including GlaxoSmithKline plc and Bristol-Myers Squibb Company, are developing proprietary technologies or have entered into arrangements with, or acquired, companies with technologies for the treatment of diabetes.

 

Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization. Our competitors may develop products that are more effective, safer, more convenient or less costly than any that we are developing or that would render our product candidates obsolete or non-competitive. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours.

 

Many of our potential competitors have:

 

 

Our product candidates may be rendered obsolete by technological change.

 

The rapid rate of scientific discoveries and technological changes could result in one or more of our product candidates becoming obsolete or noncompetitive. For several decades, scientists have attempted to improve the bioavailability of injected formulations and to devise alternative non-invasive delivery systems for the delivery of drugs such as insulin. Our product candidates will compete against many products with similar indications. In addition to the currently marketed rapid-acting insulin analogs, our competitors are developing insulin formulations delivered by oral pills, pulmonary devices and oral spray devices. Our future success will depend not only on our ability to develop our product candidates, but to maintain market acceptance against emerging industry developments. We cannot assure prospective investors that we will be able to do so.

 

Our business activities involve the storage and use of hazardous materials, which require compliance with environmental and occupational safety laws regulating the use of such materials. If we violate these laws, we could be subject to significant fines, liabilities or other adverse consequences.

 

Our research and development work and manufacturing processes involve the controlled storage and use of hazardous materials, including chemical and biological materials. Our operations also produce hazardous waste products. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials. Although we believe that our safety procedures for handling and disposing of such materials and waste products comply in all material respects with the standards prescribed by federal, state and local laws and regulations, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident or failure to comply with environmental laws, we could be held liable for any damages that may result, and any such liability could fall outside the coverage or exceed the limits of our insurance. In addition, we could be required to incur significant costs to comply with environmental laws and regulations in the future or pay substantial fines or penalties if we violate any of these laws or regulations. Finally, current or future environmental laws and regulations may impair our research, development or production efforts.

 

Risks Related to Our Dependence on Third Parties

 

Use of third parties to manufacture our product candidates may increase the risk that we will not have
sufficient quantities of our product candidates or such quantities at an acceptable cost, and clinical development and commercialization of our product candidates could be delayed, prevented or impaired.

 

We do not own or operate manufacturing facilities for commercial production of our product candidates. We have limited experience in drug manufacturing and we lack the resources and the capabilities to manufacture any of our product candidates on a clinical or commercial scale. Our strategy is to outsource all manufacturing of our product candidates and products to third parties. We also expect to rely upon third parties to produce materials required for the commercial production of our product candidates if we succeed in obtaining necessary regulatory approvals. Although we have contracted with a large commercial manufacturer for VIAject ^tm , there can be no assurance that we will be able to do so successfully with our remaining product candidates. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques, processes and quality controls.

 

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates or products ourselves, including:

 

 

Our manufacturers may not be able to comply with current good manufacturing practice, or cGMP, regulations or other regulatory requirements or similar regulatory requirements outside the United States. Our manufacturers are subject to unannounced inspections by the FDA, state regulators and similar regulators outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates.

 

Our product candidates and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that are both capable of manufacturing for us and willing to do so. If the third parties that we engage to manufacture product for our clinical trials should cease to continue to do so for any reason, we likely would experience delays in advancing these trials while we identify and qualify replacement suppliers and we may

be unable to obtain replacement supplies on terms that are favorable to us. In addition, if we are not able to obtain adequate supplies of our product candidates or the drug substances used to manufacture them, it will be more difficult for us to develop our product candidates and compete effectively.

 

Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to develop product candidates and commercialize any products that receive regulatory approval on a timely and competitive basis.

 

We rely on third parties to conduct our clinical trials and those third parties may not perform satisfactorily, including failing to meet established deadlines for the completion of such trials.

 

We do not independently conduct clinical trials for our product candidates. We rely on third parties, such as contract research organizations, clinical data management organizations, medical institutions and clinical investigators, to enroll qualified patients and conduct our clinical trials. Our reliance on these third parties for clinical development activities reduces our control over these activities. We are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.

 

If our suppliers, principally our sole insulin supplier, fail to deliver materials and provide services needed for the production of VIAject ^tm and VIAtab ^tm in a timely and sufficient manner, or if they fail to comply with applicable regulations, clinical development or regulatory approval of our product candidates or
commercialization of our products could be delayed, producing additional losses and depriving us of potential product revenue.

 

We need access to sufficient, reliable and affordable supplies of recombinant human insulin and other materials for which we rely on various suppliers. We also must rely on those suppliers to comply with relevant regulatory and other legal requirements, including the production of insulin in accordance with cGMP. We can make no assurances that our suppliers, particularly our insulin supplier, will comply with cGMP. We currently have an agreement with a single insulin supplier that is responsible for providing all of the insulin that we use for testing and manufacturing VIAject ^tm and VIAtab ^tm . If supply of recombinant human insulin and other materials becomes limited, or if our supplier does not meet relevant regulatory requirements, and if we were unable to obtain these materials in sufficient amounts, in a timely manner and at reasonable prices, we could be delayed in the manufacturing and future commercialization of VIAject ^tm and VIAtab ^tm . We would incur substantial costs and manufacturing delays if our suppliers are unable to provide us with products or services approved by the FDA or other regulatory agencies.

 

Risks Related to Our Intellectual Property

 

If we are unable to protect our intellectual property rights, our competitors may develop and market similar or identical products that may reduce demand for our products, and we may be prevented from establishing collaborative relationships on favorable terms.

 

The following factors are important to our success:

 

 

 

We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. We try to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Because the patent position of pharmaceutical companies involves complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from others may not provide any protection against competitors.

 

We currently do not own or in-license any issued patents. We have three pending United States patent applications relating to our VIAdel ^tm , VIAject ^tm and VIAtab ^tm technology. These pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If patents do not issue with claims encompassing our products, our competitors may develop and market similar or identical products that compete with ours. Even if patents are issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Failure to obtain effective patent protection for our technology and products may reduce demand for our products and prevent us from establishing collaborative relationships on favorable terms.

 

The active and inactive ingredients in our VIAject ^tm and VIAtab ^tm product candidates have been known and used for many years and, therefore, are no longer subject to patent protection. Accordingly, our pending patent applications are directed to the particular formulations of these ingredients in our products, and their use. Although we believe our formulations and their use are patentable and provide a competitive advantage, even if issued, our patents may not prevent others from marketing formulations using the same active and inactive ingredients in similar but different formulations.

 

We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as potential corporate partners, collaborators, employees and consultants. Any of these parties may breach the agreements and disclose our confidential information or our competitors may learn of the information in some other way. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.

 

The laws of many foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States.

 

We may become involved in lawsuits and administrative proceedings to protect, defend or enforce our
patents that would be expensive and time-consuming.

 

In order to protect or enforce our patent rights, we may initiate patent litigation against third parties in the United States or in foreign countries. In addition, we may be subject to certain opposition proceedings conducted in patent and trademark offices challenging the validity of our patents and may become involved in future opposition proceedings challenging the patents of others. The defense of intellectual property rights, including patent rights, through lawsuits, interference or opposition proceedings, and other legal and administrative proceedings can be costly and can divert our technical and management personnel from their normal responsibilities. Such costs increase our operating losses and reduce our resources available for development activities. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

 

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. For example, during the course of this kind of litigation and despite protective orders entered by

the court, confidential information may be inadvertently disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. This disclosure could materially adversely affect our business and financial results.

 

Claims by other parties that we infringe or have misappropriated their proprietary technology may result in liability for damages, royalties, or other payments, or stop our development and commercialization efforts.

 

Competitors and other third parties may initiate patent litigation against us in the United States or in foreign countries based on existing patents or patents that may be granted in the future. Many of our competitors have obtained patents covering products and processes generally related to our products and processes, and they may assert these patents against us. Moreover, there can be no assurance that these competitors have not sought or will not seek additional patents that may cover aspects of our technology. As a result, there is a greater likelihood of a patent dispute than would be expected if our competitors were pursuing unrelated technologies.

 

While we conduct patent searches to determine whether the technologies used in our products infringe patents held by third parties, numerous patent applications are currently pending and may be filed in the future for technologies generally related to our technologies, including many patent applications that remain confidential after filing. Due to these factors and the inherent uncertainty in conducting patent searches, there can be no guarantee that we will not violate third-party patent rights that we have not yet identified.

 

We know of U.S. and foreign patents issued to third parties that relate to aspects of our product candidates. There may also be patent applications filed by these or other parties in the United States and various foreign jurisdictions that relate to some aspects of our product candidates, which, if issued, could subject us to infringement actions. The owners or licensees of these and other patents may file one or more infringement actions against us. In addition, a competitor may claim misappropriation of a trade secret by an employee hired from that competitor. Any such infringement or misappropriation action could cause us to incur substantial costs defending the lawsuit and could distract our management from our business, even if the allegations of infringement or misappropriation are unwarranted. A need to defend multiple actions or claims could have a disproportionately greater impact. In addition, either in response to or in anticipation of any such infringement or misappropriation claim, we may enter into commercial agreements with the owners or licensees of these rights. The terms of these commercial agreements may include substantial payments, including substantial royalty payments on revenues received by us in connection with the commercialization of our products.

 

Payments under such agreements could increase our operating losses and reduce our resources available for development activities. Furthermore, a party making this type of claim could secure a judgment that requires us to pay substantial damages, which would increase our operating losses and reduce our resources available for development activities. A judgment could also include an injunction or other court order that could prevent us from making, using, selling, offering for sale or importing our products or prevent our customers from using our products. If a court determined or if we independently concluded that any of our products or manufacturing processes violated third-party proprietary rights, our clinical trials could be delayed and there can be no assurance that we would be able to reengineer the product or processes to avoid those rights, or to obtain a license under those rights on commercially reasonable terms, if at all.

 

Risks Related to Regulatory Approval of Our Product Candidates

 

If we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.

 

Our product candidates, and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Failure to obtain regulatory approval for a product candidate will prevent us from commercializing the product candidate. We have not received regulatory approval to market any of our product candidates in any jurisdiction. Securing FDA approval may require the submission of extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing FDA approval requires the submission of information about the

product manufacturing process to, and inspection of manufacturing facilities by, the FDA. Our future products may not be demonstrated effective, may be demonstrated only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or may prevent or limit commercial use.

 

The process of obtaining FDA and other regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved and challenges by competitors. Changes in regulatory approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying agency interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

 

If the FDA does not believe that our product candidates satisfy the requirements for the Section 505(b)(2) approval procedure, the approval pathway will take longer and cost more than anticipated.

 

We believe that VIAject ^tm and VIAtab ^tm qualify for approval under Section 505(b)(2) of the FFDCA. Because we are developing improved formulations of previously approved chemical entities, such as insulin, this may enable us to avoid having to submit certain types of data and studies that are required in full NDAs and instead submit a Section 505(b)(2) NDA. The FDA may not agree that our products are approvable under Section 505(b)(2). Insulin is a unique and complex drug in that it is a complex hormone molecule that is more difficult to replicate than many small molecule drugs. The availability of the Section 505(b)(2) pathway for insulin is even more controversial than for small molecule drugs, and the FDA may not accept this pathway for our insulin product candidates. The FDA has not published any guidance that specifically addresses insulin Section 505(b)(2) NDAs. No other insulin product has yet been approved under a Section 505(b)(2) NDA. If the FDA determines that Section 505(b)(2) NDAs are not appropriate and that full NDAs are required for our product candidates, the time and financial resources required to obtain FDA approval for our product candidates could substantially and materially increase. This would require us to obtain substantially more funding than previously anticipated which could significantly dilute the ownership interests of our stockholders. Even with this investment, the prospect for FDA approval may be significantly lower. If the FDA requires full NDAs for our product candidates or requires more extensive testing and development for some other reason, our ability to compete with alternative products that arrive on the market more quickly than our product candidates would be adversely impacted.

 

Notwithstanding the approval of many products by the FDA under Section 505(b)(2) over the last few years, certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may be required to change its interpretation of Section 505(b)(2) which could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit. The pharmaceutical industry is highly competitive, and it is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition.

 

Moreover, even if VIAject ^tm and VIAtab ^tm are approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product.

 

Any product for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we
experience unanticipated problems with our products, when and if any of them are approved.

 

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and comparable regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Discovery after approval of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in actions such as:

 

 

Failure to obtain regulatory approval in international jurisdictions would prevent us from marketing our products abroad.

 

We intend to have our products marketed outside the United States. In order to market our products in the European Union and many other jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The regulatory approval process outside the United States may include all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.

 

Reports of side effects or safety concerns in related technology fields or in other companies’ clinical trials could delay or prevent us from obtaining regulatory approval or negatively impact public perception of our product candidates.

 

At present, there are a number of clinical trials being conducted by us and by other pharmaceutical companies involving insulin or insulin delivery systems. The major safety concern with patients taking insulin is the occurrence of hypoglycemic events, which we monitor on a daily basis in our clinical trials. As of March 12, 2007, we have had a total of 113 mild and moderate hypoglycemic events in our Phase III clinical trials, 73 in patients receiving Humulin ^®  R and 40 in patients receiving VIAject ^tm . As of that date, we have also had a total of four severe hypoglycemic events, three in patients receiving Humulin ^®  R and one in a patient receiving VIAject ^tm . If we discover that our product is associated with a significantly increased frequency of hypoglycemic or other adverse events, or if other pharmaceutical companies announce that they observed frequent or significant adverse events in their trials involving insulin or insulin delivery systems, we could encounter delays in the commencement or completion of our clinical trials or difficulties in obtaining the approval of our product candidates. In addition, the public perception of our products might be adversely affected, which could harm our business and results of operations, even if the concern relates to another company’s product.

 

Risks Related to Employee Matters and Managing Growth

 

Our future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualified personnel.

 

We are highly dependent on Dr. Solomon S. Steiner, our Chairman, President and Chief Executive Officer, Dr. Roderike Pohl, our Vice President, Research, and F. Scott Reding, our Chief Financial Officer. Dr. Steiner and Dr. Pohl are the inventors of our VIAdel ^tm technology. The loss of the services of any of these persons might impede the achievement of our research, development and commercialization objectives. With the exception of Dr. Steiner, Dr. Pohl and Mr. Reding, who each have employment agreements, all of our employees are “at will” and we currently do not have employment agreements with any of the other members of our management or scientific staff. Replacing key employees may be difficult and time-consuming because of the limited number of individuals in our industry with the skills and experience required to develop, gain regulatory approval of and commercialize our product candidates successfully. Other than a $1 million key person insurance policy on Dr. Steiner, we do not have key person life insurance to cover the loss of any of our other employees.

 

Recruiting and retaining qualified scientific personnel, clinical personnel and sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms, if at all, given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from other companies, universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

 

We expect to expand our development, regulatory and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

 

We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of manufacturing, clinical trials management, regulatory affairs, business development and sales and marketing. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems and continue to recruit and train additional qualified personnel. Due to our limited financial resources we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

 

Risks Related to Our Common Stock and This Offering

 

After this offering, our executive officers, directors and principal stockholders will maintain the ability to control all matters submitted to stockholders for approval.

 

When this offering is completed, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately  % of our capital stock. As a result, these stockholders, if they act together, will be able to exercise a controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations and sales of all or substantially all of our assets, and will have significant control over our management and policies. The interests of this group of stockholders may not always coincide with our corporate interests or the interests of other stockholders. This significant concentration of stock ownership could also result in the entrenchment of our management and adversely affect the price of our common stock.

 

Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our corporate charter and bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.

 

Among others, these provisions:

 

 

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

 

We may not be able to comply on a timely basis with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules of the Securities and Exchange Commission, beginning with our fiscal year ending September 30, 2008, we will be required to include in our annual report an assessment of the effectiveness of our internal control over financial reporting. Furthermore, our registered independent public accounting firm will be required to report on our assessment of the effectiveness of our internal control over financial reporting and separately report on the effectiveness of our internal control over financial reporting. We have not yet completed our assessment of the effectiveness of our internal control over financial reporting. We restated our financial statements for the year ended September 30, 2006 to correct an error in the calculation of non-cash compensation expense related to options issued to non-employees. In connection with the restatement it was determined that we have a material weakness in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board. We are in the process of addressing this material weakness. We are also in the process of documenting, reviewing and, where appropriate, improving our internal controls and procedures in anticipation of being a public company and eventually being subject to the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules. Implementing appropriate changes to our internal controls may entail substantial costs in order to modify our existing financial and accounting systems, take a significant period of time to complete, and distract our officers, directors and employees from the operation of our business. Moreover, these changes may not be effective in maintaining the adequacy or effectiveness of our internal controls. If we fail to complete the assessment on a timely basis, or if our independent registered public accounting firm cannot attest to our assessment, we could be subject to regulatory sanctions and a loss of public confidence. Also, the lack of effective internal control over financial reporting may adversely impact our ability to prepare timely and accurate financial statements.

 

If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment.

 

We expect the initial public offering price of our common stock to be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. To the extent outstanding options or warrants are exercised, you will incur further dilution. Based on an assumed initial public offering price of $      per share, which is the midpoint of the price range listed on the cover page of this prospectus, you will experience immediate dilution of $      per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately  % of the aggregate price paid by all purchasers of our stock but will own only approximately  % of our common stock outstanding after this offering.

 

An active trading market for our common stock may not develop.

 

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters. Although we have applied to have our common stock approved for listing on the Nasdaq Global Market, an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop, it may be difficult for you to sell shares you purchase in this offering without depressing the market price for the shares or at all.

 

If our stock price is volatile, purchasers of our common stock could incur substantial losses.

 

Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common

stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

 

 

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

 

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. We expect to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures and further clinical development of our product candidates. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delay the development of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

 

We have never paid any cash dividends on our capital stock and we do not anticipate paying any cash
dividends in the foreseeable future.

 

We have paid no cash dividends on our capital stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash dividends, if any, will depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends. Capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop
significantly, even if our business is doing well.

 

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding           shares of common stock. This includes the shares that we are selling in this offering, which may be resold in the public market immediately. Of the remaining shares,            shares are currently restricted as a result of securities laws or lock-up agreements but will be able to be sold after the offering as described in the “Shares Eligible for Future Sale” section of this prospectus. Moreover, after this offering, holders of an aggregate of           shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. After the effective date of the registration statement of which this prospectus is a part, we intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be

freely sold in the public market upon issuance, subject to the lock-up agreements described in the “Underwriters” section of this prospectus.

 

Our costs will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to comply with public company regulations.

 

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002 as well as other federal and state laws. These requirements may place a strain on our people, systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, significant resources and management oversight will be required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

 

Forward-looking statements in this prospectus include statements about:

 

 

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements.

USE OF PROCEEDS

 

We estimate that the net proceeds from our issuance and sale of           shares of common stock in this offering will be approximately $      million, assuming an initial public offering price of $      per share, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) our net proceeds from this offering by approximately $      million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds to us from this offering will be approximately $      million, assuming an initial public offering price of $      per share, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us.

 

We intend to use the net proceeds from this offering as follows:

 

 

This expected use of net proceeds of this offering represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures depend on numerous factors, including the ongoing status of and results from clinical trials for VIAject ^tm and VIAtab ^tm , as well as the development of our preclinical product pipeline, any collaborations we may enter into with third parties for our product candidates and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. Upon the completion of the offering, we expect to have sufficient funding to complete the FDA approval process for VIAject ^tm and, if we collaborate with a leading pharmaceutical or biotechnology company, for its commercialization as well. If we do not collaborate with a leading pharmaceutical or biotechnology company, we do not expect to have sufficient funding from the proceeds of this offering to commercialize VIAject ^tm . Although we expect the net proceeds from this offering and our other available funds to be sufficient to fund the completion of the FDA approval process for VIAject ^tm , we expect that we will need to raise additional funds to fund the completion of the development of our other product candidates. We have no current plans, agreements or commitments for any material acquisitions or licenses of any technologies, products or businesses.

 

Pending use of the proceeds from this offering, we intend to invest the proceeds in a variety of capital preservation investments, including short-term or long-term investment-grade, interest-bearing instruments.

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to finance the operation and expansion of our business. Accordingly, we do not anticipate paying any cash dividends to our stockholders in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, operating results and anticipated cash needs.

 

The following table sets forth our cash, cash equivalents and marketable securities and our capitalization as of December 31, 2006:

 

 

The pro forma and pro forma as adjusted information below is illustrative only. Our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing at the end of this prospectus.

 

 

 

The table above excludes:

 

 

 

 

 

 

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.

 

The historical net tangible book value of our common stock as of December 31, 2006 was approximately $12.7 million, or $1.68 per share, based on 7,575,063 shares of common stock outstanding as of December 31, 2006. Historical net tangible book value per share is equal to our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of December 31, 2006. The pro forma net tangible book value of our common stock as of December 31, 2006 was approximately $12.7 million, or $0.77 per share. Pro forma net tangible book value per share gives effect to the conversion of all outstanding shares of our preferred stock into an aggregate of 9,043,179 shares of our common stock upon the closing of this offering.

 

After giving further effect to our issuance and sale of           shares of common stock in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us, our pro forma net tangible book value as of December 31, 2006 would have been approximately $      million, or $      per share. This represents an immediate increase in pro forma net tangible book value of $      per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $      per share to new investors purchasing common stock in this offering at the initial public offering price. Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this offering from the initial public offering price per share paid by a new investor. The following table illustrates this calculation on a per share basis:

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) our pro forma net tangible book value after the offering by approximately $      million, our pro forma net tangible book value per share after this offering by approximately $      and dilution per share to new investors by approximately $     , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

 

If the underwriters exercise their over-allotment option in full or if any shares are issued in connection with outstanding options or warrants, you will experience further dilution.

 

The following table summarizes, as of December 31, 2006, the number of shares purchased from us after giving effect to conversion of all of outstanding shares of our preferred stock into an aggregate of 9,043,179 shares of common stock upon the closing of this offering, the total consideration and average price per share paid, or to be paid, to us by existing stockholders and by new investors in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the price range listed on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses payable by us:

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) the total consideration paid by new investors by $      million and increase (decrease) the percentage of total consideration paid by new investors by approximately  %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

 

The table above is based on 7,575,063 shares of common stock outstanding as of December 31, 2006 and an additional 9,043,179 shares of common stock issuable upon the conversion of all outstanding shares of our preferred stock upon the closing of this offering and excludes:

 

 

 

 

 

 

If the underwriters exercise their over-allotment option in full, the following will occur:

 

 

You should read the following selected financial data together with our financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus. We have derived the statement of operations data set forth below and the balance sheet data as of September 30, 2005 and 2006 set forth below from our audited financial statements which are included in this prospectus. We have derived the balance sheet data as of September 30, 2004 set forth below from our audited financial statements, which are not included in this prospectus. We have derived the statement of operations information set forth below for the three months ended December 31, 2005 and 2006 and the balance sheet data as of December 31, 2006 from our unaudited financial statements, which are included in this prospectus. Our unaudited financial statements include, in the opinion of our management, all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of those statements. Historical results for any prior or interim period are not necessarily indicative of results to be expected in any future period or for a full fiscal year. See our financial statements and related notes for a description of the calculation of the historical and pro forma net loss per common share and the weighted average number of shares used in computing the historical and pro forma per share data.

 

 

 

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Overview

 

We are a specialty pharmaceutical company focused on the development and commercialization of innovative treatments for endocrine disorders such as diabetes and osteoporosis, which may be safer, more effective and convenient. We develop our product candidates by applying our proprietary formulation technologies to existing drugs in order to improve their therapeutic results. Our initial development efforts are focused on peptide hormones. We have two insulin product candidates currently in clinical trials for the treatment of diabetes and two preclinical product candidates for the treatment of osteoporosis.

 

Our most advanced product candidate is VIAject ^tm , a proprietary injectable formulation of recombinant human insulin designed to be absorbed into the blood faster than the currently marketed rapid-acting insulin analogs. We are currently conducting two pivotal Phase III clinical trials of VIAject ^tm , one in patients with Type 1 diabetes and the other in patients with Type 2 diabetes. In addition to VIAject ^tm , we are developing VIAtab ^tm , a sublingual tablet formulation of insulin. We are currently conducting a Phase I clinical trial of VIAtab ^tm in patients with diabetes. Our preclinical product candidates for the treatment of osteoporosis are VIAmass ^tm , a sublingual rapid-acting formulation of parathyroid hormone 1-34, and VIAcal ^tm , a sublingual rapid-acting formulation of salmon calcitonin.

 

We have developed all of our product candidates utilizing our proprietary VIAdel ^tm technology which allows us to study the interaction between peptide hormones and small molecules. We use our technology to reformulate existing peptide drugs with small molecule ingredients that are generally regarded as safe by the FDA to improve their therapeutic effect by entering the blood more rapidly and in greater quantities.

 

We are a development stage company. We were incorporated in December 2003 and commenced active operations in January 2004. To date, we have generated no revenues and have incurred significant losses. We have financed our operations and internal growth through private placements of convertible preferred stock and other securities. We have devoted substantially all of our efforts to research and development activities, including clinical trials. Our net loss was $3.6 million for the three months ended December 31, 2006 and $7.9 million for the year ended September 30, 2006. As of December 31, 2006, we had a deficit accumulated during the development stage of $15.4 million. The deficit accumulated during the development stage is attributable primarily to our research and development activities, which represent approximately 76% of the expenses that we have incurred since our inception. We expect to continue to generate significant losses as we continue to develop our product candidates.

 

Financial Operations Overview

 

Revenues

 

To date, we have generated no revenues. We do not expect to begin generating any revenues unless any of our product candidates receive marketing approval or if we receive payments in connection with strategic collaborations that we may enter into for the commercialization of our product candidates.

 

Research and Development Expenses

 

Research and development expenses consist of the costs associated with our basic research activities, as well as the costs associated with our drug development efforts, conducting preclinical studies and clinical trials,

manufacturing development efforts and activities related to regulatory filings. Our research and development expenses consist of:

 

 

We use our employee and infrastructure resources across multiple research projects, including our drug development programs. To date, we have not tracked expenses related to our product development activities on a program-by-program basis. Accordingly, we cannot reasonably estimate the amount of research and development expenses that we incurred with respect to each of our clinical and preclinical product candidates. However, we estimate that the majority of our research and development expenses incurred to date are attributable to our VIAject ^tm program. The following table illustrates, for each period presented, our research and development costs by nature of the cost.

 

 

The successful development of our product candidates is highly uncertain. We expect to complete our Phase III clinical trials of VIAject ^tm and intend to submit an NDA to the FDA for this product candidate in 2008. We are currently conducting a Phase I clinical trial of VIAtab ^tm in patients with Type 1 diabetes. If the trial is successful, we plan to initiate later stage clinical trials of VIAtab ^tm in 2008. In addition, we expect to submit investigational new drug applications to the FDA for our preclinical product candidates, VIAmass ^tm and VIAcal ^tm , in 2008. However, at this time, we cannot reasonably estimate or know the nature, specific timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

 

 

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of the clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of that clinical development program.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries and related expenses for personnel, including stock-based compensation expenses, in our executive, legal, accounting, finance and information technology functions. Other general and administrative expenses include facility-related costs not otherwise allocated to research and development expense, travel expenses, costs associated with industry conventions and professional fees, such as legal and accounting fees and consulting costs.

 

In the year ending September 30, 2007 and in subsequent periods, we anticipate that our general and administrative expenses will increase, among others, for the following reasons:

 

 

Interest Income and Interest Expense

 

Interest income consists of interest earned on our cash and cash equivalents. In November 2006, our board of directors approved investment policy guidelines, the primary objectives of which are the preservation of capital, the maintenance of liquidity, maintenance of appropriate fiduciary control and maximum return, subject to our business objectives and tax situation.

 

Our interest expense consists of interest incurred on promissory notes that we issued in 2006 as part of our mezzanine financing. In July 2006, in connection with our Series B convertible preferred stock financing, all of these promissory notes were repaid with shares of our Series B convertible preferred stock and warrants. As of September 30, 2006, we had no interest-bearing indebtedness outstanding.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

While our significant accounting policies are more fully described in Note 2 to our financial statements appearing at the end of this prospectus, we believe that the following accounting policies, which we have discussed with our audit committee, are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.

 

Preclinical Study and Clinical Trial Accruals

 

In preparing our financial statements, we must estimate accrued expenses pursuant to contracts with multiple research institutions, clinical research organizations and contract manufacturers that conduct and manage preclinical studies, clinical trials and manufacture product for these trials on our behalf. This process involves communicating with relevant personnel to identify services that have been performed on our behalf and estimating the level of services performed and the associated costs incurred for services when we have not yet been invoiced for or otherwise notified of the actual cost. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. The financial terms of these agreements vary and may result in uneven payment flows. To date, we have not adjusted our estimates at any balance sheet date in any material amount. Examples of preclinical study, clinical trial and manufacturing expenses include the following:

 

 

Stock-Based Compensation and Valuation of Equity

 

Effective October 1, 2005, we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment , or SFAS No. 123(R), which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. We adopted SFAS No. 123(R) using the retrospective method. Under this method, compensation cost is measured and recognized for all share-based payments granted subsequent to October 1, 2004. We issued no options prior to that date.

 

The fair value of the stock underlying the options is a significant factor in determining credits or charges to operations appropriate for the stock-based payments to both employees and non-employees. Between December 23, 2004 and May 27, 2005, we granted options to purchase an aggregate of 544,000 shares of our common stock at an exercise price of $1.00 per share. Between November 1, 2005 and November 1, 2006, we granted options to purchase an aggregate of 851,500 shares of our common stock at an exercise price of $4.00 per share. In December 2006, we granted options to purchase an aggregate of 332,197 shares of our common stock at an exercise price of $8.95 per share.

 

For the options granted prior to December 2006, our board of directors did not perform a contemporaneous valuation of our common stock, but determined the exercise price for the shares of common stock underlying the options primarily based on the last price paid by outside investors for our preferred stock. In connection with the preparation of our financial statements for this offering, we engaged, for the first time, American Appraisal, Inc, or American Appraisal, an unrelated valuation specialist, to perform both a retrospective valuation of our common stock prior to December 2006 and a contemporaneous valuation with respect to the options granted in December 2006.

 

American Appraisal utilized two primary valuation methodologies to determine our enterprise value, the market valuation approach and the discounted cash flow valuation approach. American Appraisal determined the fair value of each type of equity instrument we had issued using the weighted-probability expected return method as recommended by the American Institute of Certified Public Accountants in its practice aid entitled Valuation of Privately Held Company Equity Securities Issued as Compensation, or the Practice Aid.

 

Contemporaneous Valuation Methodology.   American Appraisal, in performing its contemporaneous valuation, considered our completion of Phase II clinical trials of VIAject ^tm , our initiation of Phase III clinical trials of VIAject ^tm and the commencement of manufacturing commercial batches of VIAject ^tm .

 

In applying the market valuation methodology, American Appraisal, reviewed the price paid by outside investors for our preferred stock, the market capitalizations of comparable publicly-traded companies that are in our market segment and are conducting clinical trials in similar phases, which we refer to as guideline companies, and initial public offering prices of guideline companies expressed as a multiple of prices at which their stock was sold in private placements prior to such initial offering. American Appraisal discounted these prices at various rates to account for the lack of marketability of a private company’s securities.

 

In applying the discounted cash flow valuation, American Appraisal discounted to present value our future operating cash flow projected by management at rates of returns that reflected the business and financial risk of achieving such cash flow. In applying this valuation methodology, American Appraisal probability-weighted the scenarios in which we:

 

 

 

 

 

Retrospective Valuation Methodology.   In conducting its retrospective valuations, American Appraisal considered a combination of market and discounted cash flow valuation approaches and a probability-weighted expected return valuation methodology that is consistent with the practices recommended by the Practice Aid. In applying these valuation methodologies, American Appraisal considered the following factors:

 

 

 

 

 

 

American Appraisal also utilized the market valuation approach and the discounted cash flow valuation approach as described under contemporaneous valuation methodology.

 

American Appraisal’s Conclusions.   For both the retrospective and contemporaneous valuations, American Appraisal selected probabilities to the four relevant scenarios based on:

 

 

 

 

American Appraisal determined the fair value of our equity instruments based upon the factors listed above and other information available on the measurement dates. Specifically, American Appraisal determined that the

fair market value of our common stock was $0.59 per share as of July 14, 2005, $3.32 per share as of July 19, 2006 and $8.95 per share as of December 19, 2006.

 

Accounting Treatment.   We selected the Black-Scholes valuation model as the most appropriate valuation method for stock option grants to employees and members of our board of directors. The fair value of these stock option grants is estimated as of their date of grant using the Black-Scholes valuation method. Our compensation committee adopted the valuations of American Appraisal in determining the fair market value of our common stock for the Black-Scholes model. For all options granted prior to July 14, 2005, we used a fair market value of $0.59 per share; for options granted between July 15, 2005 and July 19, 2006, we used a fair market value of $3.32 per share; and for options granted after July 19, 2006, we used a fair market value of $8.95 per share.

 

Because we are a private company and therefore lack company-specific historical and implied volatility information, we based our estimate of expected volatility on implied volatility of comparable companies that are publicly traded and which have the following similarities: industry, therapeutic focus, clinical trial phase and dividend yield. We intend to continue to consistently apply this process using the same comparable companies until a sufficient amount of historical information regarding the volatility of our share price becomes available. We use the average of (1) the weighted average vesting period and (2) the contractual life of the option, eight years, as the estimated term of the option. The risk free rate of interest for periods within the contractual life of the stock option award is based on the yield of a U.S. Treasury strip on the date the award is granted with a maturity equal to the expected term of the award. We estimate forfeitures based on actual forfeitures during our limited history. Additionally, we have assumed that dividends will not be paid.

 

For stock warrants or options granted to non-employees and non-directors, primarily consultants serving on our Scientific Advisory Board, we measure fair value of the equity instruments utilizing the Black-Scholes method, if that value is more reliably measurable than the fair value of the consideration or service received. The fair value of these equity investments are periodically revalued as the options vest and are recognized as expense over the related period of service or the vesting period, whichever is longer. As of December 31, 2006, we had issued to these non-employees options to purchase an aggregate of 377,000 shares of our common stock. Because we must revalue these options for accounting purposes each reporting period, the amount of stock-based compensation expense related to these non-employee options will increase or decrease, based on changes in the price of our common stock. For the three months ended December 31, 2006, the stock-based compensation expense related to these options was $130,000, of which $21,000 is reflected in research and development expenses and $109,000 is reflected in general and administrative expenses. For the year ended September 30, 2006, the stock-based compensation expense related to these options was $895,000, of which $198,000 is reflected in research and development expenses and $697,000 is reflected in general and administrative expenses.

 

Income Taxes

 

As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. As of September 30, 2006, we had federal net operating loss carryforwards of $9.8 million, Connecticut state net operating loss carryforwards of $9.8 million and federal research and development tax credit carryovers of approximately $0.3 million, all of which expire starting in 2024.

 

The Internal Revenue Code contains provisions that may limit the net operating loss and credit carryforwards available to be used in any given year as a result of certain historical changes in the ownership interests of significant stockholders. As a result of the cumulative impact of our equity issuances over the past two years, a change of ownership, as defined in the Internal Revenue Code occurred upon our issuance of Series B convertible preferred stock in July 2006. As a result, our total net operating losses will be subject to an annual base limitation.

 

At September 30, 2006, we recorded a 100% valuation allowance against our net deferred tax asset of approximately $4.5 million, as our management believes it is uncertain that it will be fully realized. If we determine in the future that we will be able to realize all or a portion of our net deferred tax asset, an adjustment to the deferred tax valuation allowance would increase net income in the period in which we make such a determination.

 

Results of Operations

 

Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005

 

Revenue.   We did not recognize any revenue during the three months ended December 31, 2006 or 2005.

 

Research and Development Expenses.   Research and development expenses were $2.5 million for the three months ended December 31, 2006, an increase of $1.6 million, or 177.8%, from $0.9 million for the three months ended December 31, 2005. This increase was primarily related to increased research and development costs related to our continued development of VIAject ^tm , for which we began to incur significant expenses relating to our two pivotal Phase III clinical trials that we commenced in September 2006. Specific increases in research and development expenses included $1.0 million related to increased clinical trial expenses during the three months ended December 31, 2006 and $0.5 million related to increased manufacturing expenses incurred in the three months ended December 31, 2006 for the process development, scale-up and manufacture of commercial batches of VIAject ^tm to support our clinical trials and regulatory submissions. Research and development expenses for the three months ended December 31, 2006 include $38,000 in stock-based compensation expense related to options granted to employees and $21,000 in stock-based compensation expense related to options granted to non-employees.

 

We expect our research and development expenses to increase in the future as a result of increased development costs related to our clinical VIAject ^tm and VIAtab ^tm product candidates and as we seek to advance our preclinical VIAmass ^tm and VIAcal ^tm product candidates into clinical development. The timing and amount of these expenses will depend upon the outcome of our ongoing clinical trials, particularly the costs associated with our ongoing Phase III clinical trials of VIAject ^tm and our Phase I and planned Phase II clinical trials of VIAtab ^tm . The timing and amount of these expenses will also depend on the potential advancement of our preclinical programs into clinical development and the related expansion of our clinical development and regulatory organization, regulatory requirements and manufacturing costs.

 

General and Administrative Expenses.   General and administrative expenses were $1.3 million for the three months ended December 31, 2006, an increase of $0.9 million, or 225%, from $0.4 million for the three months ended December 31, 2005. An increase in compensation-related expenses accounted for $0.7 million of this increase. Of this amount, $0.2 million was attributable to stock-based compensation expenses and $0.1 million was related to increased bonus payments. The balance of the increase was primarily attributable to higher levels of legal and accounting fees.

 

We expect our general and administrative expenses to continue to increase in the future as a result of an increased payroll as we add personnel necessary for the management of the anticipated growth of our business, expanded infrastructure and higher consulting, legal, accounting, investor relations and other expenses associated with being a public company.

 

Interest Income.   Interest income increased to $190,000 for the three months ended December 31, 2006 from $1,000 for the three months ended December 31, 2005. The increase was due to our higher balances of cash and cash equivalents in 2006, resulting from the $21.2 million in net cash proceeds that we received from our Series B convertible preferred stock and warrant financing in July 2006.

 

Net Loss and Net Loss per Share.   Net loss was $3.6 million, or $(0.47) per share, for the three months ended December 31, 2006 compared to a net loss of $1.3 million, or $(0.17) per share, for the three months ended December 31, 2005. The increase in net loss was primarily attributable to the increased expenses described above. We expect our losses to increase in the future as we incur increased clinical development costs to advance our VIAject ^tm and VIAtab ^tm product candidates through the clinical development process and as our general and administrative costs rise as our organization grows to support this higher level of clinical activity.

 

Year Ended September 30, 2006 Compared to Year Ended September 30, 2005

 

Revenue.   We did not recognize any revenue during the years ended September 30, 2006 or 2005.

 

Research and Development Expenses.   Research and development expenses were $6.0 million for the year ended September 30, 2006, an increase of $3.4 million, or 130.8%, from $2.6 million for the year ended September 30, 2005. This increase was primarily attributable to increased research and development costs related to our continued development of VIAject ^tm , for which we conducted two Phase II clinical trials during the year

ended September 30, 2006. We also commenced our two pivotal Phase III clinical trials for VIAject ^tm in September 2006, for which we incurred trial start-up costs during the fiscal year. Specific increases in research and development expenses included $1.5 million related to increased clinical trial expenses in 2006; $1.1 million related to increased manufacturing expenses in 2006 for the process development, scale-up and manufacture of commercial batches of VIAject ^tm to support our clinical trials and regulatory submissions; and $0.5 million related to increased personnel costs and consulting fees. Research and development expenses for the year ended September 30, 2006 include $26,000 in stock-based compensation expense related to options granted to employees and $198,000 in stock-based compensation expense related to options granted to non-employees.

 

General and Administrative Expenses.   General and administrative expenses were $1.5 million for the year ended September 30, 2006, an increase of $1.0 million, or 200%, from $0.5 million for the year ended September 30, 2005. Our initiation of performance-based bonuses accounted for approximately $0.3 million of that increase. The balance of the increase was primarily attributable to higher levels of legal and consulting fees. General and administrative expenses for the year ended September 30, 2006 include $267,000 in stock-based compensation expense related to options granted to employees and $697,000 in stock-based compensation expense related to options granted to non-employees.

 

Interest and Other Income.   Interest and other income increased to $182,000 for the year ended September 30, 2006 from $9,000 for the year ended September 30, 2005. The increase was due to our higher balances of cash and cash equivalents in 2006, resulting from the $21.2 million in cash proceeds that we received from our Series B convertible preferred stock and warrant financing in July 2006.

 

Interest Expense.   Interest expense of approximately $78,000 for the year ended September 30, 2006 consisted of interest incurred on the promissory notes issued in our mezzanine financing. In July 2006, all of the promissory notes were repaid using shares of our Series B convertible preferred stock and warrants in connection with our Series B convertible preferred stock financing. As of September 30, 2006, we had no interest-bearing indebtedness outstanding.

 

Loss on Settlement of Debt.   In July 2006, we completed our Series B convertible preferred stock financing. In connection with that transaction, we exercised our option to repay the promissory notes that we had issued in our mezzanine financing with shares of Series B convertible preferred stock and warrants. Due to the contractual terms of our mezzanine financing, these investors effectively received a 25% premium on the principal amount of the promissory notes that were a part of the mezzanine financing units. As a result of this 25% premium, we recorded a loss on settlement of debt of $0.6 million. No equivalent expense was incurred in the prior year.

 

Net Loss and Net Loss per Share.   Net loss was $7.9 million, or $(1.05) per share, for the year ended September 30, 2006 compared to $3.1 million, or $(0.41) per share, for the year ended September 30, 2005. The increase in net loss was primarily attributable to the increased expenses described above.

 

Year Ended September 30, 2005 Compared to Period Ended September 30, 2004

 

We were incorporated in December 2003 and commenced active operations in January 2004. Accordingly, the following comparison of our results of operations for the year ended September 30, 2005 to the period ended September 30, 2004 is a comparison of a full year of operations to our initial ten months of operations.

 

Revenue.   We did not recognize any revenue during the year ended September 30, 2005 or the period from December 3, 2003 to September 30, 2004.

 

Research and Development Expenses.   Research and development expenses were $2.6 million for the year ended September 30, 2005 compared to $0.6 million for the period ended September 30, 2004. The largest component of the $2.0 million increase was an increase of $0.8 million from 2004 to 2005 in preclinical and clinical development expenses, including costs related to the initiation of Phase I clinical trials for VIAject ^tm and VIAtab ^tm as well as the process development and scale-up of clinical supplies to support those trials. An additional $0.6 million of this increase was attributable to increased personnel costs as six new members joined our research staff and clinical development group. The remainder of the increase was primarily attributable to additional expenses for consulting, overhead and research supplies.

 

General and Administrative Expenses.   General and administrative expenses were $0.5 million for the year ended September 30, 2005 compared to $0.2 million for the period ended September 30, 2004. This $0.3 million

increase was almost exclusively attributable to increased personnel costs, including an increase in compensation expense and the costs associated with the initiation of a health plan for our employees.

 

Interest and Other Income.   As a result of our low balances of cash and cash equivalents prior to our June 2006 Series B convertible preferred stock financing, no meaningful interest and other income was earned in either the year ended September 30, 2005 or the period ended September 30, 2004.

 

Net Loss and Net Loss per Share.   Net loss was $3.1 million, or $(0.41) per share, for the year ended September 30, 2005 compared to $0.8 million, or $(0.10) per share, for the period ended September 30, 2004. The increase in net loss is primarily attributable to the increased expenses described above.

 

 

Our future capital requirements will depend on many factors, including:

 

 

We do not anticipate generating product revenue for the next few years. In the absence of additional funding, we expect our continuing operating losses to result in increases in our cash used in operations over the next several quarters and years. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. We do not currently have any commitments for future external funding.

 

Additional equity or debt financing or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our planned commercialization efforts or obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain drug candidates that we might otherwise seek to develop or commercialize independently or enter into corporate collaborations at a later stage of development. In addition, any future equity funding will dilute the ownership of our equity investors.

 

 

In October 2006, we entered into a lease for a second facility for a term of 38 months. The lease provides for annual basic lease payments of $27,000, plus operating expenses. There were no other significant changes to our contractual obligations and commitments between September 30, 2006 and December 31, 2006.

 

Quantitative and Qualitative Disclosures about Market Risks

 

Our exposure to market risk is limited to our cash, cash equivalents and marketable securities. We invest in high-quality financial instruments, as permitted by the terms of our investment policy guidelines. Currently, our investments are limited to money market funds. In the future, we may add high-quality federal agency notes,

corporate debt securities, United States treasury notes and other securities, including long-term debt securities, to our investment portfolio. A portion of our investments may be subject to interest rate risk and could fall in value if interest rates were to increase. Our current intention is to hold longer term investments to maturity. The effective duration of our portfolio is currently less than one year, which we believe limits interest rate and credit risk. We do not hedge interest rate exposure.

 

Because most of our transactions are denominated in United States dollars, we do not have any material exposure to fluctuations in currency exchange rates.

 

Recent Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Earlier application is encouraged. We anticipate that the adoption of this accounting pronouncement will not have a material effect on our financial statements.

 

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes , or FIN 48. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are in the process of evaluating the effect that FIN 48 will have on our financial statements.

 

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments , an amendment of FASB Statements No. 133 and 140. This statement permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that would otherwise have to be accounted for separately. The new statement also requires companies to identify interest in securitized financial assets that are freestanding derivatives or contain embedded derivatives that would have to be accounted for separately, clarifies which interest-and-principal-only strips are subject to Statement 133 and amends Statement 140 to revise the conditions of a qualifying special purpose entity due to the new requirement to identify whether interests in securitized financial assets are freestanding derivatives or contain embedded derivatives. We have chosen to adopt this pronouncement on October 1, 2006 and it did not have a material effect on our financial statements.

 

In December 2006, the FASB issued FASB Staff Position No. 00-19-2, Accounting for Registration Payment Arrangements. This Staff Position specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies. This Staff Position further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. This Staff Position shall be effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance of this Staff Position. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of this Staff Position, this guidance shall be effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. We have adopted the Staff Position as of October 1, 2006, and it did not have any affect on our financial statements.

 

Overview

 

We are a specialty pharmaceutical company focused on the development and commercialization of innovative treatments for endocrine disorders such as diabetes and osteoporosis, which may be safer, more effective and convenient. We develop our product candidates by applying our proprietary formulation technologies to existing drugs in order to improve their therapeutic results. Our initial development efforts are focused on peptide hormones. We have two insulin product candidates currently in clinical trials for the treatment of diabetes. Additionally, we have two preclinical product candidates for the treatment of osteoporosis, one with parathyroid hormone 1-34 and the other with salmon calcitonin. Our most advanced product candidate is VIAject ^tm , a proprietary injectable formulation of recombinant human insulin designed to be absorbed into the blood faster than currently marketed rapid-acting insulin products. We believe VIAject ^tm can improve the management of blood glucose levels in patients with diabetes by more closely mimicking the natural first-phase insulin release that healthy individuals experience at meal-time. We are currently conducting two pivotal Phase III clinical trials of VIAject ^tm , one in patients with Type 1 diabetes and the other in patients with Type 2 diabetes. We expect to complete these two trials and intend to submit an NDA under Section 505(b)(2) of the FFDCA to the U.S. Food and Drug Administration in 2008.

 

Diabetes is a disease characterized by abnormally high levels of blood glucose and inadequate levels of insulin. Glucose is a simple sugar used by all the cells of the body to produce energy and support life. Humans need a minimum level of glucose in their blood at all times to stay alive. Insulin is a peptide hormone naturally secreted by the pancreas to regulate the body’s management of glucose. When a healthy individual begins a meal, the pancreas releases a natural spike of insulin called the first-phase insulin release, which is critical to the body’s overall control of glucose. Virtually all patients with diabetes lack the first-phase insulin release. All patients with Type 1 diabetes must treat themselves with meal-time insulin injections. As the disease progresses, patients with Type 2 diabetes also require meal-time insulin. However, none of the currently marketed meal-time insulin products adequately mimics the first-phase insulin release. As a result, patients using insulin typically have inadequate levels of insulin in their systems at the start of a meal and too much insulin in their systems between meals. This, in turn, results in the lack of adequate glucose control associated with diabetes. The long-term adverse effects of this lack of adequate glucose control include blindness, loss of kidney function, nerve damage and loss of sensation and poor circulation in the periphery, which in some severe cases, may lead to amputations.

 

Advances in insulin technology in the 1990s led to the development of new molecules, referred to as rapid-acting insulin analogs, which are similar to insulin, but are absorbed into the blood more rapidly. These rapid-acting insulin analogs had sales in excess of 2.3 billion in 2005 according to IMS Health, a leading provider of pharmaceutical market data.

 

We have conducted Phase I and Phase II clinical trials comparing the performance of VIAject ^tm to Humalog ^® , the largest selling rapid-acting insulin analog in the United States, and Humulin ^® R, a form of recombinant human insulin. In these trials, we observed that VIAject ^tm produced a release profile into the blood that more closely approximates the natural first-phase insulin release seen in healthy individuals following a meal. In September 2006, we initiated two pivotal Phase III clinical trials for VIAject ^tm , which will treat 400 patients with Type 1 diabetes and 400 patients with Type 2 diabetes over a six-month period.

 

In addition to VIAject ^tm , we are developing VIAtab ^tm , a sublingual, or below the tongue, tablet formulation of insulin. We are currently conducting a Phase I clinical trial of VIAtab ^tm in patients with diabetes. We believe that VIAtab ^tm has the potential to rapidly deliver insulin, while sparing patients from the unpleasant aspects of injection therapy. We are developing VIAtab ^tm as a potential treatment for patients with Type 2 diabetes who are in the early stages of their disease. In addition to our clinical-stage insulin programs, our preclinical product candidates for the treatment of osteoporosis are VIAmass ^tm and VIAcal ^tm . VIAmass ^tm is a sublingual rapid-acting formulation of parathyroid hormone 1-34, or PTH 1-34. VIAcal ^tm is a sublingual rapid-acting formulation of salmon calcitonin. We expect to submit investigational new drug applications, or INDs, for these product candidates to the FDA in 2008.

 

We have developed all of our product candidates utilizing our proprietary VIAdel ^tm technology which allows us to study the interaction between peptide hormones and small molecules. We use our technology to reformulate existing peptide drugs with small molecule ingredients that are generally regarded as safe by the FDA so as to improve their therapeutic effect by entering the blood rapidly and in greater quantities. We believe that this approach to drug development will allow us to utilize Section 505(b)(2) of the FFDCA for FDA approval of our product candidates. Section 505(b)(2) provides for a type of NDA that allows expedited development of new formulations of chemical entities and biological compounds that have already undergone extensive clinical trials and been approved by the FDA. Both the time and cost of development of a new product can be substantially less under a Section 505(b)(2) NDA than under a full NDA.

 

Our Strategy

 

Our goal is to build a leading specialty pharmaceutical company focused on the development and commercialization of innovative treatments for endocrine disorders, which may be safer, more effective and convenient. To achieve our goal, we are pursuing the following strategies:

 

 

 

 

 

Diabetes and the Insulin Market

 

Diabetes Overview

 

Glucose is a simple sugar used by all the cells of the body to produce energy and support life. Humans need a minimum level of glucose in their blood at all times to stay alive. The primary manner in which the body produces blood glucose is through the digestion of food. When a person is not getting this glucose from food digestion, glucose is produced from stores and released by the liver. The body’s glucose levels are regulated by insulin. Insulin is a peptide hormone that is naturally secreted by the pancreas. Insulin helps glucose enter the body’s cells to provide a vital source of energy.

 

When a healthy individual begins a meal, the pancreas releases a natural spike of insulin called the first-phase insulin release. In addition to providing sufficient insulin to process the glucose coming into the blood from digestion of the meal, the first-phase insulin release acts as a signal to the liver to stop making glucose while digestion of the meal is taking place. Because the liver is not producing glucose and there is sufficient additional insulin to process the glucose from digestion, the blood glucose levels of healthy individuals remain relatively constant and their blood glucose levels do not become too high.

 

Diabetes is a disease characterized by abnormally high levels of blood glucose and inadequate levels of insulin. There are two major types of diabetes — Type 1 and Type 2. In Type 1 diabetes, the body produces no insulin. In the early stages of Type 2 diabetes, although the pancreas does produce insulin, either the body does not produce the insulin at the right time or the body’s cells ignore the insulin, a condition known as insulin resistance. According to the Centers for Disease Control and Prevention, or CDC, Type 2 diabetes is the more prevalent form of the disease, affecting approximately 90% to 95% of all people diagnosed with diabetes.

 

Even before any other symptoms are present, one of the first effects of Type 2 diabetes is the loss of the meal-induced first-phase insulin release. In the absence of the first-phase insulin release, the liver will not receive its signal to stop making glucose. As a result, the liver will continue to produce glucose at a time when the body begins to produce new glucose through the digestion of the meal. As a result, the blood glucose level of patients with diabetes goes too high after eating, a condition known as hyperglycemia. Hyperglycemia causes glucose to attach unnaturally to certain proteins in the blood, interfering with the proteins’ ability to perform their normal function of maintaining the integrity of the small blood vessels. With hyperglycemia occurring after each meal, the tiny blood vessels eventually break down and leak. The long-term adverse effects of hyperglycemia include blindness, loss of kidney function, nerve damage and loss of sensation and poor circulation in the periphery, potentially requiring amputation of the extremities.

 

Between two and three hours after a meal, an untreated diabetic’s blood glucose becomes so elevated that the pancreas receives a signal to secrete an inordinately large amount of insulin. In a patient with early Type 2 diabetes, the pancreas can still respond and secretes this large amount of insulin. However, this occurs at the time when digestion is almost over and blood glucose levels should begin to fall. This inordinately large amount of insulin has two detrimental effects. First, it puts an undue extreme demand on an already compromised pancreas, which may lead to its more rapid deterioration and eventually render the pancreas unable to produce insulin. Second, too much insulin after digestion leads to weight gain, which may further exacerbate the disease condition.

 

The figure below, which is derived from an article in the New England Journal of Medicine , illustrates the differences in the insulin release profiles of a healthy individual and a person in the early stages of Type 2 diabetes. In response to an intravenous glucose injection, which simulates eating a meal, the healthy individual produces the first-phase insulin release. In contrast, the Type 2 diabetic lacks the first-phase insulin release and releases the insulin more slowly and over time. As a result, in the early stages of the disease, the Type 2 diabetic’s insulin level is too low at the initiation of a meal and too high after meal digestion.

 

First Phase Insulin Release

 

 

Current Treatments for Diabetes and their Limitations

 

Because patients with Type 1 diabetes produce no insulin, the primary treatment for Type 1 diabetes is daily intensive insulin therapy. The treatment of Type 2 diabetes typically starts with management of diet and exercise. Although helpful in the short-run, treatment through diet and exercise alone is not an effective long-term solution for the vast majority of patients with Type 2 diabetes. When diet and exercise are no longer sufficient, treatment commences with various non-insulin oral medications. These oral medications act by increasing the amount of insulin produced by the pancreas, by increasing the sensitivity of insulin-sensitive cells, by reducing the glucose output of the liver or by some combination of these mechanisms. These treatments are limited in their ability to manage the disease effectively and generally have significant side effects, such as weight gain and hypertension. Because of the limitations of non-insulin treatments, many patients with Type 2 diabetes deteriorate over time and eventually require insulin therapy to support their metabolism.

 

Insulin therapy has been used for more than 80 years to treat diabetes. This therapy usually involves administering several injections of insulin each day. These injections consist of administering a long-acting basal injection one or two times per day and an injection of a fast acting insulin at meal-time. Although this treatment regimen is accepted as effective, it has limitations. First, patients generally dislike injecting themselves with insulin due to the inconvenience and pain of needles. As a result, patients tend not to comply adequately with the prescribed treatment regimens and are often improperly medicated.

 

More importantly, even when properly administered, insulin injections do not replicate the natural time-action profile of insulin. In particular, the natural spike of the first-phase insulin release in a person without diabetes results in blood insulin levels rising within several minutes of the entry into the blood of glucose from a meal. By contrast, injected insulin enters the blood slowly, with peak insulin levels occurring within 80 to 100 minutes following the injection of regular human insulin.

 

A potential solution is the injection of insulin directly into the vein of diabetic patients immediately before eating a meal. In studies of intravenous injections of insulin, patients exhibited better control of their blood glucose for 3 to 6 hours following the meal. However, for a variety of medical reasons, intravenous injection of insulin before each meal is not a practical therapy.

 

One of the key improvements in insulin treatments was the introduction in the 1990s of rapid-acting insulin analogs, such as Humalog ^® , Novolog ^® and Apidra ^® . However, even with the rapid-acting insulin analogs, peak insulin levels typically occur within 50 to 70 minutes following the injection. Because the rapid-acting insulin analogs do not adequately mimic the first-phase insulin release, diabetics using insulin therapy continue to have inadequate levels of insulin present at the initiation of a meal and too much insulin present between meals. This lag in insulin delivery can result in hyperglycemia early after meal onset. Furthermore, the excessive insulin between meals may result in an abnormally low level of blood glucose known as hypoglycemia. Hypoglycemia can result in loss of mental acuity, confusion, increased heart rate, hunger, sweating and faintness. At very low glucose levels, hypoglycemia can result in loss of consciousness, coma and even death. According to the American Diabetes Association, or ADA, insulin-using diabetic patients have on average 1.2 serious hypoglycemic events per year, many of which events require hospital emergency room visits by the patients.

 

Market Opportunity

 

The World Health Organization estimates that more than 180 million people worldwide have diabetes and that this number is likely to more than double by 2030. The CDC estimates that approximately 20.8 million people in the United States, or 7.0% of the overall population, suffer from diabetes, with 1.5 million new cases diagnosed in 2005. Diabetes is currently the sixth leading cause of death by disease and is the leading cause of new cases of kidney disease and non-traumatic lower limb amputations and blindness among young adults.

 

Despite the limitations of currently available insulin therapies, the ADA estimates that approximately $12 billion was spent on insulin and related delivery supplies in 2002. The rapid-acting insulin analogs have come to dominate the market for meal-time insulin. According to IMS Health, sales of rapid-acting insulin analogs were in excess of $2.3 billion in 2005.

 

Because the time-course of insulin delivery to the blood plays such an important role in overall glucose control, we believe that there is significant market potential for insulin products that reach the blood more rapidly than the insulin analogs. In addition, because of the pain and inconvenience of insulin injection, we believe that there is significant market potential for rapid-acting insulin products that are delivered by means other than injection.

 

The Biodel Solution

 

Our two most advanced clinical programs are VIAject ^tm , an injectable formulation of insulin, and VIAtab ^tm , a sublingual formulation of insulin. We believe these product candidates may change the way Type 1 and Type 2 diabetic patients are treated by improving the efficacy, safety and ease-of-use of insulin. Based upon our preclinical and clinical data, if approved, VIAject ^tm may be the first commercially available drug to produce a profile of insulin levels in the blood that approximates the natural first-phase insulin release normally seen in persons without diabetes following a meal.

 

VIAject ^tm

 

VIAject ^tm is our proprietary formulation of injectable human insulin to be taken immediately prior to a meal or at the end of a meal. We formulated VIAject ^tm using our VIAdel ^tm technology to combine recombinant human insulin with specific ingredients generally regarded as safe by the FDA. VIAject ^tm is designed to be absorbed into the blood faster than the currently marketed rapid-acting insulin analogs. One of the key features of our formulation of insulin is that it allows the insulin to disassociate, or separate, from the six molecule, or hexameric, form to the single molecule, or monomeric, form and prevents re-association to the hexameric form. We believe that by favoring the monomeric form, VIAject ^tm allows for more rapid delivery of insulin into the blood as the human body requires insulin to be in the form of a single molecule before it can be absorbed into the body to produce its desired biological effects. Because most human insulin that is sold for injection is in the hexameric form, the injected

insulin appears to the body to be six times its actual size. This makes it more difficult for the body to absorb, as the insulin hexamer must first disassociate to form double insulin molecules and then single insulin molecules.

 

Potential Advantages of VIAject ^tm over Existing Insulin Treatments

 

We believe VIAject ^tm offers a number of potential advantages over currently available injectable insulin products.

 

 

 

 

Clinical Trials of VIAject ^tm

 

Phase I.   In 2005, we completed a Phase I clinical trial of VIAject ^tm . This was a single center, open label, five-way crossover study in which each of the ten healthy volunteers in the trial was exposed to the following five separate treatment conditions: three separate doses of VIAject ^tm , one dose of Humulin ^® R, a regular human insulin, and one dose of Humalog ^® , a rapid-acting insulin analog. Volunteers received three separate injections of VIAject ^tm at dose levels of 12 international units, or IU, 6 IU and 3 IU. Volunteers also received one 12 IU injection for each of Humulin ^® R and Humalog ^® . International units are a standardized measure of the potency of insulin. All volunteers received insulin subcutaneously. After a screening visit, insulin administration and the evaluation procedures were performed during five subsequent treatment days.

 

The study employed a “glucose clamp” procedure, which is the standard procedure for safely studying the effects of insulin in healthy individuals. In the “glucose clamp” procedure, glucose is automatically infused into the volunteer’s blood so that his or her blood glucose will be maintained at a healthy normal level of 90mg of glucose per deciliter of blood. The effect of insulin is to lower blood glucose, thereby requiring an infusion of glucose to maintain the normal glucose level. The rate at which glucose must be infused is called the glucose infusion rate, or GIR.

 

The primary objective of this trial was to estimate the pharmacodynamic activities of the applied insulins including the dose responsiveness of VIAject ^tm . Pharmacodynamics refers to the time-course and ability of the insulin to lower blood glucose after administration. The primary pharmacodynamic measure in this trial was the GIR, from which we were able to derive several parameters, including the following:

 

 

 

The secondary objectives of this trial were to evaluate the safety and the pharmacokinetic profile after a single application of VIAject ^tm in comparison to Humulin ^® R and Humalog ^® . Pharmacokinetics refers to the time-course and quantity of insulin in the serum of the blood of an individual after application of insulin.

 

The table below indicates, for each treatment condition in the trial, the mean time to 50% of maximum GIR: