As filed with the Securities and Exchange Commission on
October 24, 2006
Registration
No.
333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
Aradigm Corporation
(Exact name of Registrant as specified in its charter)
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California
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2834
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94-3133088
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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3929 Point Eden Way
Hayward, California 94545
(510) 265-9000
(Address, including zip code, and telephone number, including
area code, of Registrant’s principal executive offices)
Dr. Igor Gonda
President and Chief Executive Officer
ARADIGM CORPORATION
3929 Point Eden Way
Hayward, California 94545
(510) 265-9000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
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James C. Kitch, Esq.
Peter H. Werner, Esq.
Tarak I. Shah, Esq.
COOLEY GODWARD KRONISH LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
(650) 843-5000
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Jeffrey S. Marcus, Esq.
J. Nathan Jensen, Esq.
MORRISON & FOERSTER LLP
1290 Avenue of the Americas
New York, New York 10104
(212) 468-8000
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Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the effective date of this
Registration Statement.
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, 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
CALCULATION OF REGISTRATION FEE
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Title of Each Class
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of Securities to be
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Amount Being
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Maximum Offering
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Proposed Maximum
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Amount of
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Registered
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Registered (1)
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Price Per Security (2)
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Aggregate Offering Price (2)
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Registration Fee
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Common Stock, no par value
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23,000,000
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$1.42
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$32,660,000
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$3,494.62
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(1)
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Includes 3,000,000 shares that the underwriter has the
option to purchase to cover over-allotments, if any.
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(2)
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Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the
Securities Act of 1933, as amended.
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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 of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information
in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state
where the offer or sale is not
permitted.
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Subject to
completion,
dated ,
2006
20,000,000 Shares
ARADIGM CORPORATION
Common Stock
We are offering 20,000,000 shares of our common stock. We
have granted the underwriter a
30-day
option to
purchase up to an additional 3,000,000 shares to cover
over-allotments.
Our common stock is quoted on the Nasdaq Capital Market under
the symbol “ARDM.” The last reported sale price of our
common stock on the Nasdaq Capital Market on October 23, 2006
was $1.43 per share.
Investing in our common stock involves risks. See “Risk
Factors” beginning on page 7.
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Per Share
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Total
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Public Offering Price
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$
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$
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Underwriting Discount
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$
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$
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Proceeds to Aradigm (before expenses)
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$
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$
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Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these
securities, or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The underwriter expects to deliver the shares to purchasers
on ,
2006.
PUNK, ZIEGEL & COMPANY
The date of this prospectus
is ,
2006.
TABLE OF CONTENTS
You should rely only on the information contained in this
prospectus. We have not, and the underwriter has not, authorized
anyone to provide you with information that is different. This
prospectus is not an offer to sell, nor is it seeking an offer
to buy, these securities in any jurisdiction where the offer or
sale of these securities 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.
Aradigm
®
,
AERx
®
and the
Aradigm
®
logo are registered trademarks of Aradigm Corporation. This
prospectus also includes other trademarks of Aradigm Corporation
and trademarks of other persons.
This prospectus also contains statistical data that we obtained
from industry publications and reports generated by Business
Insights, Wolters Kluwer PHAST, the Cystic Fibrosis Foundation,
the American Lung Association, the American Diabetes
Association, Datamonitor and Decision Resources. These industry
publications and reports generally indicate that the information
contained therein was obtained from sources believed to be
reliable, but do not guarantee the accuracy and completeness of
such information. Although we believe that the publications and
reports are reliable, we have not independently verified the
data.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information that
you should consider in making your investment decision. Before
investing in our common stock, you should carefully read this
entire prospectus, including our financial statements and the
related notes and the information set forth under the headings
“Risk Factors” and “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations,” in each case included elsewhere in this
prospectus.
Our Business
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of a portfolio of drugs
delivered by inhalation for the treatment of severe respiratory
diseases by pulmonologists. Local delivery of drugs to the
respiratory tract by inhalation for the treatment of respiratory
disease has been shown to be safe and efficacious and to provide
a rapid onset of action in conditions such as asthma, chronic
bronchitis and cystic fibrosis. We have developed a significant
amount of expertise and intellectual property in pulmonary drug
delivery for respiratory and systemic diseases over the last
decade. We have demonstrated in our laboratory research and
clinical trials that our hand-held AERx pulmonary drug delivery
system, with a product candidate currently in Phase 3
clinical trials, is particularly suitable for drugs where highly
efficient and precise delivery to the respiratory tract is
advantageous or essential.
We currently have four respiratory products in active
development: innovative treatments for cystic fibrosis, asthma,
pulmonary arterial hypertension, and inhalation anthrax. Two of
these programs are in collaboration with others. In selecting
our development programs, we seek drugs approved by the United
States Food and Drug Administration, or the FDA, that can
be reformulated for both existing and new indications in
respiratory disease. Our intent is to use our pulmonary delivery
methods and formulations to improve their safety, efficacy and
convenience to patients. We believe that this strategy will
allow us to reduce cost, development time and risk of failure,
when compared to the discovery and development of new chemical
entities. We intend to commercialize our respiratory products
with our own focused sales and marketing force addressing
pulmonary specialty doctors in the United States, where we
believe that a proprietary sales force will enhance the return
to our shareholders. Where our products can benefit a broader
population of patients in the United States or in other
countries, we may enter into co-development, co-promotion or
other marketing arrangements with collaborators, thereby
reducing costs and increasing revenues through license fees,
milestone payments and royalties.
Pulmonary delivery by inhalation is already a widely used, well
accepted method of administration of a variety of drugs for the
treatment of respiratory diseases. Compared to other routes of
administration, inhalation provides local delivery of the drug
to the respiratory tract, offering a number of potential
advantages, including rapid onset of action, less drug required
to achieve the desired therapeutic effect, and reduced side
effects because the rest of the body has lower exposure to the
drug. We believe that there still are significant unmet medical
needs in the respiratory disease market, both to replace
existing therapies that over prolonged use in patients
demonstrate reduced efficacy or increased side effects, as well
as to provide novel treatments to patient populations and for
disease conditions that are inadequately treated. Based on our
analysis of market data from Business Insights and Wolters
Kluwer PHAST, we believe that we could potentially address a
market opportunity currently estimated at approximately
$20 billion, and growing at over 10% per year, for
inhaled treatments of chronic respiratory diseases.
In addition to its use in the treatment of respiratory diseases,
there is also an increasing awareness of the value of the
inhalation route of delivery to administer drugs via the lung
for the systemic treatment of disease elsewhere in the body. For
many drugs, the large and highly absorptive area of the lung
enables bioavailability via pulmonary delivery that could
otherwise only be obtained by injection. We believe that the
features of our AERx delivery system make it more attractive for
many systemic drug applications than alternative methods. The
most advanced product candidate based on the AERx delivery
system is in Phase 3 clinical trials being conducted by our
licensee, Novo Nordisk A/S, to deliver insulin systemically via
the lungs for the treatment of diabetes. We believe particular
opportunities exist for the use of our pulmonary
1
delivery technology for the delivery of biologics, including
proteins, antibodies and peptides, that today must be delivered
by injection, as well as small molecule drugs, where rapid
absorption is desirable. We intend to pursue selected
opportunities for systemic delivery via inhalation by seeking
collaborations that will fund development and commercialization.
We believe that our proprietary formulation and delivery
technologies and our experience in the development and
management of pulmonary clinical programs uniquely position us
to benefit from the opportunities in the respiratory disease
market as well as other pharmaceutical markets that would
benefit from the efficient, non-invasive inhalation delivery of
drugs.
Our Strategy
We have developed a business strategy, comprised of five key
elements, that we believe will allow us to achieve a leading
position in the specialty pharmaceutical market for respiratory
disease therapies.
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We intend to develop a proprietary portfolio of respiratory
disease therapies, where we apply our delivery and formulation
technologies to existing drugs to provide a superior therapeutic
profile or other valuable benefits to the patient when compared
with existing treatment options.
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We will seek to use regulatory pathways that will allow us to
reduce the time, risks and costs associated with product
development.
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As we approach commercialization of our own products, we intend
to establish a specialty sales and marketing force addressing
pulmonologists and subspecialists in the United States.
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We will continue to explore and exploit the potentially broad
applicability of our validated delivery technologies for
systemic applications in collaborations with companies that will
fund development and commercialization.
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We plan to outsource the late stage clinical and commercial
scale manufacturing of our products to conserve our capital for
product development.
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Product Candidates
The following table shows the disease indication and stage of
development for each product candidate in our portfolio.
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Product Candidate
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Indication
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Stage of Development
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Proprietary Programs Under Development
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ARD-3100 (Liposomal ciprofloxacin)
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Cystic Fibrosis (CF)
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Preclinical
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ARD-1100 (Liposomal ciprofloxacin)
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Inhalation Anthrax
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Preclinical
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Collaborative Programs Under Development
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AERx iDMS (Insulin)
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Type 1 and Type 2 Diabetes
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In Phase 3
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ARD-1300 (Hydroxychloroquine)
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Asthma
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In Phase 2
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ARD-1500 (Liposomal treprostinil)
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Pulmonary Arterial Hypertension
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Preclinical
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Our ARD-3100 program for the management of CF represents the
first product candidate that we intend to develop and
commercialize ourselves. We have received orphan drug
designation for this indication from the FDA. We believe that
the local lung delivery of the antibiotic ciprofloxacin in a
sustained release formulation could provide improved treatment
of the debilitating and often life-threatening lung infections
that afflict patients with CF. This program relies on much of
the laboratory and production development efforts, as well as
the preclinical safety database that we have developed, in
conjunction with our ARD-1100 anti-bioterrorism product
candidate for use in the prevention and treatment of inhalation
anthrax and similar life-threatening inhaled infections. The
ARD-1100 program is currently being co-funded by Defence
Research and Development Canada, a division of the Canadian
Department of National Defence. We intend to use the human
safety data to be obtained from the CF product development to
support the approval of the ARD-1100
2
product candidate. We also intend to explore the utility of the
liposomal formulation of ciprofloxacin for other respiratory
diseases including infections associated with chronic
obstructive pulmonary disease.
Our collaborative programs typically involve our proprietary
AERx delivery platform and address larger markets or systemic
conditions in which we anticipate sharing the development costs
and commercialization revenues with our collaborators.
The most advanced program using our AERx technology platform is
AERx iDMS for the treatment of diabetes with inhaled insulin, as
an alternative to injectable insulin, which is being developed
by Novo Nordisk and is now in Phase 3 clinical trials. We
have shown in the development program with AERx iDMS that the
system is capable of delivering insulin into the blood stream
faster than by subcutaneous injection of regular insulin, thus
providing a more convenient, patient-friendly approach to
controlling meal-time glucose levels. The total market for
insulin and insulin analogues worldwide is forecast by Business
Insights to reach $9.8 billion in 2011, of which
$2.0 billion to $3.0 billion is from sales of inhaled
insulin. Pursuant to our agreement with Novo Nordisk, Novo
Nordisk is responsible for and is funding all development,
manufacturing and commercialization activities, and we will be
entitled to receive a royalty on net sales that we estimate will
average five percent over the life of the product. Novo Nordisk
announced in October 2006 that it expects commercial launch of
the product in 2010.
The ARD-1300 program is investigating a novel aerosolized
formulation of hydroxychloroquine, or HCQ, as an inhaled
treatment for asthma, under a collaboration with APT
Pharmaceuticals, a privately held biotechnology company. HCQ is
an approved drug currently used orally as an alternative to
steroid treatment in other indications. We believe the ARD-1300
product candidate could have significant potential applicability
as a safe and effective alternative to steroid treatment of
asthma.
The ARD-1500 program, in collaboration with United Therapeutics,
is investigating the application of both our AERx delivery
technology and our liposomal formulation technology to United
Therapeutics’ approved injectable drug treprostinil for the
treatment of pulmonary arterial hypertension. We believe that
our inhaled sustained release formulation may lead to a
reduction in the number of daily administrations that are needed
to be effective. We also believe that the ARD-1500 product
candidate could potentially offer a non-invasive, more direct
and patient-friendly approach to treatment that would complement
or replace currently available treatments.
Risks Affecting Us
Our business is subject to a number of risks, which are
explained in detail under the section entitled “Risk
Factors.”
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None of our product candidates has been approved or
commercialized, and we may never successfully develop any
products.
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We recently changed our product development strategy, and if we
do not successfully implement this new strategy our business and
reputation will be damaged.
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We will need additional capital and we may not be able to obtain
it.
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We have a history of losses, we expect to incur losses for at
least the foreseeable future, and we may never attain or
maintain profitability.
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Our dependence on collaborators may delay or prevent the
progress of certain of our programs.
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The results of later stage clinical trials of our product
candidates may not be as favorable as earlier trials and that
could result in additional costs and delay or prevent
commercialization of our products.
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If our clinical trials are delayed because of patient enrollment
or other problems, we would incur additional cost and postpone
the potential receipt of revenues.
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We are subject to extensive regulation, including the
requirement of approval before any of our product candidates can
be marketed. We may not obtain regulatory approval for our
product candidates on a timely basis, or at all.
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In order to market our proprietary products, we are likely to
establish our own sales, marketing and distribution
capabilities. We have no experience in these areas, and if we
have problems establishing these capabilities, the
commercialization of our products would be impaired.
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If any products that we or our collaborators may develop do not
attain adequate market acceptance by healthcare professionals
and patients, our business prospects and results of operations
will suffer.
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We depend upon our proprietary technologies, and we may not be
able to protect our potential competitive proprietary advantage.
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Our common stock is currently listed on the Nasdaq Capital
Market and may be delisted; if our stock is delisted, it will
have less market liquidity and the price may decline.
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Corporate Information
We were incorporated in California in January 1991. Our
principal executive offices are located at 3929 Point Eden Way,
Hayward, California 94545, and our telephone number is
(510) 265-9000. Our Internet address is www.aradigm.com.
The information on, or accessible through, our website is not
part of this prospectus. Unless the context requires otherwise,
references in this prospectus to “Aradigm,”
“we,” “us” and “our” refer to
Aradigm Corporation.
4
The Offering
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Common stock offered by us
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20,000,000 shares
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Common stock to be outstanding after this offering
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36,001,203 shares
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Use of proceeds
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We estimate that our net proceeds from this offering will be
approximately
$ .
We intend to use approximately $20 million of the net
proceeds of this offering for the further development of our
ARD-3100 product for the treatment of cystic fibrosis,
$2 million for the completion of development of our
next-generation AERx pulmonary drug delivery device and the
remaining net proceeds for general corporate purposes, including
the continued development and advancement of our other programs.
We may also use a portion of the net proceeds to acquire
complementary technologies or businesses. See “Use of
Proceeds.”
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Nasdaq Capital Market symbol
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ARDM
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The number of shares of common stock that will be outstanding
after this offering is based on 14,765,502 shares of common
stock outstanding as of June 30, 2006 and excludes:
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2,573,253 shares of common stock issuable upon the exercise
of outstanding options with a weighted average exercise price of
$13.28 per share;
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2,119,766 shares of common stock issuable upon exercise of
outstanding warrants with a weighted average exercise price of
$11.11 per share; and
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1,957,635 shares of common stock reserved for future
issuance under our 2005 Equity Incentive Plan.
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Except as otherwise noted, all information in this prospectus:
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Reflects a one-for-five reverse split of our common stock
effected in January 2006;
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Assumes the automatic conversion of all outstanding shares of
Series A Convertible Preferred Stock into
1,235,701 shares of common stock upon the completion of
this offering; and
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Assumes no exercise of the underwriter’s over-allotment
option.
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5
Summary Financial Data
The following tables present summary historical and as adjusted
financial data. The summary statement of operations data for the
years ended December 31, 2003, 2004 and 2005 have been
derived from our audited financial statements included elsewhere
in this prospectus. The summary statement of operations data for
the six months ended June 30, 2005 and 2006 and the summary
balance sheet data as of June 30, 2006 have been derived
from our unaudited financial statements included elsewhere in
this prospectus. You should read this information together with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our audited and
unaudited financial statements and related notes, each included
elsewhere in this prospectus. Our interim results are not
necessarily indicative of results for the full fiscal year and
our historical results are not necessarily indicative of the
results to be expected in any future period.
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Six Months Ended
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Year Ended December 31,
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June 30,
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2003
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2004
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2005
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2005
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2006
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(Unaudited)
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(In thousands, except per share data)
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Statements of operations data:
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Contract and license revenues
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$
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33,857
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$
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28,045
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$
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10,507
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$
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8,926
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$
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2,880
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Operating expenses:
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Research and development
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49,636
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46,477
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30,174
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14,387
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13,098
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General and administrative
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10,391
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11,934
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10,895
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5,948
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5,537
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Restructuring and asset impairment
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—
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—
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—
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—
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5,370
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Total operating expenses
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60,027
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58,411
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41,069
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20,335
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24,005
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Loss from operations
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(26,170
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(30,366
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(30,562
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(11,409
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)
|
|
|
(21,125
|
)
|
|
Interest income
|
|
|
338
|
|
|
|
194
|
|
|
|
1,317
|
|
|
|
638
|
|
|
|
380
|
|
|
Other (expenses) income
|
|
|
(138
|
)
|
|
|
(17
|
)
|
|
|
30
|
|
|
|
(45
|
)
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,970
|
)
|
|
$
|
(30,189
|
)
|
|
$
|
(29,215
|
)
|
|
$
|
(10,816
|
)
|
|
$
|
(20,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(2.59
|
)
|
|
$
|
(2.37
|
)
|
|
$
|
(2.01
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(1.42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
10,039
|
|
|
|
12,741
|
|
|
|
14,513
|
|
|
|
14,486
|
|
|
|
14,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006
|
|
|
|
|
|
|
|
Actual
|
|
As Adjusted (1)
|
|
|
|
|
|
|
|
|
|
(Unaudited, in thousands)
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short term investments
|
|
$
|
8,914
|
|
|
$
|
|
|
|
Working capital
|
|
|
5,142
|
|
|
|
|
|
|
Total assets
|
|
|
17,049
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
23,669
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(295,555
|
)
|
|
|
|
|
|
Total shareholders’ (deficit) equity
|
|
|
(12,450
|
)
|
|
|
|
|
|
|
|
|
(1)
|
The as adjusted balance sheet data as of June 30, 2006
gives effect to the automatic conversion of all outstanding
shares of our Series A Convertible Preferred Stock into
1,235,701 shares of our common stock upon the completion of
this offering and the receipt of net proceeds of approximately
$ million
from the sale of 20,000,000 shares of common stock offered
by us at the assumed public offering price of $1.43 per
share, after deducting the estimated underwriting discount and
estimated offering expenses payable by us.
|
6
RISK FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors, as
well as the other information in this prospectus and the
information incorporated by reference in this prospectus, before
deciding whether to invest in shares of our common stock. The
occurrence of any of the following risks, or other risks that
are currently unknown or unforeseen by us, could harm our
business, financial condition, results of operations or growth
prospects. If any of these events occur, the trading price of
our common stock could decline, and you may lose all or part of
your investment.
Risks Related to Our Business
None of our product candidates has been approved or
commercialized, and we may never successfully develop any
products.
Most of our product candidates are in an early stage of
development. Development of our products will require extensive
additional time, effort and cost in preclinical testing and
clinical trials. Our products also require lengthy regulatory
reviews before they can be marketed. None of our products has
yet received FDA approval, and our development efforts may never
result in a commercialized product. We have spent more than
10 years developing AERx iDMS for the treatment of diabetes
and it is still not on the market. We may abandon the
development of some or all of our product candidates at any time
and without prior notice. We must incur substantial up-front
expenses to develop and commercialize products and failure to
achieve commercial feasibility, demonstrate safety, achieve
clinical efficacy, obtain regulatory approval or successfully
manufacture and market products will significantly hurt our
results of operations.
We recently changed our product development strategy, and if
we do not successfully implement this new strategy our business
and reputation will be damaged.
Since our inception in 1991 we have focused on developing drug
delivery technologies. We have recently transitioned our
business focus from the development of delivery technologies to
the application of our pulmonary drug delivery technologies and
expertise to the development of novel drug products to treat
respiratory diseases. As part of this transition we have
implemented workforce reductions in an effort to reduce our
expenses and improve our cash flows. We have not yet implemented
or are only in the early stages of implementing various aspects
of our new strategy, and we may not be successful in
implementing our new strategy. Even if we are able to implement
the various aspects of our new strategy, it may not be
successful.
We will need additional capital and we may not be able to
obtain it.
Our operations to date have consumed substantial amounts of cash
and have generated no product revenues. While our refocused
development strategy will reduce capital expenditures, we expect
negative operating cash flows to continue for at least the
foreseeable future. Even though we do not plan to engage in drug
discovery, we will nevertheless need to commit substantial funds
to develop our product candidates and we may not be able to
obtain sufficient funds on acceptable terms or at all. Our
future capital requirements will depend on many factors,
including:
|
|
|
|
|
|
•
|
our progress in the application of our delivery and formulation
technologies, which may require further refinement of these
technologies;
|
|
|
|
|
•
|
the number of product development programs we pursue and the
pace of each program;
|
|
|
|
|
•
|
our progress with formulation development;
|
|
|
|
|
•
|
the scope, rate of progress, results and costs of preclinical
testing and clinical trials;
|
|
|
|
|
•
|
the time and costs associated with seeking regulatory approvals;
|
|
|
|
|
•
|
our ability to outsource the manufacture of our product
candidates and the costs of doing so;
|
|
|
|
|
•
|
the time and costs associated with establishing in-house
resources to market and sell certain of our products;
|
7
|
|
|
|
|
|
•
|
our ability to establish and maintain collaborative arrangements
with others and the terms of those arrangements;
|
|
|
|
|
•
|
the costs of preparing, filing, prosecuting, maintaining and
enforcing patent claims; and
|
|
|
|
|
•
|
our need to acquire licenses or other rights for our product
candidates.
|
Since inception, we have financed our operations primarily
through private placements and public offerings of our capital
stock, proceeds from equipment lease financings, contract
research funding and interest earned on investments. We believe
that our existing cash and cash equivalent balances at
June 30, 2006, together with amounts received in the third
quarter from the restructuring of a license agreement and from
the sale of assets, funding commitments from collaborators,
interest earned on our investments and the estimated proceeds
from this offering should be sufficient to meet our needs for at
least the next 18 months. We will need to obtain
substantial additional funds before we would be able to bring
any of our product candidates to market. Our estimates of future
capital use are uncertain, and changing circumstances, including
those related to implementation of our new development strategy
or further changes to our development strategy, could cause us
to consume capital significantly faster than currently expected,
and our expected sources of funding may not be sufficient. If
adequate funds are not available, we will be required to delay,
reduce the scope of, or eliminate one or more of our product
development programs, or to obtain funds through arrangements
with collaborators or other sources that may require us to
relinquish rights to certain of our technologies or products
that we would not otherwise relinquish, and to reduce
personnel-related costs. If we are able to obtain funds through
the issuance of debt securities or borrowing, the terms may
restrict our operations, including a prohibition on paying
dividends on our common stock. If we are able to obtain funds
through the issuance of equity securities, your interest will be
diluted and our stock price may drop as a result.
Our common stock is currently listed on the Nasdaq Capital
Market and may be delisted; if our stock is delisted, it will
have less market liquidity and the price may decline.
Our common stock is currently listed on the Nasdaq Capital
Market. On May 18, 2006, we received a notice from Nasdaq
indicating that we had failed to comply with the continued
listing standard for the Nasdaq Capital Market requiring
(i) a market value of listed securities of
$35 million, (ii) shareholders’ equity of at
least $2.5 million or (iii) net income from continuing
operations of at least $500,000 in the last completed fiscal
year or two of the last three completed fiscal years. On
August 22, 2006, following a hearing with the Nasdaq
Listing Qualifications Panel to appeal the Nasdaq Staff
Determination to delist our common stock, Nasdaq ruled to allow
our stock to remain listed, subject to continued compliance with
Nasdaq’s listing requirements. Based on our preliminary
analysis, we do not anticipate that we will be able to meet
Nasdaq’s continued listing requirements as of
September 30, 2006. We are requesting a hearing with Nasdaq
and we intend to seek continued listing. The hearing may not be
resolved in our favor, and we may be delisted from the Nasdaq
Capital Market. Even if the hearing is resolved in our favor, we
may not be able to meet Nasdaq’s listing requirements to
continue trading on the Nasdaq Capital Market in the future. If
our common stock is delisted from the Nasdaq Capital Market, we
will likely be traded on the Pink Sheets or the
Over-the
-Counter
Bulletin Board, which may reduce the liquidity of, and may
adversely affect the price of, our common stock.
We have a history of losses, we expect to incur losses for at
least the foreseeable future, and we may never attain or
maintain profitability.
We have never been profitable and have incurred significant
losses in each year since our inception. Through June 30,
2006, we have incurred a cumulative deficit of
$295.6 million. We have not had any product sales and do
not anticipate receiving any revenues from product sales for at
least the next few years,
8
if ever. While our recent shift in development strategy may
result in reduced capital expenditures, we expect to continue to
incur substantial losses over at least the next several years as
we:
|
|
|
|
|
|
•
|
expand drug product development efforts;
|
|
|
|
|
•
|
conduct preclinical testing and clinical trials;
|
|
|
|
|
•
|
pursue additional applications for our existing delivery
technologies;
|
|
|
|
|
•
|
outsource the commercial-scale production of our
products; and
|
|
|
|
|
•
|
establish a sales and marketing force to commercialize certain
of our proprietary products if these products obtain regulatory
approval.
|
To achieve and sustain profitability, we must, alone or with
others, successfully develop, obtain regulatory approval for,
manufacture, market and sell our products. We will incur
substantial expenses in our efforts to develop and commercialize
products and we may never generate sufficient product or
contract research revenues to become profitable or to sustain
profitability.
Our dependence on collaborators may delay or prevent the
progress of certain of our programs.
Our commercialization strategy for certain of our product
candidates depends on our ability to enter into agreements with
collaborators to obtain assistance and funding for the
development and potential commercialization of our product
candidates. Collaborations may involve greater uncertainty for
us, as we have less control over certain aspects of our
collaborative programs than we do over our proprietary
development and commercialization programs. We may determine
that continuing a collaboration under the terms provided is not
in our best interest, and we may terminate the collaboration.
Our existing collaborators could delay or terminate their
agreements, and our products subject to collaborative
arrangements may never be successfully commercialized. For
example, Novo Nordisk has control over and responsibility for
development and commercialization of AERx iDMS. The development
and commercialization of AERx iDMS could be delayed further or
terminated if Novo Nordisk fails to conduct these activities in
a timely manner or at all. In 2004, Novo Nordisk amended the
protocols of a Phase 3 clinical program, which resulted in
a significant delay of the development of the product. If, due
to delays or otherwise, we do not receive development funds or
achieve milestones set forth in the agreements governing our
collaborations, or if any of our collaborators breach or
terminate their collaborative agreements or do not devote
sufficient resources or priority to our programs, our business
prospects and potential to receive revenues would be hurt.
Further, our existing or future collaborators may pursue
alternative technologies or develop alternative products either
on their own or in collaboration with others, including our
competitors, and the priorities or focus of our collaborators
may shift such that our programs receive less attention or
resources than we would like. Any such actions by our
collaborators may adversely affect our business prospects and
ability to earn revenues. In addition, we could have disputes
with our existing or future collaborators regarding, for
example, the interpretation of terms in our agreements. Any such
disagreements could lead to delays in the development or
commercialization of any potential products or could result in
time-consuming and expensive litigation or arbitration, which
may not be resolved in our favor.
Even with respect to certain other programs that we intend to
commercialize ourselves, we may enter into agreements with
collaborators to share in the burden of conducting clinical
trials, manufacturing and marketing our product candidates or
products. In addition, our ability to apply our proprietary
technologies to develop proprietary drugs will depend on our
ability to establish and maintain licensing arrangements or
other collaborative arrangements with the holders of proprietary
rights to such drugs. We may not be able to establish such
arrangements on favorable terms or at all, and our existing or
future collaborative arrangements may not be successful.
9
The results of later stage clinical trials of our product
candidates may not be as favorable as earlier trials and that
could result in additional costs and delay or prevent
commercialization of our products.
Although we believe the limited and preliminary data we have
regarding our potential products is encouraging, the results of
initial preclinical testing and clinical trials do not
necessarily predict the results that we will get from subsequent
or more extensive preclinical testing and clinical trials.
Clinical trials of our product candidates may not demonstrate
that they are safe and effective to the extent necessary to
obtain regulatory approvals. Many companies in the
biopharmaceutical industry have suffered significant setbacks in
advanced clinical trials, even after receiving promising results
in earlier trials. If we cannot adequately demonstrate through
the clinical trial process that a therapeutic product we are
developing is safe and effective, regulatory approval of that
product would be delayed or prevented, which would impair our
reputation, increase our costs and prevent us from earning
revenues.
If our clinical trials are delayed because of patient
enrollment or other problems, we would incur additional cost and
postpone the potential receipt of revenues.
Before we or our collaborators can file for regulatory approval
for the commercial sale of our potential products, the FDA will
require extensive preclinical safety testing and clinical trials
to demonstrate their safety and efficacy. Completing clinical
trials in a timely manner depends on, among other factors, the
timely enrollment of patients. Our collaborators’ and our
ability to recruit patients depends on a number of factors,
including the size of the patient population, the proximity of
patients to clinical sites, the eligibility criteria for the
study and the existence of competing clinical trials. Delays in
planned patient enrollment in our current or future clinical
trials may result in increased costs, program delays or both,
and the loss of potential revenues.
We are subject to extensive regulation, including the
requirement of approval before any of our product candidates can
be marketed. We may not obtain regulatory approval for our
product candidates on a timely basis, or at all.
We, our collaborators and our products are subject to extensive
and rigorous regulation by the federal government, principally
the FDA, and by state and local government agencies. Both before
and after regulatory approval, the development, testing,
manufacture, quality control, labeling, storage, approval,
advertising, promotion, sale, distribution and export of our
potential products are subject to regulation. Pharmaceutical
products that are marketed abroad are also subject to regulation
by foreign governments. Our products cannot be marketed in the
United States without FDA approval. The process for obtaining
FDA approval for drug products is generally lengthy, expensive
and uncertain. To date, we have not sought or received approval
from the FDA or any corresponding foreign authority for any of
our product candidates.
Even though we intend to apply for approval of most of our
products in the United States under Section 505(b)(2) of
the United States Food, Drug and Cosmetic Act, which applies to
reformulations of approved drugs and that may require smaller
and shorter safety and efficacy testing than that for entirely
new drugs, the approval process will still be costly,
time-consuming and uncertain. We or our collaborators may not be
able to obtain necessary regulatory approvals on a timely basis,
if at all, for any of our potential products. Even if granted,
regulatory approvals may include significant limitations on the
uses for which products may be marketed. Failure to comply with
applicable regulatory requirements can, among other things,
result in warning letters, imposition of civil penalties or
other monetary payments, delay in approving or refusal to
approve a product candidate, suspension or withdrawal of
regulatory approval, product recall or seizure, operating
restrictions, interruption of clinical trials or manufacturing,
injunctions and criminal prosecution.
Regulatory authorities may not approve our product candidates
even if the product candidates meet safety and efficacy
endpoints in clinical trials or the approvals may be too limited
for us to earn sufficient revenues.
The FDA and other foreign regulatory agencies can delay approval
of or refuse to approve our product candidates for a variety of
reasons, including failure to meet safety and efficacy endpoints
in our clinical
10
trials. Our product candidates may not be approved even if they
achieve their endpoints in clinical trials. Regulatory agencies,
including the FDA, may disagree with our trial design and our
interpretations of data from preclinical studies and clinical
trials. Even if a product candidate is approved, it may be
approved for fewer or more limited indications than requested or
the approval may be subject to the performance of significant
post-marketing studies. In addition, regulatory agencies may not
approve the labeling claims that are necessary or desirable for
the successful commercialization of our product candidates. Any
limitation, condition or denial of approval would have an
adverse affect on our business reputation and results of
operations.
Even if we are granted initial FDA approval for any of our
product candidates, we may not be able to maintain such
approval, which would reduce our revenues.
Even if we are granted initial regulatory approval for a product
candidate, the FDA and similar foreign regulatory agencies can
limit or withdraw product approvals for a variety of reasons,
including failure to comply with regulatory requirements,
changes in regulatory requirements, problems with manufacturing
facilities or processes or the occurrence of unforeseen
problems, such as the discovery of previously undiscovered side
effects. If we are able to obtain any product approvals, they
may be limited or withdrawn or we may be unable to remain in
compliance with regulatory requirements. Both before and after
approval we, our collaborators and our products are subject to a
number of additional requirements. For example, certain changes
to the approved product, such as adding new indications, certain
manufacturing changes and additional labeling claims are subject
to additional FDA review and approval. Advertising and other
promotional material must comply with FDA requirements and
established requirements applicable to drug samples. We, our
collaborators and our manufacturers will be subject to
continuing review and periodic inspections by the FDA and other
authorities where applicable and must comply with ongoing
requirements, including the FDA’s Good Manufacturing
Practices, or GMP, requirements. Once the FDA approves a
product, a manufacturer must provide certain updated safety and
efficacy information, submit copies of promotional materials to
the FDA and make certain other required reports. Product
approvals may be withdrawn if regulatory requirements are not
complied with or if problems concerning safety or efficacy of
the product occur following approval. Any limitation or
withdrawal of approval of any of our products could delay or
prevent sales of our products, which would adversely affect our
revenues. Further continuing regulatory requirements involve
expensive ongoing monitoring and testing requirements.
Since one of our key proprietary programs, the ARD-3100
liposomal ciprofloxacin program, relies on the FDA’s
granting of orphan drug designation for potential market
exclusivity, the product may not be able to obtain market
exclusivity and could be barred from the market for up to seven
years.
The FDA has granted orphan drug designation for our proprietary
liposomal ciprofloxacin for the management of cystic fibrosis.
Orphan drug designation is intended to encourage research and
development of new therapies for diseases that affect fewer than
200,000 patients in the United States. The designation
provides the opportunity to obtain market exclusivity for seven
years from the date of the FDA’s approval of a new drug
application, or NDA. However, the market exclusivity is granted
only to the first chemical entity to be approved by the FDA for
a given indication. Therefore, if another inhaled ciprofloxacin
product were to be approved by the FDA for a cystic fibrosis
indication before our product, then we may be blocked from
launching our product in the United States for seven years,
unless we are able to demonstrate to the FDA clinical
superiority of our product on the basis of safety or efficacy.
We may seek to develop additional products that incorporate
drugs that have received orphan drug designations for specific
indications. In each case, if our product is not the first to be
approved by the FDA for a given indication, we will be unable to
access the target market in the United States, which would
adversely affect our ability to earn revenues.
We have limited manufacturing capacity and will have to
depend on contract manufacturers and collaborators; if they do
not perform as expected, our revenues and customer relations
will suffer.
We have limited capacity to manufacture our requirements for the
development and commercialization of our product candidates. We
intend to use contract manufacturers to produce key components,
assemblies and
11
subassemblies in the clinical and commercial manufacturing of
our products. We may not be able to enter into or maintain
satisfactory contract manufacturing arrangements. Specifically,
an affiliate of Novo Nordisk has agreed to supply devices and
dosage forms to us for use in the development of our products
that incorporate our proprietary AERx technology through
January 27, 2008. We may not be able to extend this
agreement at satisfactory terms, if at all, and we may not be
able to find a replacement contract manufacturer at satisfactory
terms.
We may decide to invest in additional clinical manufacturing
facilities in order to internally produce critical components of
our product candidates and to handle critical aspects of the
production process, such as assembly of the disposable unit-dose
packets and filling of the unit-dose packets. If we decide to
produce components of any of our product candidates in-house,
rather than use contract manufacturers, it will be costly and we
may not be able to do so in a timely or cost-effective manner or
in compliance with regulatory requirements.
With respect to some of our product development programs
targeted at large markets, either our collaborators or we will
have to invest significant amounts to attempt to provide for the
high-volume manufacturing required to take advantage of these
product markets, and much of this spending may occur before a
product is approved by the FDA for commercialization. Any such
effort will entail many significant risks. For example, the
design requirements of our products may make it too costly or
otherwise infeasible for us to develop them at a commercial
scale, or manufacturing and quality control problems may arise
as we attempt to expand production. Failure to address these
issues could delay or prevent late-stage clinical testing and
commercialization of any products that may receive FDA approval.
Further, we, our contract manufacturers and our collaborators
are required to comply with the FDA’s GMP requirements that
relate to product testing, quality assurance, manufacturing and
maintaining records and documentation. We, our contract
manufacturers or our collaborators may not be able to comply
with the applicable GMP and other FDA regulatory requirements
for manufacturing, which could result in an enforcement or other
action, prevent commercialization of our product candidates and
impair our reputation and results of operations.
We rely on a small number of vendors and contract
manufacturers to supply us with specialized equipment, tools and
components; if they do not perform as we need them to, we will
not be able to develop or commercialize products.
We rely on a small number of vendors and contract manufacturers
to supply us and our collaborators with specialized equipment,
tools and components for use in development and manufacturing
processes. These vendors may not continue to supply such
specialized equipment, tools and components, and we may not be
able to find alternative sources for such specialized equipment
and tools. Any inability to acquire or any delay in our ability
to acquire necessary equipment, tools and components would
increase our expenses and could delay or prevent our development
of products.
In order to market our proprietary products, we are likely to
establish our own sales, marketing and distribution
capabilities. We have no experience in these areas, and if we
have problems establishing these capabilities, the
commercialization of our products would be impaired.
We intend to establish our own sales, marketing and distribution
capabilities to market products to concentrated, easily
addressable prescriber markets. We have no experience in these
areas, and developing these capabilities will require
significant expenditures on personnel and infrastructure. While
we intend to market products that are aimed at a small patient
population, we may not be able to create an effective sales
force around even a niche market. In addition, some of our
product development programs will require a large sales force to
call on, educate and support physicians and patients. While we
intend to enter into collaborations with one or more
pharmaceutical companies to sell, market and distribute such
products, we may not be able to enter into any such arrangement
on acceptable terms, if at all. Any collaborations we do enter
into may not be effective in generating meaningful product
royalties or other revenues for us.
12
If any products that we or our collaborators may develop do
not attain adequate market acceptance by healthcare
professionals and patients, our business prospects and results
of operations will suffer.
Even if we or our collaborators successfully develop one or more
products, such products may not be commercially acceptable to
healthcare professionals and patients, who will have to choose
our products over alternative products for the same disease
indications, and many of these alternative products will be more
established than ours. For our products to be commercially
viable, we will need to demonstrate to healthcare professionals
and patients that our products afford benefits to the patient
that are cost-effective as compared to the benefits of
alternative therapies. Our ability to demonstrate this depends
on a variety of factors, including:
|
|
|
|
|
|
•
|
the demonstration of efficacy and safety in clinical trials;
|
|
|
|
|
•
|
the existence, prevalence and severity of any side effects;
|
|
|
|
|
•
|
the potential or perceived advantages or disadvantages compared
to alternative treatments;
|
|
|
|
|
•
|
the timing of market entry relative to competitive treatments;
|
|
|
|
|
•
|
the relative cost, convenience, product dependability and ease
of administration;
|
|
|
|
|
•
|
the strength of marketing and distribution support;
|
|
|
|
|
•
|
the sufficiency of coverage and reimbursement of our product
candidates by governmental and other third-party payors; and
|
|
|
|
|
•
|
the product labeling or product insert required by the FDA or
regulatory authorities in other countries.
|
Our product revenues will be adversely affected if, due to these
or other factors, the products we or our collaborators are able
to commercialize do not gain significant market acceptance.
We depend upon our proprietary technologies, and we may not
be able to protect our potential competitive proprietary
advantage.
Our business and competitive position is dependent upon our and
our collaborators’ ability to protect our proprietary
technologies related to various aspects of pulmonary drug
delivery and drug formulation. While our intellectual property
rights may not provide a significant commercial advantage for
us, our patents and know-how are intended to provide protection
for important aspects of our technology, including methods for
aerosol generation, devices used to generate aerosols, breath
control, compliance monitoring, certain pharmaceutical
formulations, design of dosage forms and their manufacturing and
testing methods. In addition, we are maintaining as non-patented
trade secrets some of the key elements of our manufacturing
technologies, for example, those associated with production of
disposable unit-dose packets for our AERx delivery system.
Our ability to compete effectively will also depend to a
significant extent on our and our collaborators’ ability to
obtain and enforce patents and maintain trade secret protection
over our proprietary technologies. The coverage claimed in a
patent application typically is significantly reduced before a
patent is issued, either in the United States or abroad.
Consequently, any of our pending or future patent applications
may not result in the issuance of patents and any patents issued
may be subjected to further proceedings limiting their scope and
may in any event not contain claims broad enough to provide
meaningful protection. Any patents that are issued to us or our
collaborators may not provide significant proprietary protection
or competitive advantage, and may be circumvented or
invalidated. In addition, unpatented proprietary rights,
including trade secrets and know-how, can be difficult to
protect and may lose their value if they are independently
developed by a third party or if their secrecy is lost. Further,
because development and commercialization of pharmaceutical
products can be subject to substantial delays, patents may
expire early and provide only a short period of protection, if
any, following commercialization of products.
13
In July 2006, we assigned 23 issued United States patents to
Novo Nordisk along with corresponding non-United States
counterparts and certain related pending applications. In August
2006, Novo Nordisk brought suit against Pfizer, Inc. claiming
infringement of certain claims in one of the assigned United
States patents. That patent is placed at risk in connection with
this infringement lawsuit. Other patents assigned to Novo
Nordisk may become the subject of future litigation. If all or
any of the patents assigned to Novo Nordisk are invalidated, it
may reduce Novo Nordisk’s commitment to move forward with
AERx iDMS and would adversely affect any royalty which we might
potentially receive based on all or any of those patents.
Further, the patents assigned to Novo Nordisk encompass, in some
instances, technology beyond inhaled insulin and, if the patents
are invalidated, it could harm our ability to obtain market
exclusivity with respect to other product candidates.
We may infringe on the intellectual property rights of others
and any litigation could force us to stop developing or selling
potential products and could be costly, divert management
attention and harm our business.
We must be able to develop products without infringing the
proprietary rights of other parties. Because the markets in
which we operate involve established competitors with
significant patent portfolios, including patents relating to
compositions of matter, methods of use and methods of drug
delivery, it could be difficult for us to use our technologies
or develop products without infringing the proprietary rights of
others. We may not be able to design around the patented
technologies or inventions of others and we may not be able to
obtain licenses to use patented technologies on acceptable
terms, or at all. If we cannot operate without infringing the
proprietary rights of others, we will not earn product revenues.
If we are required to defend ourselves in a lawsuit, we could
incur substantial costs and the lawsuit could divert management
attention, regardless of the lawsuit’s merit or outcome.
These legal actions could seek damages and seek to enjoin
testing, manufacturing and marketing of the accused product or
process. In addition to potential liability for significant
damages, we could be required to obtain a license to continue to
manufacture or market the accused product or process and any
license required under any such patent may not be made available
to us on acceptable terms, if at all.
Periodically, we review publicly available information regarding
the development efforts of others in order to determine whether
these efforts may violate our proprietary rights. We may
determine that litigation is necessary to enforce our
proprietary rights against others. Such litigation could result
in substantial expense, regardless of its outcome, and may not
be resolved in our favor.
Furthermore, patents already issued to us or our pending patent
applications may become subject to dispute, and any disputes
could be resolved against us. For example, Eli Lilly and Company
brought an action against us seeking to have one or more
employees of Eli Lilly named as co-inventors on one of our
patents. This case was determined in our favor in 2004, but we
may face other similar claims in the future and we may lose or
settle cases at significant loss to us. In addition, because
patent applications in the United States are currently
maintained in secrecy for a period of time prior to issuance,
and patent applications in certain other countries generally are
not published until more than 18 months after they are
first filed, and because publication of discoveries in
scientific or patent literature often lags behind actual
discoveries, we cannot be certain that we were the first creator
of inventions covered by our pending patent applications or that
we were the first to file patent applications on such inventions.
We are in a highly competitive market and our competitors
have developed or may develop alternative therapies for our
target indications, which would limit the revenue potential of
any product we may develop.
We are in competition with pharmaceutical, biotechnology and
drug delivery companies, hospitals, research organizations,
individual scientists and nonprofit organizations engaged in the
development of drugs and therapies for the disease indications
we are targeting. Our competitors may succeed before we can, and
many already have succeeded, in developing competing
technologies for the same disease indications, obtaining FDA
approval for products or gaining acceptance for the same markets
that we are targeting. If we are not “first to
market,” it may be more difficult for us and our
collaborators to enter markets as second or
14
subsequent competitors and become commercially successful. We
are aware of a number of companies that are developing or have
developed therapies to address indications we are targeting,
including major pharmaceutical companies such as Bayer, Eli
Lilly, Genentech, Gilead Sciences, Merck & Co., Novartis and
Pfizer. Certain of these companies are addressing these target
markets with pulmonary products that are similar to ours. These
companies and many other potential competitors have greater
research and development, manufacturing, marketing, sales,
distribution, financial and managerial resources and experience
than we have and many of these companies may have products and
product candidates that are on the market or in a more advanced
stage of development than our product candidates. Our ability to
earn product revenues and our market share would be
substantially harmed if any existing or potential competitors
brought a product to market before we or our collaborators were
able to, or if a competitor introduced at any time a product
superior or more cost-effective than ours.
If we do not continue to attract and retain key employees,
our product development efforts will be delayed and impaired.
We depend on a small number of key management and technical
personnel. Our success also depends on our ability to attract
and retain additional highly qualified marketing, management,
manufacturing, engineering and development personnel. There is a
shortage of skilled personnel in our industry, we face intense
competition in our recruiting activities, and we may not be able
to attract or retain qualified personnel. Losing any of our key
employees, particularly our new President and Chief Executive
Officer, Dr. Igor Gonda, who plays a central role in our
strategy shift to a specialty pharmaceutical company, could
impair our product development efforts and otherwise harm our
business. Any of our employees may terminate their employment
with us at will.
Acquisition of complementary businesses or technologies could
result in operating difficulties and harm our results of
operations.
While we have not identified any definitive targets, we may use
a portion of the proceeds from this offering to acquire
products, businesses or technologies that we believe are
complementary to our business strategy. The process of
investigating, acquiring and integrating any business or
technology into our business and operations is risky and we may
not be able to accurately predict or derive the benefits of any
such acquisition. The process of acquiring and integrating any
business or technology may create operating difficulties and
unexpected expenditures, such as:
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diversion of our management from the development and
commercialization of our pipeline product candidates;
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difficulty in assimilating and efficiently using the acquired
assets or personnel; and
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inability to retain key personnel.
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In addition to the factors set forth above, we may encounter
other unforeseen problems with acquisitions that we may not be
able to overcome. Any future acquisitions may require us to
issue shares of our stock or other securities that dilute the
ownership interests of our other shareholders, expend cash,
incur debt, assume liabilities, including contingent or unknown
liabilities, or incur additional expenses related to write-offs
or amortization of intangible assets, any of which could
materially adversely affect our operating results.
If we market our products in other countries, we will be
subject to different laws and we may not be able to adapt to
those laws, which could increase our costs while reducing our
revenues.
If we market any approved products in foreign countries, we will
be subject to different laws, particularly with respect to
intellectual property rights and regulatory approval. To
maintain a proprietary market position in foreign countries, we
may seek to protect some of our proprietary inventions through
foreign counterpart patent applications. Statutory differences
in patentable subject matter may limit the protection we can
obtain on some of our inventions outside of the United States.
The diversity of patent laws may make our expenses associated
with the development and maintenance of intellectual property in
foreign jurisdictions more
15
expensive than we anticipate. We probably will not obtain the
same patent protection in every market in which we may otherwise
be able to potentially generate revenues. In addition, in order
to market our products in foreign jurisdictions, we and our
collaborators must obtain required regulatory approvals from
foreign regulatory agencies and comply with extensive
regulations regarding safety and quality. We may not be able to
obtain regulatory approvals in such jurisdictions and we may
have to incur significant costs in obtaining or maintaining any
foreign regulatory approvals. If approvals to market our
products are delayed, if we fail to receive these approvals, or
if we lose previously received approvals, our business would be
impaired as we could not earn revenues from sales in those
countries.
We may be exposed to product liability claims, which would
hurt our reputation, market position and operating results.
We face an inherent risk of product liability as a result of the
clinical testing of our product candidates in humans and will
face an even greater risk upon commercialization of any
products. These claims may be made directly by consumers or by
pharmaceutical companies or others selling such products. We may
be held liable if any product we develop causes injury or is
found otherwise unsuitable during product testing, manufacturing
or sale. Regardless of merit or eventual outcome, liability
claims would likely result in negative publicity, decreased
demand for any products that we may develop, injury to our
reputation and suspension or withdrawal of clinical trials. Any
such claim will be very costly to defend and also may result in
substantial monetary awards to clinical trial participants or
customers, loss of revenues and the inability to commercialize
products that we develop. Although we currently have product
liability insurance, we may not be able to maintain such
insurance or obtain additional insurance on acceptable terms, in
amounts sufficient to protect our business, or at all. A
successful claim brought against us in excess of our insurance
coverage would have a material adverse effect on our results of
operations.
If we cannot arrange for adequate third-party reimbursement
for our products, our revenues will suffer.
In both domestic and foreign markets, sales of our potential
products will depend in substantial part on the availability of
adequate reimbursement from third-party payors such as
government health administration authorities, private health
insurers and other organizations. Third-party payors often
challenge the price and cost-effectiveness of medical products
and services. Significant uncertainty exists as to the adequate
reimbursement status of newly approved health care products. Any
products we are able to successfully develop may not be
reimbursable by third-party payors. In addition, our products
may not be considered cost-effective and adequate third-party
reimbursement may not be available to enable us to maintain
price levels sufficient to realize a profit. Legislation and
regulations affecting the pricing of pharmaceuticals may change
before our products are approved for marketing and any such
changes could further limit reimbursement. If any products we
develop do not receive adequate reimbursement, our revenues will
be severely limited.
Our use of hazardous materials could subject us to
liabilities, fines and sanctions.
Our laboratory and clinical testing sometimes involve use of
hazardous and toxic materials. We are subject to federal, state
and local laws and regulations governing how we use,
manufacture, handle, store and dispose of these materials.
Although we believe that our safety procedures for handling and
disposing of such materials comply in all material respects with
all federal, state and local regulations and standards, there is
always the risk of accidental contamination or injury from these
materials. In the event of an accident, we could be held liable
for any damages that result and such liability could exceed our
financial resources. Compliance with environmental and other
laws may be expensive and current or future regulations may
impair our development or commercialization efforts.
If we are unable to effectively implement or maintain a
system of internal controls over financial reporting, we may not
be able to accurately or timely report our financial results and
our stock price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us
to evaluate the effectiveness of our internal controls over
financial reporting as of the end of each fiscal year, and to
include a management report
16
assessing the effectiveness of our internal controls over
financial reporting in our annual report on
Form
10-K
for that
fiscal year. Section 404 also requires our independent
registered public accounting firm, beginning with our fiscal
year ending December 31, 2007, to attest to, and report on,
management’s assessment of our internal controls over
financial reporting. Our ability to comply with the annual
internal control report requirements will depend on the
effectiveness of our financial reporting and data systems and
controls across our company. We expect these systems and
controls to involve significant expenditures and to become
increasingly complex as our business grows and to the extent
that we make and integrate acquisitions. To effectively manage
this complexity, we will need to continue to improve our
operational, financial and management controls and our reporting
systems and procedures. Any failure to implement required new or
improved controls, or difficulties encountered in the
implementation or operation of these controls, could harm our
operating results and cause us to fail to meet our financial
reporting obligations, which could adversely affect our business
and jeopardize our listing on the Nasdaq Capital Market, either
of which could reduce our stock price.
Risks Related to This Offering
Our stock price is likely to remain volatile.
The market prices for securities of many companies in the drug
delivery and pharmaceutical industries, including ours, have
historically been highly volatile, and the market from time to
time has experienced significant price and volume fluctuations
unrelated to the operating performance of particular companies.
Prices for our common stock may be influenced by many factors,
including:
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investor perception of us;
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our ability to maintain the listing of our common stock on the
Nasdaq Capital Market;
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research analyst recommendations and our ability to meet or
exceed quarterly performance expectations of analysts or
investors;
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fluctuations in our operating results;
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market conditions relating to our segment of the industry or the
securities markets in general;
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announcements of technological innovations or new commercial
products by us or our competitors;
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publicity regarding actual or potential developments relating to
products under development by us or our competitors;
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failure to maintain existing or establish new collaborative
relationships;
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developments or disputes concerning patents or proprietary
rights;
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delays in the development or approval of our product candidates;
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regulatory developments in both the United States and foreign
countries;
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concern of the public or the medical community as to the safety
or efficacy of our products, or products deemed to have similar
safety risk factors or other similar characteristics to our
products;
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period-to
-period
fluctuations in financial results;
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future sales or expected sales of substantial amounts of common
stock by shareholders;
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our ability to raise financing; and
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economic and other external factors.
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In the past, class action securities litigation has often been
instituted against companies promptly following volatility in
the market price of their securities. Any such litigation
instigated against us would, regardless of its merit, result in
substantial costs and a diversion of management’s attention
and resources.
17
You will experience immediate and substantial dilution in the
net tangible book value of the shares you purchase in this
offering.
The offering price of our common stock will be substantially
higher than the net tangible book value per share of our
outstanding common stock. As a result, investors purchasing
common stock in this offering will incur immediate dilution of
$ per
share.
We have implemented certain anti-takeover provisions, which
make it less likely that we would be acquired and you would
receive a premium price for your shares.
Certain provisions of our articles of incorporation and the
California Corporations Code could discourage a party from
acquiring, or make it more difficult for a party to acquire,
control of our company without approval of our board of
directors. These provisions could also limit the price that
certain investors might be willing to pay in the future for
shares of our common stock. Certain provisions allow our board
of directors to authorize the issuance, without shareholder
approval, of preferred stock with rights superior to those of
the common stock. We are also subject to the provisions of
Section 1203 of the California Corporations Code, which
requires us to provide a fairness opinion to our shareholders in
connection with their consideration of any proposed
“interested party” reorganization transaction.
We have adopted a shareholder rights plan, commonly known as a
“poison pill.” We have also adopted an Executive
Officer Severance Plan and a Form of Change of Control
Agreement, both of which may provide for the payment of benefits
to our officers in connection with an acquisition. The
provisions described above, our poison pill, our severance plan
and our change of control agreements, and provisions of the
California Corporations Code may discourage, delay or prevent
another party from acquiring us or reduce the price that a buyer
is willing to pay for our common stock.
Because management has broad discretion as to the use of the
net proceeds from this offering, you may not agree with how we
use them, and such proceeds may not be applied successfully.
Our management will have broad discretion with respect to the
use of the net proceeds from this offering. We currently intend
to use the net proceeds from the offering to fund the further
development of our ARD-3100 program, as well as other
development programs and for working capital and general
corporate purposes. You will be relying on the judgment of our
management concerning these uses and you will not have the
opportunity, as part of your investment decision, to assess
whether the proceeds are being used appropriately. The failure
of our management to apply these funds effectively could result
in unfavorable returns and uncertainty about our prospects, each
of which would cause the price of our common stock to decline.
We have never paid dividends on our capital stock, and we do
not anticipate paying cash dividends for at least the
foreseeable future.
We have never declared or paid cash dividends on our capital
stock. We do not anticipate paying any cash dividends on our
common stock for at least the foreseeable future. We currently
intend to retain all available funds and future earnings, if
any, to fund the development and growth of our business. As a
result, capital appreciation, if any, of our common stock will
be your sole source of potential gain for at least the
foreseeable future.
18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. When used
in this prospectus the words “anticipate,”
“objective,” “may,” “might,”
“should,” “could,” “can,”
“intend,” “expect,” “believe,”
“estimate,” “predict,”
“potential,” “plan” or the negative of these
and similar expressions identify forward-looking statements.
Forward-looking statements include, but are not limited to,
statements about:
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our expectations regarding our future expenses, sales and
operations;
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our anticipated cash needs and our estimates regarding our
capital requirements and our need for additional financing;
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the expected development path and timing of our product
candidates;
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our expectations regarding the use of Section 505(b)(2) of
the United States Food, Drug and Cosmetic Act and an expedited
development and regulatory process;
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our ability to obtain and derive benefits from orphan drug
designation;
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our ability to anticipate the future needs of our customers;
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our plans for future products and enhancements of existing
products;
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our growth strategy elements;
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our intellectual property;
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our anticipated trends and challenges in the markets in which we
operate; and
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our ability to attract customers.
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These statements reflect our current views with respect to
uncertain future events and are based on imprecise estimates and
assumptions and subject to risk and uncertainties. Given these
uncertainties, you should not place undue reliance on these
forward-looking statements. While we believe our plans,
intentions and expectations reflected in those forward-looking
statements are reasonable, these plans, intentions or
expectations may not be achieved. Our actual results,
performance or achievements could differ materially from those
contemplated, expressed or implied by the forward-looking
statements contained in this prospectus for a variety of
reasons, including those under the heading “Risk
Factors.”
All forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety
by the risk factors and other cautionary statements set forth in
this prospectus. Other than as required by applicable securities
laws, we are under no obligation, and we do not intend, to
update any forward-looking statement, whether as result of new
information, future events or otherwise.
19
USE OF PROCEEDS
We estimate that our net proceeds from the sale of our common
stock in this offering will be approximately
$ million,
or approximately
$ million
if the underwriter exercises its over-allotment option in full,
based upon an assumed public offering price of $1.43 per
share and after deducting the estimated underwriting discount
and estimated offering expenses payable by us.
We currently expect to use the net proceeds from this offering
as follows:
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approximately $20 million for preclinical and clinical
testing in our ARD-3100 program, including manufacturing of
clinical trial supplies;
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approximately $2.0 million for completion of development of
our next-generation AERx pulmonary drug delivery device; and
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the balance for working capital and general corporate expenses
as well as general development efforts.
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We may also use a portion of the proceeds for the potential
acquisition of, or investment in, product candidates,
technologies, formulations or companies that complement our
business, although we have no current understandings,
commitments or agreements to do so.
As of June 30, 2006 we had $8.9 million in cash, cash
equivalents and short-term investments. On July 5, 2006, we
received $27.5 million in cash as part of a further
restructuring of our license agreement with Novo Nordisk, and,
on August 25, 2006, we received $4.0 million in cash
from the sale of Intraject-related assets to Zogenix. We believe
that our existing capital resources and the net proceeds from
this offering will be sufficient to enable us to maintain
currently planned operations through at least the next
18 months. We do not expect our existing capital resources
and the estimated net proceeds from this offering to be
sufficient to enable us to fund to completion the development of
any of our product candidates. During the next 18 months we
expect to:
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announce Phase 2 results from our ARD-1300 program;
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announce initial clinical results for our ARD-3100 program; and
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initiate additional preclinical testing for our ARD-1500 program.
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We will need additional funds to develop our product candidates
and to continue our operations. Such funds may not be available
when needed on acceptable terms or at all. In order to reach
commercialization of ARD-3100, we estimate we will need to spend
an additional $15 million to $20 million. If we
cannot raise sufficient funds when needed, we may have to delay,
scale back or abandon clinical trials or other product
development activities, or we may be forced to license or sell
rights to our product candidates that we would have preferred to
retain. If we are able to raise additional capital through the
issuance of equity securities, your equity interest will be
diluted. If we are able to raise additional capital through the
issuance of debt securities, the terms of the debt securities
may restrict our operations, including our ability to pay
dividends on our common stock.
The actual costs and timing of clinical trials are highly
uncertain, subject to risk and may change depending upon the
clinical indication targeted, the development strategy pursued
and the results of preclinical testing and early stage clinical
trials. The amounts and timing of other expenditures will depend
on numerous factors, including the status of our product
development and commercialization efforts, the amount of
proceeds actually raised in this offering, competition,
manufacturing activities and any collaborative arrangements we
may enter into. As a result, our management will have broad
discretion to allocate the net proceeds from this offering.
20
PRICE RANGE OF COMMON STOCK
Our common stock commenced trading on the Nasdaq National Market
(now the Nasdaq Global Market) on June 20, 1996, and since
May 2, 2006, has traded on the Nasdaq Capital Market
(formerly the Nasdaq SmallCap Market). Based on our preliminary
analysis, we do not anticipate that we will be able to meet
Nasdaq’s continued listing requirements as of
September 30, 2006. We are requesting a hearing with Nasdaq
and we intend to seek continued listing. The hearing may not be
resolved in our favor, and we may be delisted from the Nasdaq
Capital Market. Even if the hearing is resolved in our favor, we
may not be able to meet Nasdaq’s listing requirements to
continue trading on the Nasdaq Capital Market in the future. If
our common stock is delisted from the Nasdaq Capital Market, we
will likely be traded on the Pink Sheets or the
Over-the
-Counter
Bulletin Board, which may reduce the liquidity of, and may
adversely affect the price of, our common stock.
The following table sets forth the high and low closing sale
prices of our common stock for the periods indicated.
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High
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Low
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2004
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First Quarter
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$
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13.70
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$
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9.05
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Second Quarter
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11.35
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4.20
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Third Quarter
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6.40
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3.30
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Fourth Quarter
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10.00
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5.90
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2005
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First Quarter
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$
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8.65
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$
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5.60
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Second Quarter
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5.90
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5.00
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Third Quarter
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6.05
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4.95
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Fourth Quarter
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5.25
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3.45
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2006
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First Quarter
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$
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5.04
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$
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3.03
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Second Quarter
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3.32
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1.29
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Third Quarter
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2.24
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1.40
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Fourth Quarter (through October 23, 2006)
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1.69
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1.42
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On October 23, 2006, the last reported sale price of our
common stock on the Nasdaq Capital Market was $1.43. As of
October 23, 2006, there were 14,776,412 shares of our
common stock outstanding, held by 124 holders of record.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital
stock and we do not currently intend to pay any cash dividends
on our capital stock for at least the foreseeable future. We
expect to retain future earnings, if any, to fund the
development and growth of our business. Any future determination
to pay dividends on our capital stock will be, subject to
applicable law, at the discretion of our board of directors and
will depend upon, among other factors, our results of
operations, financial condition, capital requirements and
contractual restrictions in loan agreements or other agreements.
21
CAPITALIZATION
The following table sets forth our capitalization as of
June 30, 2006:
|
|
|
|
|
|
•
|
on an actual basis; and
|
|
|
|
|
•
|
on an as adjusted basis to reflect (1) the automatic
conversion of our outstanding Series A Convertible
Preferred Stock into 1,235,701 shares of our common stock
upon completion of this offering and (2) the receipt of net
proceeds from the sale of 20,000,000 shares of our
common stock in this offering at an assumed public offering
price of $1.43 per share, after deducting the estimated
underwriting discount and estimated offering expenses payable by
us.
|
You should read this table together with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and our audited and unaudited financial
statements and the related notes, each appearing elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands,
|
|
|
|
|
except share data)
|
|
|
Convertible preferred stock, no par value; 5,000,000 shares
authorized, 1,544,626 shares issued and outstanding,
actual; no shares issued and outstanding, as adjusted;
liquidation preference of $41,866 at June 30, 2006, actual
|
|
$
|
23,669
|
|
|
|
—
|
|
|
Shareholders’ (deficit) equity:
|
|
|
|
|
|
|
|
|
|
|
Common stock, no par value; 100,000,000 shares authorized,
14,765,502 shares issued and outstanding, actual;
100,000,000 shares authorized, 36,001,203 shares
issued and outstanding, as adjusted
|
|
|
283,107
|
|
|
$
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
Accumulated deficit
|
|
|
(295,555
|
)
|
|
|
(295,555
|
)
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ (deficit) equity
|
|
|
(12,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capitalization
|
|
$
|
11,219
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
The outstanding share information in the table above excludes as
of June 30, 2006:
|
|
|
|
|
|
•
|
2,573,253 shares of common stock issuable upon the exercise
of outstanding options with a weighted average exercise price of
$13.28 per share;
|
|
|
|
|
•
|
2,119,766 shares of common stock issuable upon exercise of
outstanding warrants with a weighted average exercise price of
$11.11 per share; and
|
|
|
|
|
•
|
1,957,635 shares of common stock reserved for future
issuance under our 2005 Equity Incentive Plan.
|
22
DILUTION
If you invest in our common stock in this offering, your
interest will be diluted to the extent of the difference between
the assumed public offering price per share of our common stock
and the as adjusted net tangible book value per share of our
common stock after this offering. As of June 30, 2006, our
net tangible book value (deficit) was $(12.5) million, or
$(0.84) per share of common stock. Net tangible book value
per share is equal to our total tangible assets, less total
liabilities, divided by the number of shares of our outstanding
common stock. After giving effect to our sale in this offering
of 20,000,000 shares of our common stock at the assumed
public offering price of $1.43 per share, after deducting
the estimated underwriting discount and offering expenses
payable by us and after the conversion of all outstanding shares
of our Series A Convertible Preferred Stock into common
stock upon completion of this offering, our pro forma as
adjusted net tangible book value as of June 30, 2006 would
have been $ million, or
$ per
share of our common stock. This represents an immediate increase
of net tangible book value of
$ per
share to our existing shareholders and an immediate dilution of
$ per
share to investors purchasing shares in this offering. The
following table illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
|
|
|
Assumed public offering price per share
|
|
|
|
|
|
$
|
|
|
|
|
Net tangible book value (deficit) per share as of June 30,
2006
|
|
$
|
(0.84
|
)
|
|
|
|
|
|
|
Increase in net tangible book value per share attributable to
investors purchasing shares in this offering
|
|
|
|
|
|
|
|
|
|
|
Increase in net tangible book value per share attributable to
conversion of all outstanding shares of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted net tangible book value per share after giving
effect to this offering and the
conversion of all outstanding shares of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution to investors in this offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
If the underwriter exercises its over-allotment option in full,
the as adjusted net tangible book value per share after giving
effect to this offering and the conversion of our preferred
stock would be
$ per
share, and the dilution per share to investors in this offering
would be
$ per
share.
23
SELECTED FINANCIAL DATA
We present below our selected financial data. The statement of
operations data for the years ended December 31, 2003, 2004
and 2005 and the balance sheet data as of December 31, 2004
and 2005 have been derived from our audited financial statements
included elsewhere in this prospectus. The statement of
operations data for the years ended December 31, 2001 and
2002 and the balance sheet data as of December 31, 2001,
2002 and 2003 have been derived from our audited financial
statements not included in this prospectus. The statement of
operations data for the six months ended June 30, 2005 and
2006 and the balance sheet data as of June 30, 2006 have
been derived from our unaudited financial statements included
elsewhere in this prospectus. You should read this information
together with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our
audited and unaudited financial statements and related notes,
each included elsewhere in this prospectus. Our interim results
are not necessarily indicative of results for the full fiscal
year and our historical results are not necessarily indicative
of the results to be expected in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Years Ended December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005 (1)
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract and license revenues
|
|
$
|
28,916
|
|
|
$
|
28,967
|
|
|
$
|
33,857
|
|
|
$
|
28,045
|
|
|
$
|
10,507
|
|
|
$
|
8,926
|
|
|
$
|
2,880
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
58,836
|
|
|
|
54,680
|
|
|
|
49,636
|
|
|
|
46,477
|
|
|
|
30,174
|
|
|
|
14,387
|
|
|
|
13,098
|
|
|
|
General and administrative
|
|
|
9,355
|
|
|
|
10,394
|
|
|
|
10,391
|
|
|
|
11,934
|
|
|
|
10,895
|
|
|
|
5,948
|
|
|
|
5,537
|
|
|
|
Restructuring and asset impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
68,191
|
|
|
|
65,074
|
|
|
|
60,027
|
|
|
|
58,411
|
|
|
|
41,069
|
|
|
|
20,335
|
|
|
|
24,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(39,275
|
)
|
|
|
(36,107
|
)
|
|
|
(26,170
|
)
|
|
|
(30,366
|
)
|
|
|
(30,562
|
)
|
|
|
(11,409
|
)
|
|
|
(21,125
|
)
|
|
Interest income
|
|
|
1,324
|
|
|
|
818
|
|
|
|
338
|
|
|
|
194
|
|
|
|
1,317
|
|
|
|
638
|
|
|
|
380
|
|
|
Other income (2)
|
|
|
6,675
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other (expenses) income
|
|
|
(1,081
|
)
|
|
|
(642
|
)
|
|
|
(138
|
)
|
|
|
(17
|
)
|
|
|
30
|
|
|
|
(45
|
)
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(32,357
|
)
|
|
|
(35,931
|
)
|
|
|
(25,970
|
)
|
|
|
(30,189
|
)
|
|
|
(29,215
|
)
|
|
|
(10,816
|
)
|
|
|
(20,717
|
)
|
|
Deemed dividend (3)
|
|
|
(10,722
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss applicable to common shareholders
|
|
$
|
(43,079
|
)
|
|
$
|
(35,931
|
)
|
|
$
|
(25,970
|
)
|
|
$
|
(30,189
|
)
|
|
$
|
(29,215
|
)
|
|
$
|
(10,816
|
)
|
|
$
|
(20,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share applicable to common
shareholders
|
|
$
|
(9.89
|
)
|
|
$
|
(5.94
|
)
|
|
$
|
(2.59
|
)
|
|
$
|
(2.37
|
)
|
|
$
|
(2.01
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(1.42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
4,358
|
|
|
|
6,052
|
|
|
|
10,039
|
|
|
|
12,741
|
|
|
|
14,513
|
|
|
|
14,486
|
|
|
|
14,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005 (1)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(In thousands)
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
71,164
|
|
|
$
|
31,443
|
|
|
$
|
29,770
|
|
|
$
|
16,763
|
|
|
$
|
27,694
|
|
|
$
|
8,914
|
|
|
Working capital
|
|
|
48,308
|
|
|
|
16,039
|
|
|
|
19,708
|
|
|
|
4,122
|
|
|
|
21,087
|
|
|
|
5,142
|
|
|
Total assets
|
|
|
132,100
|
|
|
|
97,129
|
|
|
|
95,218
|
|
|
|
79,741
|
|
|
|
39,497
|
|
|
|
17,049
|
|
|
Noncurrent portion of notes payable and capital lease obligations
|
|
|
2,427
|
|
|
|
497
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Convertible preferred stock
|
|
|
30,735
|
|
|
|
30,665
|
|
|
|
23,669
|
|
|
|
23,669
|
|
|
|
23,669
|
|
|
|
23,669
|
|
|
Accumulated deficit
|
|
|
(153,535
|
)
|
|
|
(189,443
|
)
|
|
|
(215,436
|
)
|
|
|
(245,623
|
)
|
|
|
(274,838
|
)
|
|
|
(295,555
|
)
|
|
Total shareholders’ equity (deficit)
|
|
|
71,149
|
|
|
|
41,410
|
|
|
|
52,970
|
|
|
|
35,754
|
|
|
|
7,171
|
|
|
|
(12,450
|
)
|
24
|
|
|
|
|
(1)
|
|
On January 26, 2005, we completed the restructuring of our
AERx iDMS program, pursuant to a restructuring agreement entered
into with Novo Nordisk and an affiliate of Novo Nordisk. In
accordance with the restructuring transaction, we received
$51.3 million in cash and applied $4.0 million of
deposits from Novo Nordisk in consideration for our transfer to
Novo Nordisk of $54.5 million of property and equipment at
net book value, $515,000 of inventory and $317,000 for prepaid
and other assets. As a result of the restructuring transaction,
our contract revenues from our development agreement with Novo
Nordisk ceased in 2005. Of the amount recorded in deferred
revenue at December 31, 2004, we recorded
$11.3 million in the first quarter of 2005, consisting of:
project development revenues of $2.1 million, deferred
milestone revenues of $5.2 million, and $4.0 million
as partial payment for the sale of the insulin development
program assets in accordance with the restructuring agreement.
We recorded no material gain or loss as a result of the sale of
these assets.
|
|
|
|
(2)
|
|
Other income consists of the gain related to forgiveness of
outstanding notes and interest by Genentech, previously
classified as an extraordinary item. In 2002, we early adopted
Statement of Financial Accounting Standard 145, “Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB 13
and Technical Corrections,” which requires the
reclassification of this type of extraordinary item as a
component of operating results.
|
|
|
|
(3)
|
|
The deemed dividend represents the beneficial conversion feature
on our Series A Convertible Preferred Stock, measured as
the difference between the fair market value of our common stock
and the discounted conversion price. We reported the value of
the beneficial conversion feature on the statements of
operations for the year ended December 31, 2001 as a deemed
dividend and included the value in the calculation of net loss
applicable to the common shareholders.
|
25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with “Selected Financial Data” and our
financial statements and related notes appearing elsewhere in
this prospectus. In addition to historical information, this
discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. Our actual results
may differ materially from those anticipated in these
forward-looking statements as a result of certain factors,
including but not limited to, those set forth under “Risk
Factors” and elsewhere in this prospectus.
Overview
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of a portfolio of drugs
delivered by inhalation for the treatment of severe respiratory
diseases by pulmonologists. Over the last decade, we have
invested a large amount of capital to develop drug delivery
technologies, and in doing so we have developed a significant
amount of expertise in pulmonary drug delivery. We have also
invested considerable effort into the generation of a large
volume of laboratory and clinical data demonstrating the
performance of our AERx pulmonary drug delivery platform. We
have not been profitable since inception and expect to incur
additional operating losses over at least the next several years
as we expand product development efforts, preclinical testing
and clinical trial activities and possible sales and marketing
efforts and as we secure production capabilities from outside
contract manufacturers. To date, we have not had any significant
product sales, and we do not anticipate receiving any revenues
from the sale of products for at least the next several years.
As of June 30, 2006, we had an accumulated deficit of
$295.6 million. Historically we have funded our operations
primarily through private placements and public offerings of our
capital stock, proceeds from equipment lease financings, license
fees and milestone payments from collaborators, proceeds from
our restructuring transaction with Novo Nordisk and interest
earned on investment.
We have performed initial feasibility work and conducted early
stage clinical work on a number of potential products and have
been compensated for expenses incurred while performing this
work in several cases pursuant to feasibility study agreements
and other collaborative arrangements. We will seek to develop
certain potential products ourselves, including those that can
benefit from our experience in pulmonary delivery, and that have
markets we can address with a targeted sales and marketing force
and that we believe are likely to provide a superior therapeutic
profile or other valuable benefits to patients when compared to
existing products. For other potential products with larger or
less concentrated markets we may seek to enter into development
and commercialization agreements with collaborators.
In 2004, we executed a development agreement with Defence
Research and Development Canada, a division of the Canadian
Department of National Defence, for the development of liposomal
ciprofloxacin for the treatment of biological terrorism-related
inhalation anthrax. We are also exploring the use of liposomal
ciprofloxacin to treat other indications. We have received
orphan drug designation for this formulation from the United
States Food and Drug Administration, or the FDA, for the
management of cystic fibrosis, or CF. We initiated preclinical
studies for our ARD-3100 product candidate in 2006 and expect to
initiate human clinical studies for the CF indication in the
first half of 2007. We anticipate using safety data from these
studies to support our expected application for approval of the
ARD-1100 product candidate for the prevention and treatment of
inhalation anthrax and possibly other inhaled life-threatening
bioterrorism infections as well.
The AERx insulin Diabetes Management System, or AERx iDMS, which
we initially developed and is now licensed to Novo Nordisk, is
being developed to control blood glucose levels in patients with
diabetes. Following the restructuring of our collaborative
arrangement in January 2005, all responsibility for funding and
conducting the remaining development and commercialization of
this product, including manufacturing, clinical trials,
regulatory filings, marketing and sales, has been transferred to
Novo Nordisk. We have the right to receive royalties on any
sales of AERx iDMS. AERx iDMS is currently undergoing testing in
a Phase 3 clinical program, which began in May 2006. This
program follows significant prior clinical work
26
which provided preliminary evidence that AERx iDMS is comparable
to regular injectable insulin in the overall management of
Type 1 and Type 2 diabetes. The Phase 3 clinical
program is expected to include a total of approximately 3,400
Type 1 and Type 2 diabetes patients and is taking
place worldwide with primary focus on Europe and the United
States. The program includes treatment comparisons with other
antidiabetics. The longest of these trials is expected to last
27 months. Novo Nordisk announced in October 2006 that it
expects commercial launch of the product in 2010. As with any
clinical program, there are many factors that could delay the
launch or could result in AERx iDMS not receiving or maintaining
regulatory approval.
Following positive pre-clinical and Phase 1 study results,
our ARD-1300 program for the treatment of asthma has completed a
Phase 2 clinical trial and we expect to announce final
results by the end of 2006. The results of this Phase 2
study will form the basis of our and our collaborator’s
decision as to whether to continue this program.
We have other ongoing collaborator-funded and proprietary
programs under development. In 2006, we expect self-initiated
research and development expenses to decrease from 2005;
however, the extent of and costs associated with future research
and development efforts are uncertain and difficult to predict
due to the early stage of development of our programs.
Restructured Relationship with Novo Nordisk
During 2005, our collaborative agreement with Novo Nordisk and
its subsidiary, Novo Nordisk Delivery Technologies, or NNDT,
contributed approximately 76% of our total contract revenues.
From the inception of our collaboration in June 1998 through
December 31, 2005, we have received from Novo Nordisk
$137.1 million in product development payments,
$13.0 million in milestone payments and $35.0 million
from the purchase of our common stock by Novo Nordisk and its
affiliates. All product development and milestone payments
received to date have been recognized as revenue.
As of January 26, 2005, we restructured the AERx iDMS
program, pursuant to a restructuring agreement entered into with
Novo Nordisk and NNDT in September 2004. Under the terms of the
restructuring agreement, we sold certain equipment, leasehold
improvements and other tangible assets used in the AERx iDMS
program to NNDT, for a cash payment of $55.3 million
(before refund of cost advances made by Novo Nordisk). Our
expenses related to this transaction for legal and other
consulting costs were $1.1 million. In connection with the
restructuring transaction, we entered into various related
agreements with Novo Nordisk and NNDT, including the following:
|
|
|
|
|
|
•
|
an amended and restated license agreement amending the
development and license agreement previously in place with Novo
Nordisk, expanding Novo Nordisk’s development and
manufacturing rights to the AERx iDMS program and providing for
royalties to us on future AERx iDMS net sales in lieu of a
percentage interest in the gross profits from the
commercialization of AERx iDMS, which royalties run until the
later of last patent expiry or last use of our intellectual
property and which apply to future enhancements or generations
of our AERx delivery technology;
|
|
|
|
|
•
|
a three-year agreement under which NNDT agreed to perform
contract manufacturing of AERx iDMS-identical devices and dosage
forms filled with compounds provided by us in support of
preclinical and initial clinical development of other products
that incorporate our AERx delivery system; and
|
|
|
|
|
•
|
an amendment of the common stock purchase agreement in place
with Novo Nordisk prior to the closing of the restructuring
transaction, (i) deleting the provisions whereby we can
require Novo Nordisk to purchase certain additional amounts of
common stock, (ii) imposing certain restrictions on the
ability of Novo Nordisk to sell shares of our common stock and
(iii) providing Novo Nordisk with certain registration and
information rights with respect to these shares.
|
As a result of this transaction, we recorded our final project
development revenues from Novo Nordisk in the first quarter of
2005, and, as we were no longer obligated to continue work
related to the non-refundable milestone payment from Novo
Nordisk in connection with the commercialization of AERx, we
recognized the remaining balance of the deferred revenue
associated with the milestone of $5.2 million as revenue in
the
27
first quarter of 2005. In 2005 we recorded revenues of
approximately $727,000 from NNDT related to transition and
support agreements. As a result of this transaction, we were
released from our contractual obligations relating to future
operating lease payments for two buildings assigned to NNDT and
accordingly reversed the deferred rent liability related to the
two buildings of $1.4 million, resulting in a reduction of
operating expenses in 2005. In addition, pursuant to the
restructuring agreement, we terminated a manufacturing and
supply agreement and a patent cooperation agreement, each
previously in place with Novo Nordisk and dated October 22,
2001.
On July 5, 2006, we further restructured our relationship
with Novo Nordisk through an intellectual property assignment, a
royalty prepayment and an eight-year promissory note with Novo
Nordisk. The promissory note was secured by the royalty payments
on any AERx iDMS sales by Novo Nordisk under the license with
us. The key features of this restructuring included:
|
|
|
|
|
|
•
|
our transfer to Novo Nordisk of the ownership of 23 issued
United States patents and their corresponding non-United States
counterparts, if any, as well as related pending applications,
in exchange for $12.0 million paid to us in cash. We
retained exclusive, royalty-free control of these patents
outside the field of glucose control and will continue to be
entitled to royalties with respect to any inhaled insulin
products marketed or licensed by Novo Nordisk.
|
|
|
|
|
•
|
our receipt of a royalty prepayment of $8.0 million in
exchange for a one percent reduction on our average royalty rate
for the commercialized AERx iDMS product. As a result, we will
receive royalty rates under our license agreement with Novo
Nordisk that will commence at a minimum of 3.25% on launch, and
that we estimate will average 5% over the life of the product.
|
|
|
|
|
•
|
our issuance of an eight-year promissory note to Novo Nordisk in
connection with our receipt from Novo Nordisk of a loan in the
principal amount of $7.5 million with interest accruing at
5% per year. The principal and interest will be payable to Novo
Nordisk in three equal payments of $3.5 million on
July 2, 2012, July 1, 2013 and June 30, 2014. Our
obligations under the note are secured by royalty payments upon
any commercialization of the AERx iDMS product.
|
We and Novo Nordisk continue to cooperate and share in
technology development, as well as intellectual property
development and defense. Both we and Novo Nordisk have access to
any developments or improvements the other might make to the
AERx delivery system, within their respective fields of use.
Novo Nordisk also remains a substantial holder of our common
stock and is restricted from disposing of any of our common
stock until January 1, 2009 or the earlier occurrence of
certain specified events.
In August 2006, Novo Nordisk announced that it had filed a
lawsuit against Pfizer claiming that Exubera, an inhaled insulin
product that Pfizer has been developing with Nektar
Therapeutics, infringes a patent originally owned by us and now
owned by Novo Nordisk with rights retained by us outside the
field of glucose control. Depending on the outcome of this
lawsuit, which is highly uncertain, we could be entitled to a
portion of any proceeds received by Novo Nordisk from a
favorable outcome.
Purchase and Sale of Intraject Technology
In May 2003, we acquired select assets from the Weston Medical
Group, a company based in the United Kingdom, including the
Intraject needle-free delivery technology, related manufacturing
equipment and intellectual property and associated transfer
costs, for a total of $2.9 million. The purchase price and
additional costs were allocated to the major pieces of purchased
commercial equipment for the production of Intraject and were
recorded in property and equipment as construction in progress.
No costs or expenses were allocated to intellectual property or
in-process research and development on a pro-rata basis, because
of the lack of market information, the early stage of
development and the immateriality of any allocation to
intellectual property or in-process research and development
based on the substantial value of the tangible assets acquired.
In October 2004, we announced positive results from the clinical
performance verification trial of the Intraject needle-free
delivery system. Following the results from the configuration
trial, we initiated a pilot pharmacokinetic study comparing
Intraject with sumatriptan, a treatment for migraines, to the
currently
28
marketed needle-injected product. In June 2005, we announced
results from this study, which showed that Intraject sumatriptan
was bioequivalent to the marketed injectable product and that
patients were able to self-administer using Intraject.
In August 2006, we sold all of our assets related to the
Intraject technology platform and products, including 12 United
States patents along with any foreign counterparts corresponding
to those United States patents, to Zogenix, Inc., a newly
created private company that has some officers who were former
officers of our company. Zogenix is responsible for further
development and commercialization efforts of Intraject. We
received a $4.0 million initial payment and we will be
entitled to a milestone payment upon initial commercialization
and royalty payments upon any commercialization of products that
may be developed and sold using the Intraject technology. Our
potential royalty payments will be affected by the ability of
Zogenix to maintain and, if necessary, enforce the patents we
assigned to it.
Nasdaq Listing
Based on our preliminary analysis, we do not anticipate that we
will be able to meet Nasdaq’s continued listing
requirements as of September 30, 2006. We are requesting a
hearing with Nasdaq and we intend to seek continued listing. The
hearing may not be resolved in our favor, and we may be delisted
from the Nasdaq Capital Market. Even if the hearing is resolved
in our favor, we may not be able to meet Nasdaq’s listing
requirements to continue trading on the Nasdaq Capital Market in
the future. If our common stock is delisted from the Nasdaq
Capital Market, we will likely be traded on the Pink Sheets or
the
Over-the
-Counter
Bulletin Board, which may reduce the liquidity of, and may
adversely affect the price of, our common stock.
Critical Accounting Policies and Estimates
We consider certain accounting policies related to revenue
recognition, stock-based compensation and impairment of
long-lived assets to be critical accounting policies that
require the use of significant judgments and estimates relating
to matters that are inherently uncertain and may result in
materially different results under different assumptions and
conditions. The preparation of financial statements in
conformity with United States generally accepted accounting
principles requires us to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes to the financial statements. These estimates
include useful lives for property and equipment and related
depreciation calculations, estimated amortization periods for
payments received from product development and license
agreements as they relate to the revenue recognition of deferred
revenue and assumptions for valuing options, warrants and other
stock-based compensation. Our actual results could differ from
these estimates.
Revenue Recognition
Contract revenues consist of revenues from collaboration
agreements and feasibility studies. We recognize revenues under
the provisions of the Securities and Exchange Commission issued
Staff Accounting Bulletin, or SAB, No. 104, “Revenue
Recognition.” Under collaboration agreements, revenues are
recognized as costs are incurred. Deferred revenue represents
the portion of all refundable and nonrefundable research
payments received that have not been earned. In accordance with
contract terms, milestone payments from collaborative research
agreements are considered reimbursements for costs incurred
under the agreements and, accordingly, are generally recognized
as revenues either upon the completion of the milestone effort
when payments are contingent upon completion of the effort or
are based on actual efforts expended over the remaining term of
the agreements when payments precede the required efforts. Costs
of contract revenues are approximate to or are greater than such
revenues and are included in research and development expenses
when incurred. Refundable development and license fee payments
are deferred until the specified performance criteria are
achieved. Refundable development and license fee payments are
generally not refundable once the specific performance criteria
are achieved and accepted.
29
Impairment of Long-Lived Assets
We review for impairment whenever events or changes in
circumstances indicate that the carrying amount of property and
equipment may not be recoverable in accordance with Statement of
Financial Accounting Standard, or SFAS, No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets.” Determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the
use of the asset and its eventual disposition. Future cash flows
that are contingent in nature are generally not recognized. In
the event that such cash flows are not expected to be sufficient
to recover the carrying amount of the assets, the assets are
written down to their estimated fair values and the loss is
recognized in the statements of operations. We recorded a
non-cash impairment charge of $4.0 million during the six
months ended June 30, 2006 related to our estimate of the
net realizable value of the Intraject-related assets, based on
the expected sale of those assets.
Stock-Based Compensation Expense
Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS No. 123 (revised 2004),
“Share-Based Payment,” or SFAS No. 123R, using the
modified prospective transition method and, therefore, have not
restated prior periods’ results. Under this method, we
recognize compensation expense, net of estimated forfeitures,
for all stock-based payments granted after January 1, 2006
and all stock-based payments granted prior to but not vested as
of January 1, 2006.
Under the provisions of SFAS No. 123R, stock-based
compensation cost is estimated at the grant date based on the
award’s fair value and is recognized as expense, net of
estimated forfeitures, ratably over the requisite vesting
period. We have elected to calculate an awards’ fair value
based on the Black-Scholes option-pricing model. The
Black-Scholes model requires various assumptions including
expected option life and expected stock price volatility. If any
of the assumptions used in the Black-Scholes model or the
estimated forfeiture rate change significantly, stock-based
compensation expense may differ materially in the future from
that recorded in the current period.
Under SFAS No. 123R, we recognized compensation expense for
stock-based compensation of $854,000 for the six months ended
June 30, 2006.
Comparison of Six Months Ended June 30, 2006 and 2005
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Change in
|
|
|
|
2005
|
|
2006
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues
|
|
$
|
3,740
|
|
|
$
|
2,686
|
|
|
$
|
(1,054
|
)
|
|
|
(28)%
|
|
|
|
Milestone revenues
|
|
|
5,186
|
|
|
|
194
|
|
|
|
(4,992
|
)
|
|
|
(96)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
8,926
|
|
|
$
|
2,880
|
|
|
$
|
(6,046
|
)
|
|
|
(68)%
|
|
Total revenues consist of contract revenues and milestone
revenues. Total revenues decreased 68% for the six months ended
June 30, 2006 over the comparable period in fiscal 2005 due
to decreases in both contract revenues and milestone revenues.
The decreases were primarily due to restructuring the AERx iDMS
program in January 2005, which resulted in a decrease in
revenues associated with that program. In the six-month period
ended June 30, 2006, we recorded increased contract
revenues of $1.5 million from our programs. This increase
was primarily offset by a net decrease in contract revenues of
$2.1 million due to the restructuring of the AERx iDMS
program in January 2005 and $400,000 from a transition service
agreement with Novo Nordisk A/S, which ended on January 27,
2006. Milestone revenues for the six-month period ended
June 30, 2006 decreased by $5.2 million primarily due
to the consummation of the restructuring with Novo Nordisk on
January 26, 2005 offset by an increase of $194,000 for the
ARD-1300 development program.
30
As a result of the restructuring of the AERx iDMS program, which
was completed on January 26, 2005, we recorded project
development revenues from Novo Nordisk for the first
26 days of 2005 of approximately $2.1 million and we
also recognized $5.2 million, the remaining balance of the
deferred revenue associated with a previously received milestone
payment of $13.0 million, as revenues in the first quarter
of 2005.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Change in
|
|
|
|
2005
|
|
2006
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Research and development expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative
|
|
$
|
3,231
|
|
|
$
|
2,882
|
|
|
$
|
(349
|
)
|
|
|
(11)%
|
|
|
|
Self-initiated
|
|
|
11,156
|
|
|
|
10,216
|
|
|
|
(940
|
)
|
|
|
(8)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
14,387
|
|
|
$
|
13,098
|
|
|
$
|
(1,289
|
)
|
|
|
(9)%
|
|
Research and development expenses include salaries, payments to
contract manufacturers and contract research organizations,
contractor and consultant fees, stock-based compensation
expense, and other support costs including facilities,
depreciation and travel costs. The $1.3 million decrease in
research and development expenses is primarily due to the
reduction in wages and other compensation related to workforce
reductions and a decrease in supply-chain management costs due
to the wind-down of the Intraject program, offset by an increase
in research related to self-initiated development projects.
Stock-based compensation expense charged to research and
development for the six months ended June 30, 2006 was
$469,000 due to the adoption of SFAS No. 123R effective
January 1, 2006.
Collaborative program expenses in the six months ended
June 30, 2006 decreased by $349,000 primarily due to
reduced expenses relating to the AERx iDMS program following the
restructuring of that program in the first six months of 2005.
Similarly, research and development expenses for self-initiated
projects decreased by $940,000 due primarily to reductions in
our development programs. We expect that our research and
development expenses will remain relatively constant over the
next few quarters as we redirect our focus from drug delivery
technology development to our drug development programs.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Change in
|
|
|
|
2005
|
|
2006
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
General and administrative expenses
|
|
$
|
5,948
|
|
|
$
|
5,537
|
|
|
$
|
(411
|
)
|
|
|
(7)%
|
|
General and administrative expenses comprise salaries, legal
fees, insurance, marketing research, contractor and consultant
fees, stock-based compensation expense, and other support costs
including facilities, depreciation and travel costs. Stock-based
compensation expense charged to general and administrative
expenses for the six months ended June 30, 2006 was
$384,000 due to the adoption of SFAS No. 123R
effective January 1, 2006.
General and administrative expenses for the six months ended
June 30, 2006 decreased over the comparable period in 2005
primarily due to reduced expenses relating to the AERx iDMS
program following the restructuring of that program. As a result
of the restructuring agreement, costs for building and
maintenance, labor, labor benefits and insurance were reduced.
The reduction in expenses was offset by the increase in
stock-based compensation. We expect that our general and
administrative expenses will remain relatively constant over the
next few quarters.
31
Restructuring and Asset Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Change in
|
|
|
|
2005
|
|
2006
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Restructuring and asset impairment expenses
|
|
|
—
|
|
|
$
|
5,370
|
|
|
$
|
5,370
|
|
|
|
100%
|
|
Restructuring and asset impairment expenses comprise severance
related expenses including payroll, health insurance payments,
outplacement expenses and Intraject-related asset impairment
expenses. Severance-related expenses for the six months ended
June 30, 2006 were $1.4 million. In addition, we
recorded a non-cash impairment charge of $4.0 million to
write down our Intraject-related assets to their net realizable
value. The net realizable value does not include any future
contingent milestones or royalties that we may receive if
certain conditions are satisfied. These assets were included in
the sale of Intraject-related assets to Zogenix in August 2006.
We did not incur any restructuring and asset impairment expenses
in the six months ended June 30, 2005.
Interest Income and Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Change in
|
|
|
|
2005
|
|
2006
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Interest income and other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
638
|
|
|
$
|
380
|
|
|
$
|
(258
|
)
|
|
|
(40
|
)%
|
|
|
Other income (expenses)
|
|
|
(45
|
)
|
|
|
27
|
|
|
|
72
|
|
|
|
160
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income and other income (expenses)
|
|
$
|
593
|
|
|
$
|
407
|
|
|
$
|
(186
|
)
|
|
|
(31
|
)%
|
Interest income and other income (expenses) primarily represent
realized gains from exchange rate transactions and loss on the
disposition of assets. Interest income for the six months ended
June 30, 2006 decreased 40% over the comparable period in
2005 due to a lower average invested balance. The gain reported
in the six month period ended June 30, 2006, primarily
reflected the gain on exchange rate transactions offset by the
loss on sale of assets. The loss reported in the second quarter
of 2005 is the loss recognized from exchange rate transactions
and on the retirement of the assets located at our leased
warehouse facility, which lease has now expired.
Comparison of Years Ended December 31, 2005, 2004 and
2003
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Change in
|
|
|
|
2004
|
|
2005
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues
|
|
$
|
26,752
|
|
|
$
|
5,159
|
|
|
$
|
(21,593
|
)
|
|
|
(81
|
)%
|
|
|
Milestone revenues
|
|
|
1,293
|
|
|
|
5,348
|
|
|
|
4,055
|
|
|
|
314
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
28,045
|
|
|
$
|
10,507
|
|
|
$
|
(17,538
|
)
|
|
|
(63
|
)%
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Change in
|
|
|
|
2003
|
|
2004
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues
|
|
$
|
32,109
|
|
|
$
|
26,752
|
|
|
$
|
(5,357
|
)
|
|
|
(17)%
|
|
|
|
Milestone revenues
|
|
|
1,748
|
|
|
|
1,293
|
|
|
|
(455
|
)
|
|
|
(26)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
33,857
|
|
|
$
|
28,045
|
|
|
$
|
(5,812
|
)
|
|
|
(17)%
|
|
The 63% decrease in total revenues in 2005 compared to 2004 is
due primarily to decreases in contract revenues as a result of
the January 2005 restructuring of the AERx iDMS program. A
decrease in contract revenues of $23.6 million in 2005 from
the AERx iDMS program was offset by an increase of $727,000 in
AERx iDMS consulting revenues and an increase of
$1.3 million as a result of initiating four new feasibility
projects. Milestone revenues increased by $3.9 million due
to the recognition of deferred revenue from a non refundable
milestone balance of $5.2 million and by $162,000 from the
initiation of a new feasibility project.
The 17% decrease in total revenues in 2004 compared to 2003 is
due primarily to decreases in contract revenues and milestone
revenues as a result of the maturation of the collaboration
agreement with Novo Nordisk. This decrease of $6.1 million
was offset by a $734,000 increase in other collaborator-funded
programs. Milestone revenues from Novo Nordisk decreased in 2004
by $455,000.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Change in
|
|
|
|
2004
|
|
2005
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Research and development expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative
|
|
$
|
28,164
|
|
|
$
|
5,996
|
|
|
$
|
(22,168
|
)
|
|
|
(79
|
)%
|
|
|
Self-initiated
|
|
|
18,313
|
|
|
|
24,178
|
|
|
|
5,865
|
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
46,477
|
|
|
$
|
30,174
|
|
|
$
|
(16,303
|
)
|
|
|
(35
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Change in
|
|
|
|
2003
|
|
2004
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Research and development expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative
|
|
$
|
33,512
|
|
|
$
|
28,164
|
|
|
$
|
(5,348
|
)
|
|
|
(16
|
)%
|
|
|
Self-initiated
|
|
|
16,124
|
|
|
|
18,313
|
|
|
|
2,189
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses
|
|
$
|
49,636
|
|
|
$
|
46,477
|
|
|
$
|
(3,159
|
)
|
|
|
(6
|
)%
|
The decrease in research and development expenses in 2005
compared to 2004 is primarily due to a reduction in headcount
and facility costs associated with the restructuring transaction
with Novo Nordisk and cost reduction programs. This was offset
by a $5.9 million increase in self-initiated development
efforts primarily relating to Intraject. The decrease in
research and development expenses in 2004 compared to 2003 is
primarily due to cost reduction programs, including a reduction
in force implemented in July 2003 in order to align our costs
with the reduced revenues from collaborators. These decreases
were offset by a net increase of $2.2 million in
self-initiated program costs. A reduction in pulmonary delivery
development efforts was offset by increased spending on the
Intraject program. The reduced head count affected six months of
2003 and all of 2004.
33
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Change in
|
|
|
|
2004
|
|
2005
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
General and administrative expenses
|
|
$
|
11,934
|
|
|
$
|
10,895
|
|
|
$
|
(1,039
|
)
|
|
|
(9)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Change in
|
|
|
|
2003
|
|
2004
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
General and administrative expenses
|
|
$
|
10,391
|
|
|
$
|
11,934
|
|
|
$
|
1,543
|
|
|
|
15%
|
|
The decrease in general and administrative expenses in 2005 as
compared to 2004 resulted primarily from legal and consulting
costs incurred in 2004 associated with the January 2005
restructuring transaction with Novo Nordisk. Other than the
restructuring transaction, there were no significant corporate
transactions in 2005, 2004 and 2003.
Interest Income and Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Change in
|
|
|
|
2004
|
|
2005
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Interest income and other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
194
|
|
|
$
|
1,317
|
|
|
$
|
1,123
|
|
|
|
579%
|
|
|
|
Other income (expenses)
|
|
|
(17
|
)
|
|
|
30
|
|
|
|
47
|
|
|
|
276%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income and other income (expenses)
|
|
$
|
177
|
|
|
$
|
1,347
|
|
|
$
|
1,170
|
|
|
|
661%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
Change in
|
|
Change in
|
|
|
|
2003
|
|
2004
|
|
Dollars
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Interest income and other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
338
|
|
|
$
|
194
|
|
|
$
|
(144
|
)
|
|
|
(43
|
)%
|
|
|
Other income (expenses)
|
|
|
(138
|
)
|
|
|
(17
|
)
|
|
|
121
|
|
|
|
88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income and other income (expenses)
|
|
$
|
200
|
|
|
$
|
177
|
|
|
$
|
(23
|
)
|
|
|
(12
|
)%
|
The increase in interest income in 2005 compared to 2004 is due
to an increase in interest rates earned and higher average
invested balances in 2005. The average cash and investment
balances were higher in 2005 primarily due to receipt of net
proceeds of $11.7 million from a private placement of
common stock in December 2004 and net proceeds of
$51.3 million from the closing of the January 2005
restructuring transaction with Novo Nordisk. The decrease in
interest income in 2004 compared to 2003 was primarily due to
lower average cash and investment balances in 2004 and, to a
lesser extent, a decrease in interest rates earned on invested
cash balances.
The increase in other income (expenses) in 2005 compared to
2004 is due primarily to the $49,000 net gain on the sale
of assets and $6,000 reduction in interest expense, offset by
$12,000 loss on foreign exchange translation. The decrease in
other expenses in 2004 compared to 2003 is primarily due to
lower outstanding capital lease and equipment loan balances
under various equipment and lease lines of credit which were
completely paid off during 2004.
34
Selected Quarterly Financial Information
The following table sets forth our unaudited quarterly
statements of operations for each of the ten quarters in the
period ended June 30, 2006. You should read the following
table in conjunction with our financial statements and related
notes contained elsewhere in this prospectus. We have prepared
the unaudited information on the same basis as our audited
financial statements. This table includes all adjustments,
consisting only of normal recurring adjustments, that we
consider necessary for a fair presentation of our financial
position and operating results for the quarters presented.
Operating results for any quarter are not necessarily indicative
of results for the full fiscal year or any other future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract and license revenues
|
|
$
|
6,643
|
|
|
$
|
7,078
|
|
|
$
|
6,352
|
|
|
$
|
7,972
|
|
|
$
|
7,714
|
|
|
$
|
1,212
|
|
|
$
|
719
|
|
|
$
|
862
|
|
|
$
|
1,073
|
|
|
$
|
1,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,887
|
|
|
|
11,412
|
|
|
|
11,407
|
|
|
|
11,771
|
|
|
|
7,070
|
|
|
|
7,317
|
|
|
|
6,471
|
|
|
|
9,316
|
|
|
|
6,740
|
|
|
|
6,357
|
|
|
|
General and administrative
|
|
|
2,536
|
|
|
|
3,167
|
|
|
|
3,217
|
|
|
|
3,014
|
|
|
|
3,235
|
|
|
|
2,713
|
|
|
|
2,326
|
|
|
|
2,621
|
|
|
|
2,853
|
|
|
|
2,685
|
|
|
|
Restructuring and asset impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
14,423
|
|
|
|
14,579
|
|
|
|
14,624
|
|
|
|
14,785
|
|
|
|
10,305
|
|
|
|
10,030
|
|
|
|
8,797
|
|
|
|
11,937
|
|
|
|
9,593
|
|
|
|
14,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,780
|
)
|
|
|
(7,501
|
)
|
|
|
(8,272
|
)
|
|
|
(6,813
|
)
|
|
|
(2,591
|
)
|
|
|
(8,818
|
)
|
|
|
(8,078
|
)
|
|
|
(11,075
|
)
|
|
|
(8,520
|
)
|
|
|
(12,605
|
)
|
|
Interest income
|
|
|
66
|
|
|
|
49
|
|
|
|
45
|
|
|
|
34
|
|
|
|
288
|
|
|
|
350
|
|
|
|
342
|
|
|
|
337
|
|
|
|
245
|
|
|
|
135
|
|
|
Other income (expenses)
|
|
|
(10
|
)
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
(37
|
)
|
|
|
(8
|
)
|
|
|
8
|
|
|
|
67
|
|
|
|
(10
|
)
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,724
|
)
|
|
$
|
(7,457
|
)
|
|
$
|
(8,230
|
)
|
|
$
|
(6,778
|
)
|
|
$
|
(2,340
|
)
|
|
$
|
(8,476
|
)
|
|
$
|
(7,728
|
)
|
|
$
|
(10,671
|
)
|
|
$
|
(8,285
|
)
|
|
$
|
(12,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.61
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
12,588
|
|
|
|
12,706
|
|
|
|
12,713
|
|
|
|
12,955
|
|
|
|
14,459
|
|
|
|
14,512
|
|
|
|
14,518
|
|
|
|
14,563
|
|
|
|
14,563
|
|
|
|
14,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Since inception, we have financed our operations primarily
through private placements and public offerings of our capital
stock, proceeds from equipment lease financings, contract
research funding, proceeds from our restructuring transaction
with Novo Nordisk and interest earned on investments. As of
June 30, 2006, we had cash, cash equivalents and short-term
investments of $8.9 million and total working capital of
$5.1 million. Our principal requirements for cash are to
fund working capital needs and, to a lesser extent, capital
expenditures for equipment purchases.
For the six months ended June 30, 2006, our operating
activities used net cash of $18.1 million, which reflects
our net loss of $20.7 million offset by non-cash charges
including stock-based compensation expense under SFAS
No. 123R, impairment charges on property and equipment and
depreciation expense and our use of operating cash to fund
changes in operating assets and liabilities. Cash was used to
pay for an increase in invoices outstanding for the development
of our Intraject program, to pay for severance-related expenses
accrued for the reduction in workforce and to fund accounts
receivable, primarily related to collaborative programs. This
compares to the net cash used in our operating activities for
the six months ended June 30, 2005 of $20.1 million
reflecting our net loss of $10.8 million offset by non-cash
charges including depreciation expense and our use of cash to
fund changes in operating assets and liabilities. The net
reduction in operating assets and liabilities of
$10.1 million is due primarily to the recognition of
deferred revenue of $7.5 million, and reduction of deferred
rent of $1.3 million, recognized in the statement of
operations in the six-month period ended June 30, 2005 in
conjunction with the Novo Nordisk restructuring agreement.
35
For the six month period ended June 30, 2006, our net cash
used in investing activities was $1.5 million. We used
$974,000 for purchases of equipment primarily for the previously
planned commercialization of our Intraject program and $514,000
was used to purchase short term investments. This compares to
net cash provided by investing activities for the six month
period ended June 30, 2005 of $42.8 million which
consisted primarily of $50.3 million in net proceeds from
Novo Nordisk in connection with the restructuring agreement,
offset by our purchase of $2.5 million of fixed assets
relating to our Intraject platform and our purchases of
$5.5 million in securities classified as short-term
investments with funds received in connection with the
restructuring agreement.
Net cash provided by financing activities was $269,000 for the
six months ended June 30, 2006 compared to $326,000 for the
comparable period in the prior year. Net cash provided by
financing activities was attributable primarily to purchases
under our employee stock plans.
As of June 30, 2006, we had an accumulated deficit of
$295.6 million, working capital of $5.1 million, and a
shareholders’ deficit of $12.5 million. Management
believes that cash and cash equivalents on hand at June 30,
2006 together with cash proceeds of $27.5 million from the
July 2006 restructuring of the AERx iDMS program with Novo
Nordisk, $4.0 million of proceeds from the August 2006 sale
of Intraject-related assets to Zogenix, expected funding to be
received under collaborative arrangements and the estimated net
proceeds from this offering will be sufficient to enable us to
meet our obligations through at least the next 18 months.
We will likely need to raise additional capital to fund our
operations and to develop our product candidates. Such funds may
not be available when needed on acceptable terms or at all. If
we cannot raise sufficient funds when needed, we may have to
delay, scale back or abandon clinical trials or other product
development activities, or we may be forced to license or sell
rights to our product candidates that we would have preferred to
retain. If we are able to raise additional capital through the
issuance of equity securities, your equity interest will be
diluted. If we are able to raise additional capital through the
issuance of debt securities, the terms of the debt securities
may restrict our operations, including our ability to pay
dividends on our common stock.
Our development efforts have and will continue to require a
commitment of substantial funds to conduct the preclinical
safety testing and clinical testing activities necessary to
develop and refine such technology and proposed products and to
bring any such products to market. Our future capital
requirements will depend on many factors, including continued
progress with product development, our ability to establish and
maintain favorable collaborative arrangements with others,
progress with preclinical studies and clinical trials and the
results thereof, the time and costs involved in seeking
regulatory approvals, the cost to us of
scale-up
of our
technologies, mainly through contract manufacturers, the cost
involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims, and the need to acquire licenses or
other rights to new technology.
We continue to review our planned operations through the end of
2006 and beyond. We particularly focus on capital spending
requirements to ensure that capital outlays are not expended
sooner than necessary. If we make good progress in our
development programs, we would expect our cash requirements for
capital spending and operations to increase in future periods.
Our capital expenditure budget through the end of 2007 is for a
total of $3.0 million, primarily for investment in
manufacturing processes and equipment.
36
Contractual Obligations
Our contractual obligations and future minimum lease payments
that are non-cancelable at December 31, 2005 are disclosed
in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
After
|
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations
|
|
$
|
22,811
|
|
|
$
|
1,660
|
|
|
$
|
4,677
|
|
|
$
|
4,541
|
|
|
$
|
11,933
|
|
|
Unconditional capital purchase obligations
|
|
|
1,015
|
|
|
|
1,015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Unconditional purchase obligations
|
|
|
2,113
|
|
|
|
2,113
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments
|
|
$
|
25,939
|
|
|
$
|
4,788
|
|
|
$
|
4,677
|
|
|
$
|
4,541
|
|
|
$
|
11,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Financings and Liabilities
Other than contractual obligations incurred in the normal course
of business, we do not have any off-balance sheet financing
arrangements or liabilities, guarantee contracts, retained or
contingent interests in transferred assets or any obligation
arising out of a material variable interest in an unconsolidated
entity. We do not have any majority-owned subsidiaries.
Quantitative and Qualitative Disclosure About Market Risk
In the normal course of business, our financial position is
routinely subject to a variety of risks, including market risk
associated with interest rate movement. We regularly assess
these risks and have established policies and business practices
intended to protect against these and other exposures. As a
result, we do not anticipate material potential losses in these
areas.
As of June 30, 2006, we had cash, cash equivalents and
short-term investments of $8.9 million, consisting of cash,
cash equivalents and highly liquid short-term investments. Our
short-term investments will likely decline by an immaterial
amount if market interest rates increase and, therefore, we
believe our exposure to interest rate changes has been
immaterial. Declines of interest rates over time will, however,
reduce our interest income from short-term investments.
37
BUSINESS
We are an emerging specialty pharmaceutical company focused on
the development and commercialization of a portfolio of drugs
delivered by inhalation for the treatment of severe respiratory
diseases by pulmonologists. Historically we have focused on the
development of our drug delivery technologies, including our
AERx pulmonary drug delivery platform for both respiratory and
systemic diseases. Today, our core business focus is to utilize
our expertise and our pulmonary delivery and formulation
technologies to develop treatments for patients with respiratory
diseases that we believe could be better than the therapies that
are currently available. We select for development those inhaled
drugs for respiratory disease indications that, due to expected
development costs, market size and other factors, we believe we
can successfully develop and market with our own sales force.
Where we determine it would not be desirable or feasible for us
to develop or commercialize product candidates on our own, we
enter into co-development and co-marketing arrangements in order
to benefit from cost and risk reduction during development and
increased sales from collaborators’ marketing activities.
Additionally, multiple opportunities exist for the use of our
pulmonary delivery technology for the treatment of systemic
diseases, both for the delivery of biologics, including
proteins, antibodies and peptides, that today must be delivered
by injection, and for small molecule drugs, where rapid
absorption is desirable. We have demonstrated with a variety of
drugs and biologics that pulmonary delivery of drugs using our
proprietary technologies enhances their absorption profiles. We
believe that our technologies can provide advantages in terms of
convenience, efficiency, safety and reproducibility over other
methods of administration. Where appropriate, we will
out-license aspects of our technology and intellectual property
assets for these products that lie outside our strategic
interests and core expertise.
Our Strategy
We are transitioning our business model toward a specialty
pharmaceutical company focused on development and
commercialization of a portfolio of drugs delivered by
inhalation for the treatment of respiratory diseases. We have
chosen to focus on respiratory diseases based on the expertise
of our management team and the history of our company. We have
significant experience in the treatment of respiratory diseases
and specifically in the development of inhalation products that
are uniquely suited for their treatment. We have a portfolio of
proprietary technologies that may potentially address
significant unmet medical needs for better products in the
global respiratory market, which showed 10.3% growth
overall in 2005, with higher growth rates in the areas of
innovative products. There are five key elements of our strategy:
|
|
|
|
|
|
•
|
Develop a proprietary portfolio of products for the
treatment of respiratory diseases.
We believe our
expertise in the development of pulmonary pharmaceutical
products should enable us to advance and commercialize
respiratory products for a variety of indications. We will
continue to evaluate appropriate drugs and biologics for
inclusion in our proprietary pipeline. We will do so in
consideration of the expected market opportunity, cost, time and
potential returns and the resources needed to advance our
self-initiated programs and programs with collaborators. We
select for development those products that can benefit from our
experience in pulmonary delivery and that we believe are likely
to provide a superior therapeutic profile or other valuable
benefits to patients when compared to existing products. A key
component of our strategy will be to continue to actively seek
product opportunities where we can pursue either a new
indication or route of administration for drugs already approved
by the United States Food and Drug Administration, or the FDA.
In each case, we will then combine the drug with the most
appropriate pulmonary delivery system and formulation to create
a proprietary product candidate with an attractive therapeutic
profile and that is safe, effective and convenient for patients
to use.
|
|
|
|
|
•
|
Accelerate the regulatory approval process.
We
believe our management team’s regulatory expertise in
pharmaceutical inhalation products, new indications and
reformulations of existing drugs will enable us to pursue the
most appropriate regulatory pathway for our product candidates.
Because many of our product candidates incorporate FDA-approved
drugs, we believe that the most expedient
|
38
|
|
|
|
|
|
|
review and approval pathway for many of these product candidates
in the United States will be under Section 505(b)(2) of the
Food, Drug and Cosmetic Act, or the FDCA. Section 505(b)(2)
permits the FDA to rely on scientific literature or on the
FDA’s prior findings of safety and/or effectiveness for
approved drug products. By choosing to develop new applications
or reformulations of FDA-approved drugs, we believe that we can
substantially reduce or potentially eliminate the significant
time, expenditure and risks associated with preclinical testing
of new chemical entities and biologics, as well as utilize
knowledge of these approved drugs to reduce the risk, time and
cost of the clinical trials needed to obtain drug approval. In
addressing niche market opportunities, we intend to pursue
orphan drug designation for our products when appropriate.
Orphan drug designation may be granted to drugs and biologics
that treat rare life-threatening diseases that affect fewer than
200,000 persons in the United States. Such designation provides
a company with the possibility of market exclusivity for up to
seven years as well as regulatory assistance, reduced filing
fees and possible tax credits.
|
|
|
|
|
•
|
Develop our own sales and marketing capacity for products
in niche markets.
We intend to develop our own targeted
sales and marketing force for those of our products prescribed
primarily by the approximately 11,000 pulmonologists, or their
subspecialty segments, in the United States. We expect to begin
establishing a sales force as we approach commercialization of
the first of such products. We believe that by developing a
small sales group dedicated to interacting with disease-specific
physicians in the respiratory field, we can create greater value
from our products for our shareholders. For markets where
maximizing sales of the product would depend on marketing to
primary healthcare providers that are only addressable with a
large sales force, we plan to enter into co-marketing
arrangements. We will also establish collaborative relationships
to commercialize our products in cases where we cannot meet
these goals with a small sales force or when we need
collaborators with relevant expertise and capabilities, such as
the ability to address international markets. Through such
collaborations, we may also utilize our collaborators’
resources and expertise to conduct large late-stage clinical
development.
|
|
|
|
|
•
|
Exploit the broad applicability of our delivery technology
through opportunistic collaborations.
We continue to
believe that companies can benefit by collaborating with us when
our proprietary delivery technologies can create new
pharmaceutical and biologics product opportunities. We will
continue to exploit the broad applicability of our delivery
technologies for systemic applications of our validated
technologies in collaborations with companies that will fund
development and commercialization. We will continue to
out-license technologies and product opportunities that we have
already developed to a certain stage and that are outside of our
core strategic focus. Collaborations and out-licensing may
generate additional revenues while we progress towards the
development and potential launch of our own proprietary products.
|
|
|
|
|
•
|
Outsource manufacturing activities.
We plan to
outsource the late stage clinical and commercial scale
manufacturing of our products to conserve our capital for
product development. We believe that the manufacturing processes
for our AERx delivery systems are now sufficiently advanced that
the required late stage clinical and commercial manufacturing
capacity can be obtained from contract manufacturers. We are
also utilizing contract manufacturers to make our liposomal
formulations. With this approach, we seek manufacturers whose
expertise should allow us to reduce risk and costs normally
incurred if we were to build, operate and maintain large-scale
production facilities ourselves.
|
Product Candidates
Products in development include both our own proprietary
products and products under development with collaborators. They
consist of approved drugs combined with our controlled
inhalation delivery and/or
39
formulation technologies. The following table shows the disease
indication and stage of development for each product candidate
in our portfolio.
|
|
|
|
|
|
|
Product Candidate
|
|
Indication
|
|
Stage of Development
|
|
|
|
|
|
|
|
Proprietary Programs Under Development
|
|
|
|
|
|
ARD-3100 (Liposomal ciprofloxacin)
|
|
Cystic Fibrosis
|
|
Preclinical
|
|
ARD-1100 (Liposomal ciprofloxacin)
|
|
Inhalation Anthrax
|
|
Preclinical
|
|
Collaborative Programs Under Development
|
|
|
|
|
|
AERx iDMS (Insulin)
|
|
Type 1 and Type 2 Diabetes
|
|
In Phase 3
|
|
ARD-1300 (Hydroxychloroquine)
|
|
Asthma
|
|
In Phase 2
|
|
ARD-1500 (Liposomal treprostinil)
|
|
Pulmonary Arterial Hypertension
|
|
Preclinical
|
In addition to these programs, we are continually evaluating
opportunities for product development where we can apply our
expertise and intellectual property to produce better therapies
and where we believe the investment could provide significant
value to our shareholders.
Ciprofloxacin is approved by the FDA as an anti-infective agent
and is widely used for the treatment of a variety of bacterial
infections. Today ciprofloxacin is delivered by oral or
intravenous administration. We believe that delivering this
potent antibiotic directly to the lung may improve its safety
and efficacy in the treatment of pulmonary infections. We
believe that our novel sustained release formulation of
ciprofloxacin may be able to maintain therapeutic concentrations
of the antibiotic within infected lung tissues, while reducing
systemic exposure and the resulting side effects seen with
currently marketed ciprofloxacin products. To achieve this
sustained release, we employ liposomes, which are lipid-based
nanoparticles dispersed in water that encapsulate the drug
during storage and release the drug slowly upon contact with
fluid covering the airways and the lung. In an animal
experiment, ciprofloxacin delivered to the lung of mice appeared
to be rapidly absorbed into the bloodstream, with no drug
detectable four hours after administration. In contrast, the
liposomal formulation of ciprofloxacin produced significantly
higher levels of ciprofloxacin in the lung at all time points
and was still detectable at 12 hours. We also believe that
for certain respiratory disease indications it may be possible
that a liposomal formulation enables better interaction of the
drug with the disease target, leading to improved effectiveness
over other therapies. We have at present two target indications
with distinct delivery systems for this formulation that share
much of the laboratory and production development efforts, as
well as a common safety data base.
|
|
|
|
|
ARD-3100 — Liposomal Ciprofloxacin for the
Treatment of Cystic Fibrosis
|
One of our liposomal ciprofloxacin programs is a proprietary
program using our liposomal formulation of ciprofloxacin for the
treatment and control of respiratory infections common to
patients with cystic fibrosis, or CF. CF is a genetic disease
that causes thick, sticky mucus to form in the lungs, pancreas
and other organs. In the lungs, the mucus tends to block the
airways, causing lung damage and making these patients highly
susceptible to lung infections. According to the Cystic Fibrosis
Foundation, CF affects roughly 30,000 children and adults in the
United States and roughly 70,000 children and adults worldwide.
According to the American Lung Association, the direct medical
care costs for an individual with CF are currently estimated to
be in excess of $40,000 per year.
The inhalation route affords direct administration of the drug
to the infected part of the lung, maximizing the dose to the
affected site and minimizing the wasteful exposure to the rest
of the body where it could cause side effects. Therefore,
treatment of
CF-related
lung infections by direct administration of antibiotics to the
lung may improve both the safety and efficacy of treatment
compared to systemic administration by other routes, as well as
improving patient convenience as compared to injections. Oral
and injectable forms of ciprofloxacin are approved for the
treatment of
Pseudamonas aeruginosa,
a lung infection to
which CF patients are vulnerable. Currently, there is only one
inhalation antibiotic approved for the treatment of this
infection. We believe that local lung delivery via inhalation of
ciprofloxacin in a sustained release formulation
40
could provide a convenient, effective and safe treatment of the
debilitating and often life-threatening lung infections that
afflict patients with CF.
Our liposomal ciprofloxacin CF program represents the first
program in which we intend to retain full ownership and
development rights. We believe we have the preclinical
development, clinical and regulatory knowledge to advance this
product through development in the most efficient manner. We
intend to commercialize this program on our own.
We have received orphan drug designation from the FDA for this
product for the management of CF. As a designated orphan drug,
liposomal ciprofloxacin is eligible for tax credits based upon
its clinical development costs, as well as assistance from the
FDA to coordinate study design. The designation also provides
the opportunity to obtain market exclusivity for seven years
from the date of New Drug Application, or NDA, approval.
We initiated preclinical studies for liposomal ciprofloxacin in
2006 and expect to initiate human clinical studies in the first
half of 2007. We expect to use approximately $20 million of
the net proceeds from this offering to complete preclinical
studies and fund early stage clinical trials and related
manufacturing requirements for
ARD-3100.
In order to
reach commercialization of ARD-3100, we estimate we will need to
spend an additional $15 million to $20 million. In
order to expedite anticipated time to market and increase market
acceptance, we have elected to deliver ciprofloxacin via
nebulizer, as most CF patients already own a nebulizer and are
familiar with this method of drug delivery. We intend to examine
the potential for delivery of ciprofloxacin via our AERx
delivery system. We share the formulation and manufacturing
development as well as the safety data developed for our
inhalation anthrax program discussed below in the development of
this CF opportunity. We also intend to explore the utility of
liposomal ciprofloxacin for the treatment of serious infections
associated with other respiratory diseases, such as chronic
obstructive pulmonary disease and bronchiectasis.
|
|
|
|
|
ARD-1100 — Liposomal Ciprofloxacin for the
Treatment of Inhalation Anthrax
|
The second of our liposomal ciprofloxacin programs is for the
prevention and treatment of pulmonary anthrax infections.
Anthrax spores are naturally occurring in soil throughout the
world. Anthrax infections are most commonly acquired through
skin contact with infected animals and animal products or, less
frequently, by inhalation or ingestion of spores. With
inhalation anthrax, once symptoms appear, fatality rates are
high even with the initiation of antibiotic and supportive
therapy. Further, a portion of the anthrax spores, once inhaled,
may remain dormant in the lung for several months and germinate.
Anthrax has been identified by the Centers for Disease Control
as a likely potential agent of bioterrorism. In the fall of
2001, when anthrax-contaminated mail was deliberately sent
through the United States Postal Service to government
officials and members of the media, five people died and many
more became sick. These attacks highlighted the concern that
inhalation anthrax as a bioterror agent represents a real and
current threat.
Ciprofloxacin has been approved orally and via injection for the
treatment of inhalation anthrax (post-exposure) since 2000. This
ARD-1100
research and
development program has been funded by Defence Research and
Development Canada, or DRDC, a division of the Canadian
Department of National Defence. We believe that this product
candidate may potentially be able to deliver a long acting
formulation of ciprofloxacin directly into the lung and could
have fewer side effects and be more effective to prevent and
treat inhalation anthrax than currently available therapies.
We began our research into liposomal ciprofloxacin under a
technology demonstration program funded by DRDC as part of their
interest to develop products to counter bioterrorism. DRDC had
already demonstrated the feasibility of inhaled liposomal
ciprofloxacin for post-exposure prophylaxis of
Francisella
tularensis,
a potential bioterrorism agent similar to
anthrax. Mice were exposed to a lethal dose of
F. tularensis
and then 24 hours later were
exposed via inhalation to a single dose of free ciprofloxacin,
liposomal ciprofloxacin or
41
saline. All the mice in the control group and the free
ciprofloxacin group were dead within 11 days
post-infection; in contrast, all the mice in the liposomal
ciprofloxacin group were alive 14 days post-infection. The
same results were obtained when the mice received the single
inhaled treatment as late as 48 or 72 hours post-infection.
The DRDC has funded our development efforts to date and
additional development of this program is dependent on
negotiating for and obtaining continued funding from DRDC or on
identifying other collaborators or sources of funding. We plan
to use our preclinical and clinical safety data from our CF
program to supplement the data needed to have this product
candidate considered for approval for use in treating inhalation
anthrax and possibly other inhaled life-threatening bioterrorism
infections.
If we can obtain sufficient additional funding, we would
anticipate developing this drug for approval under FDA
regulations relating to the approval of new drugs or biologics
for potentially fatal diseases where human studies cannot be
conducted ethically or practically. Unlike most drugs, which
require large, well controlled Phase 3 clinical trials in
patients with the disease or condition being targeted, these
regulations allow for a drug to be evaluated and approved by the
FDA on the basis of demonstrated safety in humans combined with
studies in animal models to show effectiveness.
|
|
|
|
|
AERx iDMS — Inhaled Insulin for the Treatment of
Diabetes
|
AERx iDMS is being developed to control blood glucose levels in
patients with diabetes. This product is currently in
Phase 3 clinical trials, and our licensee, Novo Nordisk, is
responsible for all remaining development, manufacturing and
commercialization. We will receive royalties from any sales of
this product as well as from future enhancements or generations
of this technology. According to 2005 statistics from the
American Diabetes Association, approximately 20.8 million
Americans suffer from either Type 1 or Type 2
diabetes. Over 90% of these Americans have Type 2 diabetes,
the prevalence of which is increasing dramatically due to
lifestyle factors such as inappropriate diet and lack of
physical activity. Patients with Type 1 diabetes do not
have the ability to produce their own insulin and must
administer insulin injections to survive. Patients with
Type 2 diabetes are insulin resistant and unable to
efficiently use the insulin that their bodies produce. While
many Type 2 patients can initially maintain adequate
control over blood glucose through diet, exercise and oral
medications, most Type 2 patients progress within three
years to where they cannot maintain adequate control over their
glucose levels and insulin therapy is needed. However, given the
less acute nature of Type 2 diabetes, many of these
patients are reluctant to take insulin by injection despite the
risks. Inadequate regulation of glucose levels in diabetes
patients is associated with a variety of short and long-term
effects, including blindness, kidney disease, heart disease,
amputation resulting from chronic or extended periods of reduced
blood circulation to body tissue and other circulatory
disorders. The global market for diabetes therapies in 2005 was
in excess of $18 billion, according to Business Insights.
The majority of this amount was from sales of oral
antidiabetics, while insulin and insulin analogues accounted for
$7.3 billion, a 17% increase over the prior year.
Sales of insulin and insulin analogues are forecast to grow to
$9.8 billion in 2011. Type 2 patients consume the
majority of insulin used in the United States. We believe that
when patients are provided a non-invasive delivery alternative
to injection, they will be more likely to self-administer
insulin as often as needed to keep tight control over their
blood-glucose levels.
We believe that AERx iDMS possesses features that will benefit
diabetes patients and will provide an advantage over competitive
pulmonary insulin products or can be used as a replacement for
or adjunct to currently available therapies. Our patented breath
control methods and technologies guide patients into the optimal
breathing pattern for effective insulin deposition in and
absorption from the lung. An optimal breathing pattern for
insulin delivery depends on several elements: actuation of drug
delivery at the early part of inspiration, control of
inspiratory flow rate, and the state of inflation of the lung
after the insulin is deposited, with the fully inflated lung
providing the most desirable absorption profile. We believe a
patient’s ability to breathe reproducibly will be required
to assure adequate safety and efficacy of inhaled insulin for
the treatment of Type 1 and Type 2 diabetes. Our system also
allows patients to adjust dosage in single unit increments,
which is key to proper glucose control in diabetes. AERx iDMS
offers the ability for patients and physicians to monitor and
review a patient’s dosing regimen. We believe the
combination of breath control, high efficiency of delivery to
the lung and single unit adjustable dosing in an inhalation
device will make AERx iDMS a competitively attractive product.
42
Over a decade ago, we initiated research and development into
the inhalation delivery of insulin to meet a major unmet medical
need in the treatment of Type 1 and Type 2 diabetes: a system
that could provide similar levels of safety and efficacy as
injected insulin but with the added benefit of a non-invasive
route of delivery. We successfully completed a Phase 1
clinical study and filed an Investigational New Drug
application, or IND, relating to our AERx iDMS program in 1998.
After our initial work, we entered into a collaboration for our
AERx iDMS in June 1998 with a world leader in the treatment of
diabetes, Novo Nordisk. From 1998 to January 2005, we received
an aggregate of $150.1 million from Novo Nordisk to fund
development of the AERx delivery system for delivering insulin,
production for preclinical and clinical testing and process
development and scale up. In January 2005, we transferred the
partially completed initial commercial production facility and
associated personnel to Novo Nordisk for $55.3 million, and
Novo Nordisk assumed responsibility for continuing production
and bringing the facility up to its planned capacity of
750 million dosage forms per year.
AERx iDMS is currently undergoing testing in Phase 3
clinical trials, begun in May 2006 by Novo Nordisk. These trials
follow significant prior clinical work that showed AERx iDMS to
be comparable to injectable insulin in the overall management of
Type 1 and Type 2 diabetes. Past clinical testing has shown:
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HbAlc levels, a key marker of blood glucose control, are
statistically the same in patients using AERx iDMS and patients
using subcutaneous insulin injections.
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The onset of action of inhaled insulin via AERx iDMS is not
significantly different from subcutaneous injection of
rapid-acting insulin, but significantly faster than subcutaneous
injection of human regular insulin.
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The duration of action of inhaled insulin via AERx iDMS is not
significantly different from subcutaneous injection of human
regular insulin, but significantly longer than subcutaneous
injection of rapid-acting insulin.
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Although small declines were seen on some pulmonary function
parameters following
12-24
months of
dosing on AERx iDMS, these declines were not considered to be of
clinical significance, and the findings are not expected to have
an impact on overall pulmonary safety of the product.
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The Phase 3 clinical trials are expected to include a total
of approximately 3,400 Type 1 and Type 2 diabetes patients. The
trials include treatment comparisons with other antidiabetics.
The longest trial is expected to last 27 months. Novo
Nordisk announced in October 2006 that it expects the commercial
launch of the product in 2010. As with any clinical program,
there are many factors that could delay the launch or could
result in AERx iDMS not receiving or maintaining regulatory
approval.
In January 2005 and in July 2006, we announced restructurings of
the AERx iDMS program. Under the new arrangements, Novo Nordisk
is responsible for all further clinical, manufacturing and
commercial development, while we and Novo Nordisk continue to
cooperate and share in technology development, as well as
intellectual property development and defense. We will receive
royalty payments on any commercial sales. Novo Nordisk also
remains a substantial holder of our common stock.
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ARD-1300 — Hydroxychloroquine for the Treatment of
Asthma
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The
ARD-1300
program is
currently in Phase 2 clinical trials and is investigating a
novel aerosolized formulation of hydroxychloroquine, or HCQ, as
a treatment for asthma under a collaboration with APT
Pharmaceuticals, a privately held biotechnology company. Asthma
is a common chronic disorder of the lungs characterized by
airway inflammation, airway hyperresponsiveness or airway
narrowing due to certain stimuli. Despite several treatment
options, asthma remains a major medical problem associated with
high morbidity and large economic costs to the society.
According to the American Lung Association, asthma accounts for
$11.5 billion in direct healthcare costs annually in the
United States, of which the largest single expenditure, at
$5 billion, was prescription drugs. Primary symptoms of
asthma include coughing, wheezing, shortness of breath and
tightness of the chest with symptoms varying in frequency and
degree. According to Datamonitor,
43
asthma affected 41.5 million people in developed countries
in 2005, with 9.5 million of those affected being children.
The highest prevalence of asthma occurs in the United States and
the United Kingdom.
The most common treatment for the inflammatory condition causing
chronic asthma is inhaled steroid therapy via metered dose
inhalers, dry powder inhalers or nebulizers. While steroids are
effective, they have side effects, including oral thrush, throat
irritation, hoarseness and growth retardation in children,
particularly at high doses and with prolonged use. HCQ is an
FDA-approved drug that has been used for over 20 years in
oral formulations as an alternative to steroid therapy for
treatment for lupus and rheumatoid arthritis. We believe
targeted delivery of HCQ to the airway will enhance the
effectiveness of the treatment of asthma relative to systemic
delivery while reducing side effects by decreasing exposure of
the drug to other parts of the body. We believe that our
ARD-1300
product
candidate may potentially provide a treatment for asthma that
could have anti-inflammatory properties similar to inhaled
steroids but with reduced side effects as compared to long-term
steroid treatment.
APT has funded all activities in the development of this program
to date. The ARD-1300 program has advanced into Phase 2
clinical trials following positive preclinical testing and
Phase 1 clinical results. In preclinical testing, the
efficacy of once-daily aerosolized HCQ was compared to that of
budesonide, a leading inhaled steroid, in an asthma sheep model.
Both drugs significantly suppressed the clinically relevant late
phase asthmatic response and airway hyper-reactivity to a
similar extent during 28 days of administration. However,
the HCQ group showed significant continued suppression of these
factors 14 days after cessation of treatment, with no
post-treatment suppression detected in the budesonide group. We
then conducted a Phase 1 clinical trial of both single dose
and seven day dosing of
AERx-delivered
HCQ in
approximately 30 healthy volunteers that indicated that
AERx-delivered
HCQ has
a favorable safety and tolerability profile.
We began the Phase 2 clinical trial in March 2006. The
Phase 2 clinical trial is a randomized, double-blind,
placebo-controlled, multi-dose study in patients with asthma.
The trial enrolled 100 patients with moderate-persistent
asthma who were randomized to one of two treatments groups:
either aerosolized placebo or aerosolized HCQ given once daily
for 21 consecutive days. Both treatment groups were
administered the drug via our AERx delivery system with
efficacy, safety and tolerability assessments being performed
throughout the study. The dosing of patients in the trial was
completed in August 2006, and we are now in the data analysis
phase of this trial, with the results expected to be announced
by the end of 2006. The outcome of this Phase 2 clinical
study will form the basis of our and APT’s decision as to
whether to continue this program and, if so, what the design and
funding of future studies should be.
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ARD-1500 — Treprostinil for the Treatment of
Pulmonary Arterial Hypertension
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The
ARD-1500
program is
being developed as part of a commercial agreement with United
Therapeutics and is investigating a sustained-release liposomal
formulation of a prostacyclin analogue for administration using
our AERx delivery system for the treatment of pulmonary arterial
hypertension, or PAH. PAH is a rare disease that results in the
progressive narrowing of the arteries of the lungs, causing
continuous high blood pressure in the pulmonary artery and
eventually leading to heart failure. According to Decision
Resources, in 2003, the more than 130,000 people worldwide
affected by PAH purchased $600 million of PAH-related
medical treatments and sales are expected to reach
$1.2 billion per year by 2013.
Prostacyclin analogues are an important class of drugs used for
the treatment of pulmonary arterial hypertension. However, the
current methods of administration of these drugs are burdensome
on patients. Treprostinil is marketed by United Therapeutics
under the name Remodulin and is administered by intravenous or
subcutaneous infusion. CoTherix markets in the United States
another prostacyclin analogue, iloprost, under the name Ventavis
that is administered six to nine times per day using a
nebulizer, with each treatment lasting four to six minutes. We
believe administration of liposomal treprostinil by inhalation
using our AERx delivery system may be able to deliver an
adequate dose for the treatment of PAH in a small number of
breaths. We also believe that our sustained release formulation
may lead to a reduction in the number of daily administrations
that are needed to be effective when compared to existing
therapies. We
44
believe that our
ARD-1500
product
candidate potentially could offer a
non-invasive,
more
direct and patient-friendly approach to treatment to replace or
complement currently available treatments.
United Therapeutics has funded our activities in this program to
date. We have completed initial preclinical testing of selected
formulations and are now examining performance of the
formulations in the AERx delivery system before a joint decision
is taken with our collaborator as to whether and how to proceed
with the next steps of the program.
Additional Potential Product Applications
We have demonstrated in human clinical trials to date effective
deposition and, where required, systemic absorption of a wide
variety of drugs, including small molecules, peptides and
proteins, using our AERx delivery system. We intend to identify
additional pharmaceutical product opportunities that could
potentially utilize our proprietary delivery systems for the
pulmonary delivery of various drug types, including proteins,
peptides, oligonucleotides, gene products and small molecules.
We have demonstrated in the past our ability to successfully
enter into collaborative arrangements for our programs, and we
believe additional opportunities for collaborative arrangements
exist outside of our core respiratory disease focus, for some of
which we have data as well as intellectual property positions.
The following are descriptions of two potential opportunities:
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Smoking Cessation.
Based on internal work and work
funded under grants from the National Institutes of Health, we
are developing intellectual property in the area of smoking
cessation. To date, we have two issued United States patents
containing claims directed towards the use of titrated nicotine
replacement therapy for smoking cessation.
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Pain Management System.
Based on our internal work
and a currently dormant collaboration with GlaxoSmithKline, we
have developed a significant body of preclinical and
Phase 1 clinical data on the use of inhaled morphine and
fentanyl, and Phase 2 clinical data on inhaled morphine,
with our proprietary AERx delivery system for the treatment of
breakthrough pain in cancer and post-surgical patients.
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We are currently examining our previously conducted preclinical
and clinical programs to identify molecules that may be suitable
for further development consistent with our current business
strategy. In most cases, we have previously demonstrated the
feasibility of delivering these compounds via our proprietary
AERx delivery system but we have not been able to continue
development due to a variety of reasons, most notably the lack
of funding from collaborators. If we identify any such programs
during this review, we will consider continuing the development
of such compounds on our own.
Pulmonary Drug Delivery Background
Pulmonary delivery describes the delivery of drugs by oral
inhalation and is a common method of treatment of many
respiratory diseases, including asthma, chronic bronchitis and
CF. The current global market for inhalation products includes
delivery through metered-dose inhalers, dry powder inhalers and
nebulizers. The advantage of inhalation delivery for the
diagnosis, prevention and treatment of lung disease is that the
active agent is delivered in high concentration directly to the
desired targets in the respiratory tract while keeping the
body’s exposure to the rest of the drug, and resulting side
effects, at minimum. Over the last two decades, there has also
been increased interest in the use of the inhalation route for
systemic delivery of drugs throughout the body, either for the
purpose of rapid onset of action or to enable noninvasive
delivery of drugs that are not orally bioavailable.
45
The efficacy, safety and efficient delivery of any inhaled drug
depend on delivering the dose of the drug to the specified area
of the respiratory tract. To achieve reproducible delivery of
the dose, it is essential to control three factors:
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emitted dose;
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particle size distribution; and
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breathing maneuver.
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Breathing maneuver includes synchronization of the dose
administration with the inhalation, inspiratory flow rate and
the amount of air that the patient inhales at the time of
dose — the “lung volume.”
Lack of control of any of these factors may impair patient
safety and therapeutic benefits. Further, the efficiency of
delivery has economic implications, especially for drugs whose
inherent production costs are high, such as biologics.
Traditional inhalation delivery systems, such as inhalers, have
been designed and used primarily for delivery of drugs to the
respiratory airways, not to the deep lung. While these systems
have been useful in the treatment of certain diseases such as
asthma, they generate a wide range of particle sizes, only a
portion of which can reach the deep lung tissues. In order for
an aerosol to be delivered to the deep lung where there is a
large absorptive area suitable for effective systemic
absorption, the medication needs to be delivered into the
airstream early during inhalation. This is best achieved with
systems that are breath-actuated,
i.e.
, the dose delivery
is automatically started at the beginning of inhalation.
Further, the drug formulation must be transformed into very fine
particles or droplets (typically one to three microns in
diameter). In addition, the velocity of these particles must be
low as they pass through the airways into the deep lung. The
particle velocity is determined by the particle generator and
the inspiratory flow rate of the patient. Large or fast-moving
particles typically get deposited in the mouth and upper
airways, where they may not be absorbed and could cause side
effects. Most of the traditional drug inhalation delivery
systems have difficulty in generating appropriate drug particle
sizes or consistent emitted doses, and they also rely heavily on
proper patient breathing technique to ensure adequate and
reproducible lung delivery. To achieve appropriate drug particle
sizes and consistent emitted doses, most traditional inhalation
systems require the use of various additives such as powder
carrier materials, detergents, lubricants, propellants,
stabilizers and solvents, which may potentially cause toxicity
or allergic reactions. It is also well documented that the
typical patient frequently strays from proper inhalation
technique after training and may not be able to maintain a
consistent approach over even moderate periods of time. Since
precise and reproducible dosing with medications is necessary to
ensure safety and therapeutic efficacy, any variability in
breathing technique among patients or from dose to dose may
negatively impact the therapeutic benefits to the patient. We
believe high efficiency and reproducibility of lung delivery
will be required in order for inhalation to successfully replace
certain injectable products.
The rate of absorption of drug molecules such as insulin from
the lung has been shown to depend also on the lung volume
following the deposition of the drug in the lung. In order to
achieve safety and efficacy comparable to injections, this
absorption step also needs to be highly reproducible. We
therefore believe that an inhalation system that will coach the
patient to breathe reproducibly to the same lung volume will be
required to assure adequate safety and reproducibility of
delivery of certain drugs delivered systemically via the lung.
The AERx Delivery Technology
The AERx delivery technology provides an efficient and
reproducible means of targeting drugs to the diseased parts of
the lung, or to the lung for systemic absorption, through a
combination of fine mist generation technology and breath
control mechanisms. Similar to nebulizers, the AERx delivery
technology is capable of generating aerosols from simple liquid
drug formulations, avoiding the need to develop complex dry
powder or other formulations. However, in contrast to
nebulizers, AERx is a hand-held unit that can deliver the
required dosage typically in one or two breaths due to its
enhanced efficiency, compared to nebulization treatments, which
commonly last about 15 minutes. We believe the ability to
make small micron-
46
size droplets from a hand-held device that incorporates breath
control will be the preferred method of delivery for many
medications.
We have demonstrated in the laboratory and in many human
clinical trials that our AERx delivery system enables pulmonary
delivery of a wide range of pharmaceuticals in liquid
formulations for local or systemic effects. Our proprietary
technologies focus principally on delivering liquid medications
through small particle aerosol generation and controlling
patient inhalation technique for efficient and reproducible
delivery of the aerosol drug to the deep lung. We have developed
these proprietary technologies through an integrated approach
that combines expertise in physics, engineering and
pharmaceutical sciences. The key features of the AERx delivery
system include the following:
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Liquid Formulation.
Most drugs being considered
for pulmonary delivery, especially biologics, are currently
marketed in stable water formulations. The AERx delivery system
takes advantage of existing liquid-drug formulations, reducing
the time, cost and risk of formulation development compared to
dry-powder-based technologies. The formulation technology of the
AERx delivery system allows us to use conventional, sterile
pharmaceutical manufacturing techniques. We believe that this
approach will result in lower cost production methods than those
used in dry powder systems because we are able to bypass
entirely the complex formulation and manufacturing processes
required for those systems. Moreover, the liquid drug
formulations used in AERx delivery system are expected to have
the same stability profile as the currently marketed versions of
the same drugs. Because of the nature of liquid formulations,
the additives we use are standard and therefore minimize safety
concerns.
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Efficient, Precise Aerosol Generation.
Our
proprietary technology produces the low-velocity, small-particle
aerosols necessary for efficient deposition of a drug in the
deep lung. The AERx delivery system aerosolizes liquid drug
formulations from pre-packaged, single-use, disposable packets.
Each disposable packet comprises a small blister package of the
drug and an adjacent aerosolization nozzle. The AERx device
compresses the packet to push the drug through the nozzle and
thereby creates the aerosol. No propellants are required since
mechanical pressure is used to generate the aerosol. Each packet
is used only once to avoid plugging or wearing that could
degenerate aerosol quality if reused. Through this technology,
we believe we can achieve highly efficient and reproducible
aerosols. The AERx device also has the ability to deliver a
range of patient-selected doses, making it ideal for
applications where the dose must be changed between uses or over
time.
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Breath-Control Technology and Automated Breath-Controlled
Delivery.
Studies have shown that even well trained
patients tend to develop improper inhalation technique over
time, resulting in less effective therapy. The typical problems
are associated with the inability to coordinate the start of
inhalation with the activation of the dose delivery,
inappropriate inspiratory flow rate and inhaled volume of air
with the medication. The AERx delivery system employs breath
control methods and technologies to guide the patient into the
proper breathing maneuver. As a result, a consistent dose of
medication is delivered each time the product is used. The
characteristics of the breath control can be customized for
different patient groups, such as young children or other
patients with small lung volumes.
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The AERx delivery system offers additional patented features
that we believe provide an advantage over competitive pulmonary
products for certain important indications. For example, we
believe our system for insulin delivery is unique in allowing
the patients to adjust dosage in single insulin unit increments.
This adjustable dosing feature may provide an advantage in
certain other types of disease management where precise dosing
adjustment is critical. The electronic version of the AERx
delivery system can also be designed to incorporate the ability
for a physician to monitor and download a patient’s dosing
regimen, which we believe will aid in patient care and assist
physicians in addressing potential issues of non-compliance. We
have also developed a lockout feature for the AERx delivery
system, which can be used to prevent use of the system by anyone
other than the prescribed patient, and to prevent excessive
dosing in any given time frame. These features of our AERx
delivery system are protected by our strong intellectual
property estate that
47
includes patent claims directed toward the design, manufacture
and testing of the AERx dosage forms and the various AERx
pulmonary drug delivery systems.
We currently have two versions of the first-generation hand-held
AERx delivery system in clinical use: AERx iDMS, which has been
customized for the delivery of insulin, and the AERx Single Dose
Platform, which is designed for general clinical use. We are
also in the final stages of development of a next-generation
system, the AERx Essence, which retains the key features of
breath control and aerosol quality, but which is a much smaller,
palm-sized device.
Formulation Technologies
We have a number of formulation technologies for drugs delivered
by inhalation. We have proprietary knowledge and trade secrets
relating to the formulation of drugs to achieve products with
adequate stability and safety, and the manufacture and testing
of inhaled drug formulations. We have been exploring the use of
liposomal formulations of drugs that may be used for the
prevention and treatment of respiratory diseases. Liposomes are
lipid-based nanoparticles dispersed in water that encapsulate
the drug during storage and release the drug slowly upon contact
with fluid covering the airways and the lung. We are developing
liposomal formulations particularly for those drugs that
currently need to be dosed several times a day, or when the slow
release of the drug is likely to improve the efficacy and safety
profile. We believe a liposomal formulation will provide
extended duration of protection and treatment against lung
infection, greater convenience for the patient and reduced
systemic levels of the drug. The formulation may also enable
better interaction of the drug with the disease target,
potentially leading to greater efficacy. We have applied this
technology to ciprofloxacin and treprostinil. We are also
examining other potential applications of this formulation
technology for respiratory therapies.
Intellectual Property and Other Proprietary Rights
Our success will depend to a significant extent on our ability
to obtain, expand and protect our intellectual property estate,
enforce patents, maintain trade secret protection and operate
without infringing the proprietary rights of other parties. As
of August 31, 2006, we had 78 issued United
States patents, with 17 additional United
States patent applications pending. In addition, we had
82 issued foreign patents and additional foreign patent
applications pending. The bulk of our patents and patent
applications contain claims directed toward our proprietary
delivery technologies, including methods for aerosol generation,
devices used to generate aerosols, breath control, compliance
monitoring, certain pharmaceutical formulations, design of
dosage forms and their manufacturing and testing methods. In
addition, we have purchased three United States patents
containing claims that are relevant to our inhalation
technologies. The bulk of our patents, including fundamental
patents directed toward our proprietary AERx delivery
technology, expire between 2013 and 2023. For certain of our
formulation technologies we have in-licensed some technology and
will seek to supplement such intellectual property rights with
complementary proprietary processes, methods and formulation
technologies, including through patent applications and trade
secret protection. Because patent positions can be highly
uncertain and frequently involve complex legal and factual
questions, the breadth of claims obtained in any application or
the enforceability of our patents cannot be predicted.
In connection with the further restructuring of our
collaboration with Novo Nordisk in July 2006, we transferred to
Novo Nordisk the ownership of 23 issued United
States patents and their corresponding
non-United
States counterparts, if any. These transferred patents are
especially important for the AERx iDMS program. We retain
exclusive, royalty-free control of these patents outside the
field of glucose control and will continue to be entitled to
royalties in respect of any inhaled insulin products marketed or
licensed by Novo Nordisk.
In December 2004, as part of our research and development
efforts funded by DRDC for the development of liposomal
ciprofloxacin for the treatment of biological terrorism-related
inhalation anthrax, we obtained worldwide exclusive rights to a
patented liposomal formulation technology for the pulmonary
delivery of ciprofloxacin, and may have the ability to expand
the exclusive license to other fields.
48
We seek to protect our proprietary position by protecting
inventions that we determine are or may be important to our
business. We do this when we are able through the filing of
patent applications with claims directed toward the devices,
methods and technologies we develop. Our ability to compete
effectively will depend to a significant extent on our ability
and the ability of our collaborators to obtain and enforce
patents and maintain trade secret protection over our
proprietary technologies. The coverage claimed in a patent
application typically is significantly reduced before a patent
is issued, either in the United States or abroad. Consequently,
any of our pending or future patent applications may not result
in the issuance of patents or, to the extent patents have been
issued or will be issued, these patents may be subjected to
further proceedings limiting their scope and may in any event
not contain claims broad enough to provide meaningful
protection. Patents that are issued to us or our collaborators
may not provide significant proprietary protection or
competitive advantage, and may be circumvented or invalidated.
We also rely on our trade secrets and the know-how of our
employees, officers, consultants and other service providers.
Our policy is to require our officers, employees, consultants
and advisors to execute proprietary information and invention
assignment agreements upon commencement of their relationships
with us. These agreements provide that all confidential
information developed or made known to the individual during the
course of the relationship shall be kept confidential except in
specified circumstances. These agreements also provide that all
inventions developed by the individual on behalf of us shall be
assigned to us and that the individual will cooperate with us in
connection with securing patent protection for the invention if
we wish to pursue such protection. These agreements may not
provide meaningful protection for our inventions, trade secrets
or other proprietary information in the event of unauthorized
use or disclosure of such information.
We also execute confidentiality agreements with outside
collaborators and consultants. However, disputes may arise as to
the ownership of proprietary rights to the extent that outside
collaborators or consultants apply technological information
developed independently by them or others to our projects, or
apply our technology or proprietary information to other
projects, and any such disputes may not be resolved in our
favor. Even if resolved in our favor, such disputes could result
in substantial expense and diversion of management attention.
In addition to protecting our own intellectual property rights,
we must be able to develop products without infringing the
proprietary rights of other parties. Because the markets in
which we operate involve established competitors with
significant patent portfolios, including patents relating to
compositions of matter, methods of use and methods of delivery
and products in those markets, it may be difficult for us to
develop products without infringing the proprietary rights of
others.
We would incur substantial costs if we are required to defend
ourselves in suits, regardless of their merit. These legal
actions could seek damages and seek to enjoin development,
testing, manufacturing and marketing of the allegedly infringing
product. In addition to potential liability for significant
damages, we could be required to obtain a license to continue to
manufacture or market the allegedly infringing product and any
license required under any such patent may not be available to
us on acceptable terms, if at all.
We may determine that litigation is necessary to enforce our
proprietary rights against others. Such litigation could result
in substantial expense and diversion of management attention,
regardless of its outcome and any litigation may not be resolved
in our favor.
Competition
We are in a highly competitive industry. We are in competition
with pharmaceutical and biotechnology companies, hospitals,
research organizations, individual scientists and nonprofit
organizations engaged in the development of drugs and other
therapies for the respiratory disease indications we are
targeting. Our competitors may succeed, and many have already
succeeded, in developing competing products, obtaining FDA
approval for products or gaining patient and physician
acceptance of products before us for the same markets and
indications that we are targeting. Many of these companies, and
large pharmaceutical companies in particular, have greater
research and development, regulatory, manufacturing, marketing,
financial and managerial resources and experience than we have
and many of these companies may have products and
49
product candidates that are in a more advanced stage of
development than our product candidates. If we are not
“first to market” for a particular indication, it may
be more difficult for us or our collaborators to enter markets
unless we can demonstrate our products are clearly superior to
existing therapies.
Examples of competitive therapies include:
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ARD-3100.
Currently marketed products include Tobi
marketed by Novartis, Pulmozyme marketed by Genentech, Zithromax
marketed by Pfizer and Cipro marketed by Bayer. CF products
under development include inhaled aztreonam under development by
Gilead, inhaled amikacin under development by Transave,
Doripenam under development by Johnson & Johnson and
inhaled ciprofloxacin under development by Bayer.
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ARD-1100.
Current anthrax treatment products
include various oral generic and proprietary antibiotics, such
as Cipro marketed by Bayer.
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AERx iDMS.
Currently marketed diabetes products
include insulin products marketed by companies such as Novo
Nordisk, Eli Lilly and sanofi-aventis. Pfizer, in collaboration
with Nektar Therapeutics, has recently obtained FDA approval for
Exubera, an inhaled form of insulin. Eli Lilly, in collaboration
with Alkermes Pharmaceuticals, and Mannkind Corporation have
announced they have inhaled insulin products in development.
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ARD-1300.
Currently marketed products include
Advair marketed by GlaxoSmithKline, Xolair marketed by Novartis
in collaboration with Genentech, Singulair marketed by Merck,
Asmanex marketed by Schering-Plough and Pulmicort marketed by
AstraZeneca International. Similar asthma products under
development include Symbicort under development by AstraZeneca
and Alvesco under development by sanofi-aventis.
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ARD-1500.
Currently marketed products include
intravenous delivery and subcutaneous infusion of prostacyclins,
such as Remodulin marketed by United Therapeutics, and inhaled
prostacyclins, such as Ventavis, marketed by Schering AG and
CoTherix.
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Many of these products have substantial current sales and long
histories of effective and safe use. In addition, we believe
there are a number of additional drug candidates in various
stages of development that, if approved, would compete with any
future products we may develop. Moreover, one or more of our
competitors that have developed or are developing pulmonary drug
delivery technologies, such as Alkermes, Nektar, Mannkind or
Alexza Pharmaceuticals, or other competitors with alternative
drug delivery methods may negatively impact our potential
competitive position.
We believe that our respiratory expertise and pulmonary delivery
and formulation technologies provide us with an important
competitive advantage for our potential products. We intend to
compete by developing products that are safer, more efficacious,
more convenient, less costly, earlier to market, marketed with
smaller sales forces or cheaper to develop than existing
products or any combination of the foregoing.
Government Regulation
United States
The research, development, testing, manufacturing, labeling,
advertising, promotion, distribution, marketing, and export,
among other things, of any products we develop are subject to
extensive regulation by governmental authorities in the United
States and other countries. The FDA regulates drugs in the
United States under the FDCA and implementing regulations
thereunder.
If we or our product development collaborators fail to comply
with the FCDA or FDA regulations, we, our collaborators, and our
products could be subject to regulatory actions. These may
include delay in approval or refusal by the FDA to approve
pending applications, injunctions ordering us to stop sale of
any products we develop, seizure of our products, warning
letters, imposition of civil penalties or other monetary
payments, criminal prosecution, and recall of our products. Any
such events would harm our reputation and our results of
operations.
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Before any of our drugs may be marketed in the United States, it
must be approved by the FDA. None of our product candidates has
received such approval. We believe that our products currently
in development will be regulated by FDA as drugs.
The steps required before a drug may be approved for marketing
in the United States generally include:
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preclinical laboratory and animal tests, and formulation studies;
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the submission to the FDA of an Investigational New Drug
application, or IND, for human clinical testing that must become
effective before human clinical trials may begin;
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adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product candidate for each
indication for which approval is sought;
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the submission to the FDA of a New Drug Application, or NDA, and
FDA’s acceptance of the NDA for filing;
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satisfactory completion of an FDA inspection of the
manufacturing facilities at which the product is to be produced
to assess compliance with the FDA’s Good Manufacturing
Practices, or GMP; and
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FDA review and approval of the NDA.
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Preclinical Testing
The testing and approval process requires very substantial time,
effort, and financial resources, and the receipt and timing of
approval, if any, is highly uncertain. Preclinical tests include
laboratory evaluations of product chemistry, toxicity, and
formulation, as well as animal studies. The results of the
preclinical studies, together with manufacturing information and
analytical data, are submitted to the FDA as part of the IND.
The IND automatically becomes effective 30 days after
receipt by the FDA, unless the FDA raises concerns or questions
about the conduct of the proposed clinical trials as outlined in
the IND prior to that time. In such a case, the IND sponsor and
the FDA must resolve any outstanding FDA concerns or questions
before clinical trials can proceed. Submission of an IND may not
result in FDA authorization to commence clinical trials. Once an
IND is in effect, the protocol for each clinical trial to be
conducted under the IND must be submitted to the FDA, which may
or may not allow the trial to proceed.
Clinical Trials
Clinical trials involve the administration of the
investigational drug to human subjects under the supervision of
qualified investigators and healthcare personnel. Clinical
trials are conducted under protocols detailing, for example, the
parameters to be used in monitoring patient safety and the
safety and effectiveness criteria, or end points, to be
evaluated. Clinical trials are typically conducted in three
defined phases, but the phases may overlap or be combined. Each
trial must be reviewed and approved by an independent
institutional review board overseeing the institution conducting
the trial before it can begin.
These phases generally include the following:
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Phase 1.
Phase 1 clinical trials
usually involve the initial introduction of the drug into human
subjects, frequently healthy volunteers. In Phase 1, the
drug is usually evaluated for safety, including adverse effects,
dosage tolerance, absorption, distribution, metabolism,
excretion and pharmacodynamics.
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Phase 2.
Phase 2 usually involves
studies in a limited patient population with the disease or
condition for which the drug is being developed to
(1) preliminarily evaluate the efficacy of the drug for
specific, targeted indications; (2) determine dosage
tolerance and appropriate dosage; and (3) identify possible
adverse effects and safety risks.
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Phase 3.
If a drug is found to be
potentially effective and to have an acceptable safety profile
in Phase 2 studies, the clinical trial program will be
expanded, usually to further evaluate clinical efficacy and
safety by administering the drug in its final form to an
expanded patient population at
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geographically dispersed clinical trial sites. Phase 3
studies usually include several hundred to several thousand
patients.
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Phase 1, Phase 2, or Phase 3 clinical trials may
not be completed successfully within any specified period of
time, if at all. Further, we, our product development
collaborators, or the FDA may suspend clinical trials at any
time on various grounds, including a finding that the patients
are being exposed to an unacceptable health risk. For example,
in 2004, Novo Nordisk, our collaborator in the AERx iDMS
program, amended the protocols of a Phase 3 clinical
program, which resulted in significant delay in the development
of AERx iDMS.
Assuming successful completion of the required clinical testing,
the results of preclinical studies and clinical trials, together
with detailed information on the manufacture and composition of
the product, are submitted to the FDA in the form of an NDA
requesting approval to market the product for one or more
indications. Before approving an application, the FDA usually
will inspect the facility or facilities at which the product is
manufactured, and will not approve the product unless continuing
GMP compliance is satisfactory. If the FDA determines the NDA is
not acceptable, the FDA may outline the deficiencies in the NDA
and often will request additional information or additional
clinical trials. Notwithstanding the submission of any requested
additional testing or information, the FDA ultimately may decide
that the application does not satisfy the regulatory criteria
for approval.
If regulatory approval of a product is granted, such approval
will usually entail limitations on the indicated uses for which
such product may be marketed. Once approved, the FDA may
withdraw the product approval if compliance with pre and
post-marketing regulatory requirements and conditions of
approvals are not maintained, if GMP compliance is not
maintained or if problems occur after the product reaches the
marketplace. In addition, the FDA may require post-marketing
studies, referred to as Phase 4 studies, to monitor the
effect of approved products and may limit further marketing of
the product based on the results of these post-marketing studies.
After approval, certain changes to the approved product, such as
adding new indications, certain manufacturing changes, or
additional labeling claims are subject to further FDA review and
approval. Post-approval marketing of products can lead to new
findings about the safety or efficacy of the products. This
information can lead to a product sponsor making, or the FDA
requiring, changes in the labeling of the product or even the
withdrawal of the product from the market.
Section 505(b)(2) Applications
Some of our product candidates may be eligible for submission of
applications for approval under the FDA’s
Section 505(b)(2) approval process, which requires less
information than the NDAs described above.
Section 505(b)(2) applications may be submitted for drug
products that represent a modification (e.g., a new indication
or new dosage form) of an eligible approved drug and for which
investigations other than bioavailability or bioequivalence
studies are essential to the drug’s approval.
Section 505(b)(2) applications may rely on the FDA’s
previous findings for the safety and effectiveness of the listed
drug, scientific literature, and information obtained by the
505(b)(2) applicant needed to support the modification of the
listed drug. For this reason, preparing Section 505(b)(2)
applications is generally less costly and time-consuming than
preparing an NDA based entirely on new data and information from
a full set of clinical trials. The law governing
Section 505(b)(2) or FDA’s current policies may change
in such a way as to adversely affect our applications for
approval that seek to utilize the Section 505(b)(2)
approach. Such changes could result in additional costs
associated with additional studies or clinical trials and delays.
The FDCA provides that reviews and/or approvals of applications
submitted under Section 505(b)(2) will be delayed in
various circumstances. For example, the holder of the NDA for
the listed drug may be entitled to a period of market
exclusivity, during which the FDA will not approve, and may not
even review a Section 505(b)(2) application from other
sponsors. If the listed drug is claimed by patent that the NDA
holder has listed with the FDA, the Section 505(b)(2)
applicant must submit a patent certification. If the 505(b)(2)
applicant certifies that the patent is invalid, unenforceable,
or not infringed by the product that is the subject of the
Section 505(b)(2), and the 505(b)(2) applicant is sued
within 45 days of its notice to the entity that
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holds the approval for the listed drug and the patent holder,
the FDA will not approve the Section 505(b)(2) application
until the earlier of a court decision favorable to the
Section 505(b)(2) applicant or the expiration of
30 months. The regulations governing marketing exclusivity
and patent protection are complex, and it is often unclear how
they will be applied in particular circumstances.
In addition, both before and after approval is sought, we and
our collaborators are required to comply with a number of FDA
requirements. For example, we are required to report certain
adverse reactions and production problems, if any, to the FDA,
and to comply with certain limitations and other requirements
concerning advertising and promotion for our products. Also,
quality control and manufacturing procedures must continue to
conform to continuing GMP after approval, and the FDA
periodically inspects manufacturing facilities to assess
compliance with continuing GMP. In addition, discovery of
problems such as safety problems may result in changes in
labeling or restrictions on a product manufacturer or NDA
holder, including removal of the product from the market.
Orphan Drug Designation
The FDA may grant orphan drug designation to drugs intended to
treat a “rare disease or condition” which generally is
a disease or condition that affects fewer than 200,000
individuals in the United States. A sponsor may request orphan
drug designation of a previously unapproved drug, or of a new
indication for an already marketed drug. Orphan drug designation
must be requested before an NDA is submitted. If the FDA grants
orphan drug designation, which it may not, the identity of the
therapeutic agent and its potential orphan status are publicly
disclosed by the FDA. Orphan drug designation does not convey an
advantage in, or shorten the duration of, the review and
approval process. If a drug which has an orphan drug designation
subsequently receives the first FDA approval for the indication
for which it has such designation, the drug is entitled to
orphan exclusivity, meaning that the FDA may not approve any
other applications to market the same drug for the same
indication for a period of seven years, unless the subsequent
application is able to demonstrate clinical superiority in
efficacy or safety. Orphan drug designation does not prevent
competitors from developing or marketing different drugs for
that indication, or the same drug for other indications.
We have obtained orphan drug designation from the FDA for
inhaled liposomal ciprofloxacin for the management of cystic
fibrosis. We may seek orphan drug designation for other eligible
product candidates we develop. However, our liposomal
ciprofloxacin may not receive orphan drug marketing exclusivity.
Also, it is possible that our competitors could obtain approval,
and attendant orphan drug designation or exclusivity, for
products that would preclude us from marketing our liposomal
ciprofloxacin for this indication for some time.
International Regulation
We are also subject to foreign regulatory requirements governing
clinical trials, product manufacturing, marketing and product
sales. Our ability to market and sell our products in countries
outside the United States will depend upon receiving marketing
authorization(s) from appropriate regulatory authorities. We
will only be permitted to commercialize our products in a
foreign country if the appropriate regulatory authority is
satisfied that we have presented adequate evidence of safety,
quality and efficacy. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to the
commencement of marketing of the product in those countries.
Approval of a product by the FDA does not assure approval by
foreign regulators. Regulatory requirements, and the approval
process, vary widely from country to country, and the time, cost
and data needed to secure approval may be longer or shorter than
that required for FDA approval. The regulatory approval and
oversight process in other countries includes all of the risks
associated with the FDA process described above.
Scientific Advisory Board
We have assembled a scientific advisory board comprised of
scientific and product development advisors who provide
expertise, on a consulting basis from time to time, in the areas
of respiratory diseases, allergy and immunology, hormonal and
metabolic disorders, pharmaceutical development and drug
delivery, including pulmonary delivery, but are employed
elsewhere on a full-time basis. As a result, they can only spend
a
53
limited amount of time on our affairs. We access scientific and
medical experts in academia, as needed, to support our
scientific advisory board. The scientific advisory board assists
us on issues related to potential product applications, product
development and clinical testing. Its members, and their
affiliations and areas of expertise, include:
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Name
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Affiliation
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Area of Expertise
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Peter R. Byron, Ph.D.
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Medical College of Virginia, Virginia Commonwealth University
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Aerosol Science/Pharmaceutics
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Peter S. Creticos, M.D.
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The Johns Hopkins University School of Medicine
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Allergy/Immunology/Asthma
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Robert E. Ratner, M.D.
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MedStar Research Institute
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Endocrinology
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In addition to our scientific advisory board, for certain
indications and programs we assemble groups of experts to assist
us on issues specific to such indications and programs.
Employees
As of August 31, 2006, we had 63 employees, of whom 17 have
advanced degrees. Of these, 46 are involved in research and
development, product development and commercialization; and 17
are involved in business development, finance and
administration. Our employees are not represented by any
collective bargaining agreement.
Facilities
We lease one building with an aggregate of 72,000 square
feet of office and laboratory facilities in Hayward, California.
The aggregate lease payments for our building in 2006 are
approximately $2.0 million, and decrease to approximately
$1.6 million by 2016. The lease expires in June 2016,
subject to our option to extend the term for six months to
December 2016. We believe that the facilities we currently lease
are sufficient for at least the next year and that anticipated
future growth thereafter can be accommodated by leasing
additional space near our current facilities at a comparable
price per square foot.
Legal Proceedings
We are not currently a party to any pending legal proceedings.
54
MANAGEMENT
Executive Officers and Directors
Our directors and executive officers and their ages as of
October 23, 2006 are as follows:
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Name
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Age
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Position
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Igor Gonda, Ph.D.
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President, Chief Executive Officer and Director
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Thomas C. Chesterman
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Senior Vice President and Chief Financial Officer
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Babatunde A. Otulana, M.D.
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Senior Vice President, Development
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Frank H. Barker (1)(2)(3)
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Director
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Stephen O. Jaeger (1)(2)(3)
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Director
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Virgil D. Thompson (1)(2)(3)
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Chairman of the Board
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(1)
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Member of the Audit Committee.
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(2)
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Member of the Compensation Committee.
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(3)
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Member of the Nominating and Corporate Governance Committee.
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Igor Gonda, Ph.D.
has served as our President and
Chief Executive Officer since August 2006, and as a director
since September 2001. From December 2001 to August 2006,
Dr. Gonda was the Chief Executive Officer and Managing
Director of Acrux Limited, a publicly traded specialty
pharmaceutical company located in Melbourne, Australia. From
July 2001 to December 2001, Dr. Gonda was our Chief
Scientific Officer and, from October 1995 to July 2001, was our
Vice President, Research and Development. From February 1992 to
September 1995, Dr. Gonda was a Senior Scientist and Group
Leader at Genentech, Inc. His key responsibilities at Genentech
were the development of the inhalation delivery of rhDNase
(Pulmozyme) for the treatment of cystic fibrosis and
non-parenteral methods of delivery of biologics. Prior to that,
Dr. Gonda held academic positions at the University of
Aston in Birmingham, United Kingdom, and the University of
Sydney, Australia. Dr. Gonda holds a B.Sc. in Chemistry and
a Ph.D. in Physical Chemistry from Leeds University, United
Kingdom. Dr. Gonda was the Chairman of our Scientific
Advisory Board until August 2006.
Thomas C. Chesterman
has served as our Senior Vice
President and Chief Financial Officer since August 2002. From
March 1996 to December 2001, Mr. Chesterman was Vice
President and Chief Financial Officer at Bio-Rad Laboratories,
Inc., a life-science research products and clinical diagnostics
company. From 1993 to 1996, Mr. Chesterman was Vice
President of Strategy and Chief Financial Officer of Europolitan
AB, a telecommunications company. Mr. Chesterman holds a
B.A. from Harvard University, and an M.B.A. in Finance and
Accounting from the University of California at Davis.
Babatunde A. Otulana, M.D.
has served as our Senior
Vice President, Development, since August 2006. Prior to that,
Dr. Otulana served as our Vice President, Clinical and
Regulatory Affairs since October 1997. From 1991 to September
1997, Dr. Otulana was a Medical Reviewer in the Division of
Pulmonary Drug Products at the Center for Drug Evaluation and
Research of the United States Food and Drug Administration.
Dr. Otulana currently serves as an Assistant Clinical
Professor in Pulmonary Medicine at the School of Medicine,
University of California at Davis. Dr. Otulana holds an
M.D. from the University of Ibadan, Nigeria, and completed
Pulmonary Fellowships at Papworth Hospital, University of
Cambridge, United Kingdom, and at Howard University Hospital,
Washington, D.C.
Frank H. Barker
has been a director since May 1999. From
January 1980 to January 1994, Mr. Barker served as a
company group chairman of Johnson & Johnson, Inc., a
diversified health care company, and was Corporate Vice
President from January 1989 to January 1996. Mr. Barker
retired from Johnson & Johnson, Inc. in January 1996.
Mr. Barker holds a B.A. in Business Administration from
Rollins College, Winter Park, Florida.
Stephen O. Jaeger
has been a director since March 2004.
Mr. Jaeger was Chairman, President and Chief Executive
Officer of eBT International, Inc. a privately held software
products and services company, from 1999 to December 2005. Prior
to joining eBT, Mr. Jaeger was the Executive Vice President
and Chief
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Financial Officer of Clinical Communications Group, Inc., a
provider of educational marketing services to the pharmaceutical
and biotech industries, from 1997 to 1998. From 1995 to 1997,
Mr. Jaeger served as Vice President, Chief Financial
Officer and Treasurer of Applera Corp., formerly known as Perkin
Elmer Corporation, an analytical instrument and systems company
with a focus on life science and genetic discovery. Prior to
1995, Mr. Jaeger was Chief Financial Officer and a director
of Houghton Mifflin Company and held various financial positions
with BP, Weeks Petroleum Limited and Ernst & Young LLP.
Mr. Jaeger holds a B.A. in Psychology from Fairfield
University and an M.B.A. in Accounting from Rutgers University
and is a Certified Public Accountant. Mr. Jaeger is the
Chairman of the Board of Savient Pharmaceuticals Inc., a
publicly traded specialty pharmaceutical company, and Arlington
Tankers, Ltd., a publicly traded shipping company.
Mr. Jaeger is the Chairman of, and the designated
“audit committee financial expert” on our and Savient
Pharmaceuticals’ audit committees and is the Chairman of
Arlington Tankers’ audit committee.
Virgil D. Thompson
has been a director since June 1995
and has been Chairman of the Board since January 2005. Since
November 2002, Mr. Thompson has been President and Chief
Executive Officer of Angstrom Pharmaceuticals, Inc., a privately
held pharmaceutical company. From September 2000 to November
2002, Mr. Thompson was President, Chief Executive Officer
and a director of Chimeric Therapies, Inc., a privately held
biotechnology company. From May 1999 until September 2000,
Mr. Thompson was the President, Chief Operating Officer and
a director of Savient Pharmaceuticals, a publicly traded
specialty pharmaceutical company. From January 1996 to April
1999, Mr. Thompson was the President and Chief Executive
Officer and a director of IDM Pharma, Inc., a publicly traded
biopharmaceutical company. From 1994 to 1996, Mr. Thompson
was President and Chief Executive Officer of Cibus
Pharmaceuticals, Inc., a privately held drug delivery device
company. From 1991 to 1993, Mr. Thompson was President of
Syntex Laboratories, Inc., a publicly traded pharmaceutical
company. Mr. Thompson holds a B.S. in Pharmacy from Kansas
University and a J.D. from The George Washington University Law
School. Mr. Thompson is a director of Questcor
Pharmaceuticals, Inc., a publicly traded pharmaceutical company,
and Savient Pharmaceuticals.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Except as set forth below, since January 1, 2003, there has
not been, nor is there currently proposed, any transaction or
series of similar transactions to which we were a party or are a
party in which:
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the amounts involved exceeded or will exceed $60,000; and
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a director, executive officer, holder of more than 5% of
our common stock or any member of their immediate family had or
will have a direct or indirect material interest.
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Transactions with Novo Nordisk
As of January 26, 2005, we restructured the AERx iDMS
program, pursuant to a restructuring agreement entered into with
Novo Nordisk and its subsidiary, Novo Nordisk Delivery
Technologies, or NNDT, in September 2004. Under the terms
of the restructuring agreement, we sold certain equipment,
leasehold improvements and other tangible assets used in the
AERx iDMS program to NNDT, for a cash payment of
$55.3 million (before refund of cost advances made by Novo
Nordisk). Our expenses related to this transaction for legal and
other consulting costs were $1.1 million. In connection
with the restructuring transaction, we entered into various
related agreements with Novo Nordisk and NNDT, including the
following:
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an amended and restated license agreement amending the
development and license agreement previously in place with Novo
Nordisk, expanding Novo Nordisk’s development and
manufacturing rights to the AERx iDMS program and providing for
royalties to us on future AERx iDMS net sales in lieu of a
percentage interest in the gross profits from the
commercialization of AERx iDMS, which royalties run until the
later of last patent expiry or last use of our intellectual
property and which apply to future enhancements or generations
of our AERx delivery technology;
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a three-year agreement under which NNDT agreed to perform
contract manufacturing of AERx iDMS-identical devices and dosage
forms filled with compounds provided by us in support of
preclinical and initial clinical development of other products
that incorporate our AERx delivery system; and
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an amendment of the common stock purchase agreement in place
with Novo Nordisk prior to the closing of the restructuring
transaction, (i) deleting the provisions whereby we can
require Novo Nordisk to purchase certain additional amounts of
common stock, (ii) imposing certain restrictions on the
ability of Novo Nordisk to sell shares of our common stock and
(iii) providing Novo Nordisk with certain registration and
information rights with respect to these shares.
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As a result of this transaction, we were no longer obligated to
continue work related to the non-refundable milestone payment
from Novo Nordisk in connection with the commercialization of
AERx iDMS. We also entered into transition and support
agreements with NNDT and we were released from our contractual
obligations relating to future operating lease payments for two
buildings assigned to NNDT. Pursuant to the restructuring
agreement, we terminated a manufacturing and supply agreement
and a patent cooperation agreement, each previously in place
with Novo Nordisk and dated October 22, 2001. As part of
the restructuring, one of our officers and many of our employees
became employees of NNDT.
On July 5, 2006, we further restructured our relationship
with Novo Nordisk through an intellectual property assignment, a
royalty prepayment and an eight-year promissory note with Novo
Nordisk. The promissory note was secured by the royalty payments
on any AERx iDMS sales by Novo Nordisk under the license with
us. The key features of this restructuring included:
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our transfer to Novo Nordisk of the ownership of 23 issued
United States patents and their corresponding non-United States
counterparts, if any, as well as related pending applications,
in exchange for $12.0 million paid to us in cash. We
retained exclusive, royalty-free control of these patents
outside the field of glucose control and will continue to be
entitled to royalties with respect to any inhaled insulin
products marketed or licensed by Novo Nordisk.
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our receipt of a royalty prepayment of $8.0 million in
exchange for a one percent reduction on our average royalty rate
for the commercialized AERx iDMS product. As a result, we will
receive royalty rates under our license agreement with Novo
Nordisk that will commence at a minimum of 3.25% on launch, and
that we estimate will average 5% over the life of the product.
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our issuance of an eight-year promissory note to Novo Nordisk in
connection with our receipt from Novo Nordisk of a loan in the
principal amount of $7.5 million with interest accruing at
5% per year. The principal and accrued interest will be payable
to Novo Nordisk in three equal payments of $3.5 million on
July 2, 2012, July 1, 2013 and June 30, 2014,
commencing in six years at a five percent annual interest rate.
Our obligations under the note are secured by royalty payments
upon any commercialization of the AERx iDMS product.
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We and Novo Nordisk continue to cooperate and share in
technology development, as well as intellectual property
development and defense. Both we and Novo Nordisk have access to
any developments or improvements the other might make to the
AERx delivery system, within their respective fields of use. In
August 2006, Novo Nordisk announced that it had filed a lawsuit
against Pfizer claiming that Exubera, an inhaled insulin product
that Pfizer has been developing with Nektar Therapeutics,
infringes a patent originally developed by us and now owned by
Novo Nordisk with rights retained by us outside the field of
glucose control. Depending on the outcome of this lawsuit, which
is highly uncertain, we could be entitled to a portion of any
proceeds received by Novo Nordisk from a favorable outcome.
As of August 15, 2006 Novo Nordisk beneficially owned
1,573,673 shares, or 10.7%, of our outstanding common
stock, and is considered a related party. There are restrictions
on the ability of Novo Nordisk to dispose of any shares of our
common stock.
Arrangements with Current and Former Executive Officers
Dr. Gonda
On August 10, 2006, we entered into an “at will”
employment agreement with Dr. Gonda, pursuant to which he
is employed as our President and Chief Executive Officer.
Dr. Gonda is entitled to receive a salary of
$320,000 per year, subject to annual review and adjustment,
and received a $100,000 signing bonus. Dr. Gonda is also
eligible to receive discretionary cash bonuses, as determined by
our Board of Directors, of up to $160,000. In addition,
Dr. Gonda is eligible to receive a stock bonus of up to
100,000 shares of our common stock, not to exceed
$1.0 million in value, upon the achievement of certain
stock price targets over the first two years of his employment.
He is also eligible to receive customary fringe benefits and
reimbursement of up to $75,000 in relocation costs. In the event
of his termination, Dr. Gonda may be entitled to severance
benefits under our existing Executive Officer Severance Benefit
Plan or under our standard Change of Control Agreement adopted
in October 2005.
Dr. Lawlis
Pursuant to an offer letter dated September 20, 2001, we
agreed to provide Dr. V. Bryan Lawlis, our former President
and Chief Executive Officer, with a loan in the principal amount
of $200,000. The loan had a five-year term and accrued interest
at the rate of 4.8% per year. By the terms of the offer
letter, the loan was to be forgiven over the first five years of
Dr. Lawlis’s employment. All principal and accrued
interest outstanding on this loan has been repaid in full by
Dr. Lawlis.
Mr. Rigby
Pursuant to an offer letter with Jonathan Rigby, on
November 30, 2003, we provided Mr. Rigby with a loan
in the principal amount of $191,000. The loan has a five-year
term and accrues interest at the rate of 3.8% per year. As
of December 31, 2004 and 2005, there was $152,161 and
$128,935 in principal and accrued interest outstanding under
this loan, respectively. As of June 30, 2006, there was
$120,609 in principal and accrued interest outstanding under
this loan.
58
Executive Officer Severance Benefit Plan and Charge of
Control Agreements
On October 7, 2005, we adopted the Aradigm Corporation
Executive Officer Severance Benefit Plan, pursuant to which
members of our senior management who are involuntarily
terminated are eligible to receive (i) a lump sum payment
equal to such officer’s annual base salary plus an amount
up to such officer’s target bonus, (ii) payment of
COBRA premiums for a period of up to 12 months following
termination and (iii) career transition assistance.
Pursuant to this plan, Dr. Stephen Farr, Dr. Lawlis,
John Turanin and Bobba Venkatadri, our former executive
officers, are entitled to receive a total of $1.0 million,
of which approximately $440,000 has been paid as of
September 30, 2006.
We have also entered into change of control agreements with our
executive officers, whereby if such officers are involuntarily
or constructively terminated following a change of control, such
officers are eligible to receive (i) a lump sum payment
equal to between one and two times such officer’s annual
base salary plus up to two times such officer’s target
bonus, (ii) payment of COBRA premiums for a period of
between 12 and 24 months following termination,
(iii) career transition assistance and (iv) and
accelerated vesting of all options and/or restricted stock held
by such officer.
Indemnification Agreements
We have entered into indemnity agreements with certain officers
and directors that provide, among other things, that we will
indemnify such officer or director, under the circumstances and
to the extent provided for therein, for expenses, damages,
judgments, fines and settlements he may be required to pay in
actions or proceedings to which such officer or director is or
may be made a party by reason of such officer’s or
director’s position as a director, officer or other agent
of us, and otherwise to the full extent permitted under
California law and our bylaws.
59
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership
information of our common stock at August 15, 2006 on an
actual basis and as adjusted to reflect the sale of the shares
of common stock in this offering, for:
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•
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each person known to us to be the beneficial owner of more than
5% of our common stock;
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•
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our chief executive officer and our four other most highly
compensated executive officers as of December 31, 2005;
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•
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our current chief executive officer;
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•
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each of our directors; and
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•
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all of our current executive officers and directors as a group.
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Unless otherwise noted below, the address of the persons and
entities listed on the table is c/o Aradigm Corporation,
3929 Point Eden Way, Hayward, California 94545.
This table is based upon information supplied by officers,
directors and principal shareholders and supplied in
Schedules 13D and 13G filed with the SEC. Except as
indicated by the footnotes below, we believe, based on the
information furnished to us, that the persons and entities named
in the table below have sole voting and investment power with
respect to all shares of common stock reflected as beneficially
owned, subject to applicable community property laws.
We have determined beneficial ownership in accordance with the
rules of the SEC. In computing the number of shares of common
stock beneficially owned by a person and the percentage
ownership of that person, we deemed outstanding shares of common
stock subject to options or warrants held by that person that
are currently exercisable or exercisable within 60 days of
August 15, 2006. We did not deem these shares outstanding,
however, for the purpose of computing the percentage ownership
of any other person.
We have based our calculation of the percentage of beneficial
ownership on 14,765,502 shares of common stock and
1,544,626 shares of convertible preferred stock outstanding
on August 15, 2006 and 36,001,203 shares of common
stock outstanding upon completion of this offering. We have
granted the underwriter an option to purchase up to
3,000,000 additional shares of our common stock to cover
over-allotments, if any, and the table below assumes no exercise
of that option. Beneficial ownership representing less than 1%
is denoted with an asterisk (*). The beneficial ownership
of our stock after this offering listed in the table below
assumes the automatic conversion of all outstanding shares of
our Series A Convertible Preferred Stock into
1,235,701 shares of common stock upon completion of this
offering.
60
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Beneficial Ownership
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Before This Offering
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After This Offering
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Common
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Series A Preferred
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Common
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Number of
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Percent of
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Number of
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Percent of
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Number of
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Percent of
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Beneficial owner
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Shares
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Total (%)
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Shares
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Total (%)
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Shares
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Total (%)
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Novo Nordisk A/ S (1)
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1,573,673
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10.7
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—
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—
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1,573,673
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4.4
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Novo Alle DK-2880
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Bagsvaerd, Denmark
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New Enterprise Associates 10,
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937,638
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6.2
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1,033,057
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66.9
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1,764,084
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4.8
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Limited Partnership (2)
1119 St. Paul Street
Baltimore, MD 21202
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Laurence W. Lytton (3)
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787,382
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5.3
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—
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—
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787,382
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2.2
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467 Central Park West
New York, NY 10025
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Domain Public Equity Partners, LP (4)
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417,523
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2.8
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154,958
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10.0
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541,489
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1.5
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One Palmer Square
Princeton, NJ 08542
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MPM BioEquities Master Fund LP (5)
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107,436
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*
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206,611
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13.4
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272,725
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*
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501 Gateway Blvd., Suite 360
South San Francisco, CA 94080
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Camden Partners Strategic
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Fund II-A, LP (6)
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—
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—
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150,000
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9.7
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120,000
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*
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c/o Camden Partners, Inc.
One South Street, Suite 2150
Baltimore, MD 21202
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Igor Gonda (7)
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78,435
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*
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—
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—
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78,435
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*
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Thomas C. Chesterman (8)
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146,125
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1.0
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—
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—
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146,125
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*
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Babatunde A. Otulana (9)
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126,641
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—
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126,641
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*
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Virgil D. Thompson (10)
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57,500
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—
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57,500
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*
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Frank H. Barker (11)
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35,043
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—
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—
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35,043
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*
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Stephen O. Jaeger (12)
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13,000
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—
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—
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13,000
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*
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V. Bryan Lawlis (13)
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119,300
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*
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—
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—
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119,300
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*
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Bobba Venkatadri (14)
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56,561
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*
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—
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—
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56,561
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*
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Stephen J. Farr (15)
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124,966
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*
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—
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—
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124,966
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*
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All executive officers and directors as a group
(6 persons) (16)
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456,744
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3.0
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—
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—
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456,744
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1.3
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(1)
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Represents 1,573,673 shares of common stock held by Novo
Nordisk A/S, a company publicly traded in Denmark. According to
a Schedule 13D Amendment No. 4 dated
September 28, 2004, Novo Nordisk A/S holds the shares
through Novo Nordisk Pharmaceuticals, Inc., a Delaware
corporation. Novo Nordisk Pharmaceuticals, Inc. is a wholly
owned subsidiary of Novo Nordisk North America, Inc., a Delaware
corporation. Novo Nordisk North America, Inc. is wholly owned by
Novo Nordisk A/S. Novo A/S, a private limited Danish company,
owns approximately 26.7% of Novo Nordisk A/S’s total share
capital, representing approximately 69.0% of the voting rights
of Novo Nordisk A/S and may be deemed to control Novo Nordisk
A/S. Novo A/S is a wholly owned subsidiary of Novo Nordisk
Foundation, a self-governing and self-owned foundation.
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(2)
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Includes 497,917 shares of common stock and warrants to
purchase an aggregate of 439,721 shares of common stock
held by New Enterprise Associates 10, Limited Partnership
(NEA 10). According to a Schedule 13D Amendment
No. 4 dated June 25, 2003, NEA Partners 10,
Limited Partnership (NEA Partners 10) is the sole general
partner of NEA 10, and Stewart Alsop, James Barrett, Peter
J. Barris, Robert T. Coneybeer, Nancy L. Dorman, Ronald H. Kase,
C. Richard Kramlich, Thomas C. McConnell, Peter T. Morris,
Charles W. Newhall III, Mark W. Perry, Scott D. Sandell and
Eugene A. Trainor III are general partners of NEA
Partners 10. NEA Partners 10 and each of the
aforementioned general partners of NEA Partners 10 have
shared dispositive and shared voting power with respect to the
shares held by NEA 10. Each of the aforementioned disclaims
beneficial ownership as to the shares held by NEA 10,
except to the extent of their pecuniary interest therein.
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(3)
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According to a Schedule 13G dated December 13, 2005,
represents 787,382 shares of common stock held directly by
Laurence W. Lytton.
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(4)
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Includes 240,430 shares of common stock issuable upon
exercise of warrants exercisable within 60 days of
August 15, 2006.
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(5)
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Includes 107,436 shares of common stock issuable upon
exercise of warrants exercisable within 60 days of
August 15, 2006.
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61
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(6)
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Includes 8,400 shares of Series A Convertible
Preferred Stock held by Camden Partners Strategic
Fund II-B, L.P.
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(7)
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Includes 48,809 shares of common stock subject to options
exercisable within 60 days of August 15, 2006.
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(8)
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Includes 136,122 shares of common stock subject to options
exercisable within 60 days of August 15, 2006.
Includes 570 shares of common stock issuable upon exercise
of warrants exercisable within 60 days of August 15,
2006.
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(9)
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Includes 123,621 shares of common stock subject to options
exercisable within 60 days of August 15, 2006.
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(10)
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Includes 57,500 shares of common stock subject to options
exercisable within 60 days of August 15, 2006.
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(11)
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Includes 35,043 shares of common stock subject to options
exercisable within 60 days of August 15, 2006.
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(12)
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Includes 13,000 shares of common stock subject to options
exercisable within 60 days of August 15, 2006.
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(13)
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Includes 109,997 shares of common stock subject to options
exercisable within 60 days of August 15, 2006.
Includes 1,709 shares of common stock issuable upon
exercise of warrants exercisable within 60 days of
August 15, 2006. Dr. Lawlis ceased serving as our
President and Chief Executive Officer as of August 10, 2006.
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(14)
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Includes 56,561 shares of common stock subject to options
exercisable within 60 days of August 15, 2006.
Mr. Venkatadri’s position was terminated on
September 15, 2006.
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(15)
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Includes 124,966 shares of common stock subject to options
exercisable through September 16, 2006.
Dr. Farr’s position was terminated on June 16,
2006.
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(16)
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See footnotes (7) through (12) above.
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62
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares
of common stock, no par value per share, and
5,000,000 shares of preferred stock, no par value per
share. The rights and preferences of the preferred stock may be
established from time to time by our board of directors, without
shareholder approval. The following description summarizes some
of the terms of our capital stock. Because it is only a summary,
it does not contain all of the information that may be important
to you. For a complete description you should refer to our
articles of incorporation and bylaws, which are incorporated by
reference as exhibits to the registration statement of which the
prospectus is a part.
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•
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As of October 23, 2006, 14,776,412 shares of common
stock and 1,544,626 shares of Series A Convertible
Preferred Stock, convertible into 1,235,701 shares of
common stock, were issued and outstanding.
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•
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As of October 23, 2006, we had 124 holders of record
of common stock and 4 holders of record of Series A
Convertible Preferred Stock.
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•
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Immediately after the closing of this offering, we will have
approximately shares
of common stock outstanding and no shares of preferred stock
outstanding.
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Common Stock
The holders of our common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of
the shareholders. Our articles of incorporation provide
shareholders the ability to cumulate their votes in the election
of directors; provided, however, that the shareholders shall not
be entitled to cumulate as long as we are a “listed
corporation” as defined in Section 301.5 of the
California Corporations Code. Subject to preferences that may be
applicable to any then outstanding shares of preferred stock,
holders of our common stock are entitled to receive ratably such
dividends as may be declared by our board of directors out of
funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of our common
stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preference of
any then outstanding shares of preferred stock. Holders of our
common stock have no preemptive rights and no right to convert
their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to our common
stock. All outstanding shares of our common stock are, and all
shares of common stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.
Preferred Stock
Our board of directors has designated 1,500,000 shares of
preferred stock as Series A Junior Participating Preferred
Stock and 2,050,000 shares of our preferred stock as
Series A Convertible Preferred Stock. The shares of
Series A Junior Participating Preferred Stock are
purchasable upon exercise of the rights under our shareholder
rights plan, discussed below. Our board of directors has the
authority to issue the remaining undesignated shares of
preferred stock in one or more series and to determine the
powers, preferences and rights and the qualifications,
limitations or restrictions granted to or imposed upon any new
series of preferred stock, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption,
prices, liquidation preferences, and to fix the number of shares
constituting any series and the designation of such series,
without any further vote or action by our shareholders. The
issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control transaction and may
adversely affect the voting and other rights of the holders of
our common stock. The issuance of shares of preferred stock with
voting and conversion rights may adversely affect the voting
power of the holders of our common stock, including the loss of
voting control to others. At present, we have no plans to issue
any additional shares of our preferred stock.
63
Warrants
As of October 23, 2006, we had outstanding warrants to purchase
an aggregate of 2,119,766 shares of our common stock with a
weighted average exercise price of $11.11 per share. The
warrants expire between December 16, 2006 and
December 22, 2008, with a weighted average remaining term
of 280 days.
Shareholder Rights Plan
In August 1998, we adopted a shareholder rights plan pursuant to
which we distributed rights to purchase shares of Series A
Junior Participating Preferred Stock as a dividend at the rate
of one right for each share of common stock outstanding. The
rights are designed to guard against partial tender offers and
other abusive and coercive tactics that might be used in an
attempt to gain control of us or to deprive our shareholders of
their interest in our long-term value. The shareholder rights
plan seeks to achieve these goals by encouraging a potential
acquirer to negotiate with our board of directors to redeem the
rights and allow the potential acquirer to acquire our shares
without suffering significant dilution. However, these rights
could deter or prevent transactions that shareholders deem to be
in their interests and could reduce the price that investors or
an acquirer might be willing to pay in the future for shares of
our common stock.
Until the earlier to occur of (i) the date of a public
announcement that a person, entity or group of affiliated or
associated persons have acquired beneficial ownership of 15% or
more of our outstanding common stock, such person or entity
being referred to as an acquiring person, or (ii) 10
business days (or such later date as may be determined by action
of our board of directors prior to such time as any person or
entity acquires beneficial ownership of 15% or more of our
outstanding common stock) following the commencement of, or
announcement of an intention to commence, a tender offer or
exchange offer the consummation of which would result in any
person or entity acquires beneficial ownership of 15% or more of
our outstanding common stock, the earlier of such dates being
called the distribution date, the rights trade with, and are not
separable from, our common stock and are not exercisable.
In the event that any person or group of affiliated or
associated persons becomes a beneficial ownership of 15% or more
of our outstanding common stock, each holder of a right, other
than rights beneficially owned by the acquiring person and its
associates and affiliates (which will thereafter be void), will
for a
60-day
period
have the right to receive upon exercise that number of shares of
our common stock having a market value of two times the exercise
price of the right. In the event that we are acquired in a
merger or other business combination transaction or 50% or more
of our consolidated assets or earning power are sold to an
acquiring person, its associates or affiliates or certain other
persons in which such persons have an interest, each holder of a
right will thereafter have the right to receive, upon the
exercise thereof at the then current exercise price of the
right, that number of shares of common stock of the acquiring
company which at the time of such transaction will have a market
value of two times the exercise price of the right.
The rights will expire at the close of business on
September 8, 2008. At any time prior to the earliest of
(i) the day of the first public announcement that a person
has acquired beneficial ownership of 15% or more of our
outstanding common stock or (ii) September 8, 2008,
our board of directors may redeem the rights in whole, but not
in part, at a price of $.001 per right. Following the
expiration of the above periods, the rights become
nonredeemable. Immediately upon any redemption of the rights,
the right to exercise the rights will terminate and the only
right of the holders of rights will be to receive the redemption
price.
The terms of the rights may be amended by our board of directors
without the consent of the holders of the rights, except that,
from and after such time as the rights are distributed, no such
amendment may adversely affect the interest of the holders of
the rights, excluding the interests of an acquiring person.
Anti-Takeover Effects of Provisions of Our Articles of
Incorporation, Our Bylaws, California Law and Our Other
Agreements
Certain provisions of our articles of incorporation, our bylaws
and the California Corporations Code could discourage a third
party from acquiring, or make it more difficult for a third
party to acquire, control of our company without approval of our
board of directors. These provisions could also limit the price
that
64
certain investors might be willing to pay in the future for
shares of our common stock. Certain provisions allow the board
of directors to authorize, without shareholder approval, the
issuance of preferred stock with rights superior to those of the
common stock. We are also subject to the provisions of
Section 1203 of the California Corporations Code which
requires us to provide a fairness opinion to our shareholders in
connection with their consideration of any proposed
“interested party” reorganization transaction.
We have also adopted an Executive Officer Severance Plan and a
Form of Change of Control Agreement, both of which may provide
for the payment of benefits to our officers in connection with
an acquisition. The severance plan and our change of control
agreements may discourage, delay or prevent a third party from
acquiring us.
Limitation of Liability
Our articles of incorporation and bylaws include provisions to
(i) eliminate the personal liability of our directors for
monetary damages resulting from breaches of their fiduciary
duty, to the extent permitted by California law and
(ii) permit us to indemnify our directors and officers,
employees and other agents to the fullest extent permitted by
the California Corporations Code. Pursuant to Section 317
of the California Corporations Code, a corporation generally has
the power to indemnify its present and former directors,
officers, employees and agents against any expenses incurred by
them in connection with any suit to which they are, or are
threatened to be made, a party by reason of their serving in
such positions so long as they acted in good faith and in a
manner they reasonably believed to be in, or not opposed to, the
best interests of a corporation, and with respect to any
criminal action, they had no reasonable cause to believe their
conduct was unlawful. We believe that these provisions are
necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate liability for
breach of the directors’ duty of loyalty to us or our
shareholders, for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law,
for any transaction from which the director derived an improper
personal benefit or for any willful or negligent payment of any
unlawful dividend.
We have entered into indemnification agreements with certain
officers and directors that provide, among other things, that we
will indemnify such officer or director, under the circumstances
and to the extent provided for therein, for expenses, damages,
judgments, fines and settlements such officer or director may be
required to pay in actions or proceedings to which such officer
or director is or may be made a party be reason of such
officer’s or director’s position as a director,
officer or other agent of us, and otherwise to the full extent
permitted under California law and our bylaws.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is
Computershare Trust Company, N.A.
Nasdaq Capital Market Listing
Our common stock is listed on the Nasdaq Capital Market under
the symbol “ARDM.” Based on our preliminary analysis,
we do not anticipate that we will be able to meet Nasdaq’s
continued listing requirements as of September 30, 2006. We
are requesting a hearing with Nasdaq and we intend to seek
continued listing. The hearing may not be resolved in our favor
and we may be delisted from the Nasdaq Capital Market
immediately and without prior notice. Even if the hearing is
resolved in our favor, we may not be able to meet Nasdaq’s
continued listing requirements to continue trading on the Nasdaq
Capital Market in the future. If our common stock is delisted
from the Nasdaq Capital Market, we will likely be traded on the
Pink Sheets or the
Over-the
-Counter
Bulletin Board, which may reduce the liquidity of, and
adversely affect the price of, our common stock.
65
SHARES ELIGIBLE FOR FUTURE SALE
Based on 14,776,412 shares of common stock outstanding as
of October 23, 2006 and assuming no exercise of the
underwriter’s over-allotment option, there will be
36,012,113 shares of our common stock outstanding upon
completion of this offering. Of these shares,
34,392,461 shares will be freely tradable, except that any
shares held by our “affiliates,” as that term is
defined under Rule 144 promulgated under the Securities Act
of 1933, may only be sold in compliance with certain
requirements of Rule 144, including volume limitations,
manner of sale provisions, notice requirements and the
availability of current public information about us. As of
October 23, 2006, 45,979 shares are subject to
90-day
lock-up
agreements
entered into by certain of our officers, directors and
shareholders with the underwriter.
As of August 15, 2006 Novo Nordisk A/ S beneficially owned
1,573,673 shares, or 10.7%, of our outstanding common stock
and is considered a related party. Pursuant to that certain
Amended and Restated Stock Purchase Agreement we entered into
with Novo Nordisk A/ S and Novo Nordisk Pharmaceuticals, Inc. in
connection with the January 2005 restructuring of our
collaboration with Novo Nordisk, Novo Nordisk agreed not to
transfer or dispose of any shares of our common stock, with
limited exceptions, until one of the following occurs:
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•
|
the first AERx iDMS product is made available for sale in
commercial quantities anywhere in the world;
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|
|
|
•
|
the acquisition of all or substantially all of our outstanding
common stock by a third party;
|
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|
|
|
•
|
the termination of our Amended and Restated License Agreement
with Novo Nordisk;
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|
|
|
•
|
our filing of a voluntary petition for bankruptcy
protection (or the filing of an involuntary petition that
is not dismissed or withdrawn within 60 days after it is
filed);
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|
|
•
|
our initiation of an assignment for the benefit of creditors or
other similar insolvency proceeding;
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|
•
|
the cessation of all of our business activities;
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|
•
|
a judicial or other governmental determination of our insolvency;
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|
•
|
a material change in our business activities that is
incompatible with accepted ethical standards within the
pharmaceutical industry; or
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•
|
January 1, 2009.
|
66
UNDERWRITING
We and Punk, Ziegel & Company, L.P., as underwriter,
intend to enter into an underwriting agreement with respect to
the shares being offered. Subject to the terms and conditions of
the underwriting agreement, the underwriter has agreed to
purchase from us the number of shares of our common stock set
forth on the cover page of this prospectus at the public
offering price, less the underwriting discount set forth on the
cover page of this prospectus.
The underwriting agreement provides that the obligations of the
underwriter to purchase the shares of common stock offered
hereby are conditional and may be terminated at the
underwriter’s discretion based on its assessment of the
state of the financial markets. The obligations of the
underwriter may also be terminated upon the occurrence of other
events specified in the underwriting agreement. The underwriter
is committed to purchase all of the shares of common stock being
offered by us if any shares are purchased.
The underwriter proposes to offer the shares of common stock to
the public at the public offering price set forth on the cover
page of this prospectus. The underwriter may offer the common
stock to securities dealers at the price to the public less a
concession not in excess of
$ per
share. Securities dealers may reallow a concession not in excess
of
$ per
share to other dealers. After the shares of common stock are
released for sale to the public, the underwriter may vary the
offering price and other selling terms from time to time.
We have granted to the underwriter an option, exercisable not
later than 30 days after the date of this prospectus, to
purchase up to an aggregate
of additional
shares of common stock at the public offering price set forth on
the cover page of this prospectus, less the underwriting
discount. The underwriter may exercise this option only to cover
over-allotments, if any, made in connection with the sale of
common stock offered hereby.
The following table summarizes the compensation to be paid to
the underwriter by us and the proceeds, before expenses, payable
to us.
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Total
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Without
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With
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|
Per Share
|
|
|
Over-Allotment
|
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|
Over-Allotment
|
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|
|
|
|
|
|
|
|
|
|
|
Public Offering Price
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Underwriting Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds to Us (before expenses)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We estimate that the total expenses of this offering, excluding
the underwriting discount, will be approximately
$ .
We have agreed to indemnify the underwriter against certain
civil liabilities, including liabilities under the Securities
Act of 1933, and to contribute to payments the underwriter may
be required to make in respect of any such liabilities.
Our directors and executive officers have agreed with the
underwriter that, for a period of 90 days from the date of
this prospectus, they will not offer, sell, assign, transfer,
pledge, contract to sell or otherwise dispose of, or hedge any
shares of our common stock or any securities convertible into or
exchangeable for, shares of common stock. However, so long as
the transferee agrees to be bound by the terms of the
lock-up
agreement, a
director, executive officer or other holder may transfer his or
her securities by gift or for estate planning purposes and in
some other limited circumstances. Punk, Ziegel &
Company may, in its sole discretion, release all or any portion
of the shares from the restrictions in any such agreement at any
time without prior notice. We have entered into a similar
agreement with the underwriter. Currently, we are not aware of
any agreements between the underwriter and any of our security
holders releasing them from these
lock-up
agreements
prior to the expiration of the
90-day
period. This
90-day
period may be
extended for up to an additional 18 days if we are
expecting to issue an announcement of our financial results or
of a material event or other material news within 17 days
before or 16 days after the end of such
90-day
period.
67
In considering any request to release shares subject to a
lock-up
agreement,
Punk, Ziegel & Company will consider the facts and
circumstances relating to a request at the time of that request.
The underwriter may engage in over-allotment, stabilizing
transactions, syndicate-covering transactions and passive market
making in accordance with Regulation M under the Securities
Exchange Act of 1934. Over-allotment involves underwriter
syndicate sales in excess of the offering size, which creates a
syndicate short position. Covered short sales are sales made in
an amount not greater than the number of shares available for
purchase by the underwriter under the over-allotment option. The
underwriter may close out a covered short sale by exercising the
over-allotment option or purchasing shares in the open market.
Naked short sales are sales made in an amount in excess of the
number of shares available under the over-allotment option. The
underwriter must close out any naked short sale by purchasing
shares in the open market. Stabilizing transactions permit bids
to purchase the underlying security so long as the stabilizing
bids do not exceed a specified maximum. Syndicate-covering
transactions involve purchases of the shares of common stock in
the open market after the distribution has been completed in
order to cover syndicate short positions. In passive market
making, market makers in the shares of common stock who are an
underwriter or prospective underwriter may, subject to certain
limitations, make bids for or purchases of the shares of common
stock until the time, if any, at which a stabilizing bid is
made. These stabilizing transactions and syndicate-covering
transactions may cause the price of the shares of our common
stock to be higher than it would otherwise be in the absence of
these transactions. These transactions may be commenced and
discontinued at any time without notice.
An electronic prospectus will be available on the website
maintained by Punk, Ziegel & Company, at www.pzk.com.
Other than the prospectus in electronic format, the information
on this website is not part of this prospectus or the
registration statement of which this prospectus forms a part,
has not been approved or endorsed by us or any underwriter in
its capacity as underwriter, and should not be relied upon by
investors.
68
LEGAL MATTERS
The validity of our common stock offered by this prospectus will
be passed upon for us by Cooley Godward Kronish
llp
, Palo Alto,
California. Certain legal matters in connection with this
offering will be passed upon for the underwriter by
Morrison & Foerster
llp
, New York, New
York.
EXPERTS
Ernst & Young LLP, independent registered public
accounting firm, has audited our financial statements at
December 31, 2005 and 2004, and for each of the three years
in the period ended December 31, 2005, as set forth in
their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP’s report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file electronically with the Securities and Exchange
Commission our annual reports on
Form
10-K,
quarterly interim reports on
Form
10-Q,
current
reports on
Form
8-K
and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934. We have also filed with the Securities and Exchange
Commission a registration statement on
Form
S-1
under the
Securities Act of 1933, as amended, with respect to the shares
of our common stock offered hereby. This prospectus does not
contain all of the information set forth in the registration
statement and the exhibits and schedules thereto. Some items are
omitted in accordance with the rules and regulations of the SEC.
For further information with respect to us and the common stock
offered hereby, we refer you to the registration statement and
the exhibits and schedules filed therewith. Statements contained
in this prospectus as to the contents of any contract, agreement
or any other document are summaries of the material terms of the
contract, agreement or other document. With respect to each of
these contracts, agreements or other documents filed or
incorporated by reference as an exhibit to the registration
statement, reference is made to the exhibits for a more complete
description of the matter involved.
We make available on or through our website at www.aradigm.com,
free of charge, copies of these reports as soon as reasonably
practicable after we electronically file or furnish such reports
to the SEC. A copy of the registration statement, the exhibits
and schedules thereto and any other document we file with the
SEC may be inspected without charge, or copies may be obtained,
at the SEC’s Public Reference Room maintained by the SEC at
100 F Street, N.E., Washington, D.C. 20549. Please call the
SEC at
1-800-SEC-0330
for further information on the operation of the public reference
facility. The SEC maintains a website that contains our
registration statement and the other documents that we file
electronically with the SEC. The address of the SEC’s
website is http://www.sec.gov. In addition, we will provide to
each person, including any beneficial owner, to whom a
prospectus is delivered, without charge upon written or oral
request, a copy of any or all of the documents that are
incorporated by reference into this prospectus but not delivered
with the prospectus, including exhibits that are specifically
incorporated by reference into such documents. Requests should
be directed to: Investor Relations, Aradigm Corporation, 3929
Point Eden Way, Hayward, California 94545, telephone
(510) 265-9000.
69
INCORPORATION BY REFERENCE
We incorporate by reference into this prospectus the documents
listed below and filed with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934.
Except as set forth below, the SEC file number for the documents
incorporated by reference in this prospectus is 000-28402. We
incorporate by reference the following information that has been
filed with the SEC:
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•
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our Annual Report on
Form
10-K
for the
year ended December 31, 2005;
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|
•
|
each of our Quarterly Reports on
Form
10-Q
for the
quarterly periods ended March 31, 2006 and June 30,
2006;
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|
|
|
•
|
our Proxy Statement on Schedule 14A filed with the SEC on
April 6, 2006;
|
|
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|
|
•
|
each of our Current Reports on
Form
8-K
filed
with the SEC on March 13, 2006, April 6, 2006,
April 24, 2006, May 2, 2006, May 24, 2006,
June 23, 2006, July 7, 2006, August 14, 2006,
August 24, 2006, August 28, 2006 and October 11,
2006.
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70
ARADIGM CORPORATION
INDEX TO FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Aradigm Corporation:
We have audited the accompanying balance sheets of Aradigm
Corporation as of December 31, 2005 and 2004, and the
related statements of operations, convertible preferred stock
and shareholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2005. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Aradigm Corporation at December 31, 2005 and 2004, and
the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2005, in
conformity with U.S. generally accepted accounting
principles.
/s/ Ernst &
Young LLP
Palo Alto, California
March 10, 2006
F-2
ARADIGM CORPORATION
BALANCE SHEETS
(In thousands, except share data)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,308
|
|
|
$
|
27,694
|
|
|
$
|
8,407
|
|
|
|
Short-term investments
|
|
|
2,455
|
|
|
|
—
|
|
|
|
507
|
|
|
|
Receivables
|
|
|
99
|
|
|
|
400
|
|
|
|
552
|
|
|
|
Current portion of notes receivable from officers and employees
|
|
|
67
|
|
|
|
62
|
|
|
|
20
|
|
|
|
Prepaid and other current assets
|
|
|
1,602
|
|
|
|
874
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
18,531
|
|
|
|
29,030
|
|
|
|
10,148
|
|
|
Property and equipment, net
|
|
|
60,555
|
|
|
|
9,875
|
|
|
|
6,294
|
|
|
Noncurrent portion of notes receivable from officers and
employees
|
|
|
216
|
|
|
|
129
|
|
|
|
151
|
|
|
Other assets
|
|
|
439
|
|
|
|
463
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
79,741
|
|
|
$
|
39,497
|
|
|
$
|
17,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,469
|
|
|
$
|
3,034
|
|
|
$
|
672
|
|
|
|
Accrued clinical and cost of other studies
|
|
|
293
|
|
|
|
398
|
|
|
|
523
|
|
|
|
Accrued compensation
|
|
|
2,984
|
|
|
|
3,814
|
|
|
|
3,021
|
|
|
|
Deferred revenue
|
|
|
7,525
|
|
|
|
222
|
|
|
|
217
|
|
|
|
Other accrued liabilities
|
|
|
1,138
|
|
|
|
475
|
|
|
|
573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,409
|
|
|
|
7,943
|
|
|
|
5,006
|
|
|
Noncurrent portion of deferred revenue
|
|
|
3,966
|
|
|
|
—
|
|
|
|
—
|
|
|
Noncurrent portion of deferred rent
|
|
|
1,943
|
|
|
|
714
|
|
|
|
824
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, no par value; 2,050,000 shares
authorized; issued and outstanding shares: 1,544,626 at
December 31, 2004 and 2005 and June 30, 2006;
liquidation preference of $41,866 at December 31, 2005 and
2004 and June 30, 2006
|
|
|
23,669
|
|
|
|
23,669
|
|
|
|
23,669
|
|
|
Shareholders’ equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, no par value; authorized shares: 150,000,000 at
December 31, 2004 and 2005; 100,000,000 at June 30,
2006; issued and outstanding shares: 14,459,145 at
December 31, 2004; 14,562,809 at December 31, 2005;
14,765,502 at June 30, 2006
|
|
|
281,387
|
|
|
|
282,004
|
|
|
|
283,107
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
(10
|
)
|
|
|
5
|
|
|
|
(2
|
)
|
|
Accumulated deficit
|
|
|
(245,623
|
)
|
|
|
(274,838
|
)
|
|
|
(295,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity (deficit)
|
|
|
35,754
|
|
|
|
7,171
|
|
|
|
(12,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible preferred stock and
shareholders’ equity (deficit)
|
|
$
|
79,741
|
|
|
$
|
39,497
|
|
|
$
|
17,049
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-3
ARADIGM CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
Years ended December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Contract and license revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
$
|
33,546
|
|
|
$
|
26,999
|
|
|
$
|
8,013
|
|
|
$
|
7,711
|
|
|
$
|
50
|
|
|
|
Unrelated parties
|
|
|
311
|
|
|
|
1,046
|
|
|
|
2,494
|
|
|
|
1,215
|
|
|
|
2,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
33,857
|
|
|
|
28,045
|
|
|
|
10,507
|
|
|
|
8,926
|
|
|
|
2,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
49,636
|
|
|
|
46,477
|
|
|
|
30,174
|
|
|
|
14,387
|
|
|
|
13,098
|
|
|
|
General and administrative
|
|
|
10,391
|
|
|
|
11,934
|
|
|
|
10,895
|
|
|
|
5,948
|
|
|
|
5,537
|
|
|
|
Restructuring and asset impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
60,027
|
|
|
|
58,411
|
|
|
|
41,069
|
|
|
|
20,335
|
|
|
|
24,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(26,170
|
)
|
|
|
(30,366
|
)
|
|
|
(30,562
|
)
|
|
|
(11,409
|
)
|
|
|
(21,125
|
)
|
|
Interest income
|
|
|
338
|
|
|
|
194
|
|
|
|
1,317
|
|
|
|
638
|
|
|
|
380
|
|
|
Other income (expense)
|
|
|
(138
|
)
|
|
|
(17
|
)
|
|
|
30
|
|
|
|
(45
|
)
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,970
|
)
|
|
$
|
(30,189
|
)
|
|
$
|
(29,215
|
)
|
|
$
|
(10,816
|
)
|
|
$
|
(20,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(2.59
|
)
|
|
$
|
(2.37
|
)
|
|
$
|
(2.01
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(1.42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
10,039
|
|
|
|
12,741
|
|
|
|
14,513
|
|
|
|
14,486
|
|
|
|
14,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-4
ARADIGM CORPORATION
STATEMENT OF CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Total
|
|
|
|
|
preferred stock
|
|
|
Common stock
|
|
|
|
|
other
|
|
|
|
|
shareholders’
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
comprehensive
|
|
|
Accumulated
|
|
|
equity
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
compensation
|
|
|
income (loss)
|
|
|
deficit
|
|
|
(deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2002
|
|
|
2,001,236
|
|
|
$
|
30,665
|
|
|
|
6,231,522
|
|
|
$
|
230,853
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
(189,464
|
)
|
|
$
|
41,410
|
|
|
Issuance of common stock for cash, net of issuance costs of
$7,353, including warrants valued at $5,657
|
|
|
—
|
|
|
|
—
|
|
|
|
5,354,588
|
|
|
|
27,312
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27,312
|
|
|
Issuance of common stock through conversion of Series A
Preferred Stock
|
|
|
(456,610
|
)
|
|
|
(6,996
|
)
|
|
|
365,288
|
|
|
|
6,996
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,996
|
|
|
Issuance of common stock under the employee stock purchase plan
|
|
|
—
|
|
|
|
—
|
|
|
|
110,606
|
|
|
|
596
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
596
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
5,425
|
|
|
|
11
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11
|
|
|
Issuance of common stock upon exercise of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
482,810
|
|
|
|
2,522
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,522
|
|
|
Issuance of options and warrants to purchase common stock for
services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
116
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
116
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,970
|
)
|
|
|
(25,970
|
)
|
|
Net change in unrealized loss on available-for-sale investments:
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(23
|
)
|
|
|
—
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003
|
|
|
1,544,626
|
|
|
|
23,669
|
|
|
|
12,550,239
|
|
|
|
268,406
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(215,434
|
)
|
|
|
52,970
|
|
|
Issuance of common stock for cash, net of issuance costs of
$817, including warrants valued at $2,278
|
|
|
—
|
|
|
|
—
|
|
|
|
1,666,679
|
|
|
|
11,683
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,683
|
|
|
Issuance of common stock under the employee stock purchase plan
|
|
|
—
|
|
|
|
—
|
|
|
|
167,946
|
|
|
|
911
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
911
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
81
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Issuance of common stock upon exercise of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
74,200
|
|
|
|
304
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
304
|
|
|
Issuance of options and warrants to purchase common stock for
services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
82
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
82
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(30,189
|
)
|
|
|
(30,189
|
)
|
|
Net change in unrealized loss on available-for-sale investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
1,544,626
|
|
|
|
23,669
|
|
|
|
14,459,145
|
|
|
|
281,387
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
(245,623
|
)
|
|
|
35,754
|
|
|
Issuance of common stock under the employee stock purchase plan
|
|
|
—
|
|
|
|
—
|
|
|
|
93,662
|
|
|
|
458
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
458
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
10,077
|
|
|
|
42
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
42
|
|
|
Adjustment to common stock shares for rounding of partial shares
from the reverse stock split
|
|
|
—
|
|
|
|
—
|
|
|
|
(75
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Warrant revaluation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90
|
|
|
Issuance of options for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27
|
|
|
|
(21
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
|
Amortization of deferred compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Total
|
|
|
|
|
preferred stock
|
|
|
Common stock
|
|
|
|
|
other
|
|
|
|
|
shareholders’
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
comprehensive
|
|
|
Accumulated
|
|
|
equity
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
compensation
|
|
income (loss)
|
|
|
deficit
|
|
|
(deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(29,215
|
)
|
|
|
(29,215
|
)
|
|
Net change in unrealized loss on available-for-sale investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
1,544,626
|
|
|
|
23,669
|
|
|
|
14,562,809
|
|
|
|
282,004
|
|
|
|
—
|
|
|
|
5
|
|
|
|
(274,838
|
)
|
|
|
7,171
|
|
|
Issuance of common stock under the employee stock purchase plan
(unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
84,486
|
|
|
|
248
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
248
|
|
|
Issuance of common stock under the restricted stock award plan
(unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
139,500
|
|
|
|
14
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14
|
|
|
Issuance of common stock upon exercise of stock options
(unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
645
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
Stock-based compensation related to issuance of employee and
non- employee stock options (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
840
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
840
|
|
|
Reversal of restricted stock award due to forfeiture (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
(21,938
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,717
|
)
|
|
|
(20,717
|
)
|
|
Net change in unrealized loss on available-for-sale investments
(unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2006 (unaudited)
|
|
|
1,544,626
|
|
|
$
|
23,669
|
|
|
|
14,765,502
|
|
|
$
|
283,107
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
(295,555
|
)
|
|
$
|
(12,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-6
ARADIGM CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
Years ended December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,970
|
)
|
|
$
|
(30,189
|
)
|
|
$
|
(29,215
|
)
|
|
$
|
(10,816
|
)
|
|
$
|
(20,717
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash asset impairment on property and equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,000
|
|
|
|
Amortization and accretion of investments
|
|
|
83
|
|
|
|
166
|
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Depreciation and amortization
|
|
|
5,983
|
|
|
|
3,813
|
|
|
|
1,412
|
|
|
|
743
|
|
|
|
549
|
|
|
|
Stock-based compensation expense related to employee stock
options and employee stock purchases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
854
|
|
|
|
Loss on impairment, retirement and sale of property and equipment
|
|
|
—
|
|
|
|
544
|
|
|
|
268
|
|
|
|
25
|
|
|
|
6
|
|
|
|
Cost of warrants and common stock options for services
|
|
|
116
|
|
|
|
82
|
|
|
|
117
|
|
|
|
93
|
|
|
|
—
|
|
|
|
Amortization of deferred compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7
|
|
|
|
—
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
142
|
|
|
|
41
|
|
|
|
(301
|
)
|
|
|
(650
|
)
|
|
|
(152
|
)
|
|
|
Prepaid and other current assets
|
|
|
(454
|
)
|
|
|
308
|
|
|
|
728
|
|
|
|
444
|
|
|
|
212
|
|
|
|
Other assets
|
|
|
21
|
|
|
|
(51
|
)
|
|
|
(24
|
)
|
|
|
(118
|
)
|
|
|
7
|
|
|
|
Accounts payable
|
|
|
(1,066
|
)
|
|
|
1,584
|
|
|
|
565
|
|
|
|
(248
|
)
|
|
|
(2,362
|
)
|
|
|
Accrued compensation
|
|
|
(174
|
)
|
|
|
963
|
|
|
|
830
|
|
|
|
147
|
|
|
|
(793
|
)
|
|
|
Accrued liabilities
|
|
|
294
|
|
|
|
439
|
|
|
|
(558
|
)
|
|
|
(889
|
)
|
|
|
223
|
|
|
|
Deferred rent
|
|
|
215
|
|
|
|
620
|
|
|
|
(1,229
|
)
|
|
|
(1,337
|
)
|
|
|
110
|
|
|
|
Deferred revenue
|
|
|
(3,921
|
)
|
|
|
(1,440
|
)
|
|
|
(7,250
|
)
|
|
|
(7,472
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(24,731
|
)
|
|
|
(23,120
|
)
|
|
|
(34,607
|
)
|
|
|
(20,071
|
)
|
|
|
(18,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(5,362
|
)
|
|
|
(2,300
|
)
|
|
|
(5,311
|
)
|
|
|
(2,490
|
)
|
|
|
(974
|
)
|
|
|
Proceeds from sale of property and equipment to Novo Nordisk
Delivery Technologies, Inc., a related party
|
|
|
—
|
|
|
|
—
|
|
|
|
50,292
|
|
|
|
50,291
|
|
|
|
—
|
|
|
|
Purchases of available-for-sale investments
|
|
|
(9,962
|
)
|
|
|
(6,376
|
)
|
|
|
(5,330
|
)
|
|
|
(5,530
|
)
|
|
|
(514
|
)
|
|
|
Increase in restricted cash
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Proceeds from sales and maturities of available-for-sale
investments
|
|
|
7,056
|
|
|
|
15,190
|
|
|
|
7,750
|
|
|
|
538
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(8,268
|
)
|
|
|
6,514
|
|
|
|
47,401
|
|
|
|
42,809
|
|
|
|
(1,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
|
30,441
|
|
|
|
12,899
|
|
|
|
500
|
|
|
|
254
|
|
|
|
249
|
|
|
|
Proceeds from exercise of options and warrants for common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
42
|
|
|
|
—
|
|
|
|
Payments received on notes receivable from officers and employees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30
|
|
|
|
20
|
|
|
|
Forgiveness of (cash used in issuance of) notes receivable with
officers and employees
|
|
|
(93
|
)
|
|
|
115
|
|
|
|
92
|
|
|
|
—
|
|
|
|
—
|
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
Years ended December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
Payments on capital lease obligations and equipment loans
|
|
|
(1,822
|
)
|
|
|
(427
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
28,526
|
|
|
|
12,587
|
|
|
|
592
|
|
|
|
326
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(4,473
|
)
|
|
|
(4,019
|
)
|
|
|
13,386
|
|
|
|
23,064
|
|
|
|
(19,287
|
)
|
|
Cash and cash equivalents at beginning of year
|
|
|
22,800
|
|
|
|
18,327
|
|
|
|
14,308
|
|
|
|
14,308
|
|
|
|
27,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
18,327
|
|
|
$
|
14,308
|
|
|
$
|
27,694
|
|
|
$
|
37,372
|
|
|
$
|
8,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
126
|
|
|
$
|
16
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of options and warrants to purchase common stock for
services
|
|
|
116
|
|
|
|
82
|
|
|
|
117
|
|
|
|
93
|
|
|
|
—
|
|
|
|
Issuance of common stock through conversion of Series A
preferred stock
|
|
|
6,996
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Issuance of warrants in conjunction with private placement of
common stock
|
|
|
5,657
|
|
|
|
2,278
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
See accompanying Notes to Financial Statements.
F-8
ARADIGM CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
(Information as of June 30, 2006
and for the six months ended June 30, 2005 and 2006 is
unaudited)
|
|
|
|
1.
|
Organization and Summary of Significant Accounting
Policies
|
Organization
Aradigm Corporation (the “Company”) is a California
corporation focused on the development and commercialization of
a portfolio of drugs delivered by inhalation for the treatment
of severe respiratory diseases by pulmonologists. The
Company’s principal activities to date have included
obtaining financing, recruiting management and technical
personnel, securing operating facilities, conducting research
and development, and expanding commercial production
capabilities. The Company does not anticipate receiving any
revenues from the sale of products in the upcoming year. The
Company operates as a single operating segment.
Liquidity and Financial Condition
The Company has incurred significant operating losses and
negative cash flows from operations since its inception. At
December 31, 2005, the Company has an accumulated deficit
of $274.8 million and working capital of $21.1 million
and shareholders’ equity of $7.2 million. Management
believes that cash and cash equivalents on hand at June 30,
2006 together with cash proceeds of $27.5 million from the
July 2006 restructuring of the AERx iDMS program with Novo
Nordisk, $4.0 of proceeds from the sale of Intraject-related
assets to Zogenix and potential funding to be received under
additional collaborative arrangements or equity or debt
financing(s) will be sufficient to enable the Company to meet
its obligations for at least the next 18 months. If such
additional potential funds are not available, the Company may be
required to delay, reduce the scope of, or eliminate one or more
of its development programs or obtain funds through
collaborative arrangements with others that may require the
Company to relinquish rights of certain of its technologies or
programs that the Company would otherwise seek to develop or
commercialize itself, and to reduce personnel-related costs.
Management plans to continue to fund the Company with funds
obtained through collaborative arrangements, equity issuances
and/or debt arrangements.
Use of Estimates
The preparation of financial statements in conformity with
United States generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. These estimates include useful lives for
property and equipment and related depreciation calculations,
estimated amortization period for payments received from product
development and license agreements as they relate to the revenue
recognition of deferred revenue and assumptions for valuing
options and warrants. Actual results could differ from these
estimates.
Unaudited Interim Results
The accompanying balance sheet as of June 30, 2006, the
statements of operations and of cash flows for the six months
ended June 30, 2005 and 2006 and the statement of
convertible preferred stock and shareholders’ equity
(deficit) for the six months ended June 30, 2006 are
unaudited. The unaudited interim financial statements have been
prepared on the same basis as the annual financial statements
and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments, necessary to
state fairly the Company’s financial position at
June 30, 2006 and results of operations and cash flows for
the six months ended June 30, 2005 and 2006. The financial
data and other information disclosed in these notes to financial
statements related to the six-month periods are unaudited. The
results for the six months
F-9
ended June 30, 2006 are not necessarily indicative of the
results to be expected for the year ending December 31,
2006 or for any other interim period or for any future year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with a maturity of three months or less from purchase date to be
cash equivalents. The Company places its cash and cash
equivalents in money market funds, commercial paper and
corporate notes.
Investments
Management determines the appropriate classification of the
Company’s marketable securities, which consist solely of
debt securities, at the time of purchase and re-evaluates such
designation at each balance sheet date. All marketable
securities are classified as available-for-sale, carried at
estimated fair value and reported in either cash equivalents or
short-term investments. Unrealized gains and losses on
available-for-sale securities are excluded from earnings and
reported as a separate component of the statements of redeemable
convertible preferred stock and shareholders’ equity until
realized. Fair values of investments are based on quoted market
prices where available. Interest income is recognized when
earned and includes interest, dividends, amortization of
purchase premiums and discounts, and realized gains and losses
on sales of securities. The cost of securities sold is based on
the specific identification method. The Company regularly
reviews all of its investments for other-than-temporary declines
in fair value. When the Company determines that the decline in
fair value of an investment below the Company’s accounting
basis is other-than-temporary, the Company reduces the carrying
value of the securities held and records a loss in the amount of
any such decline. No such reductions have been required during
any of the periods presented.
Notes Receivable
Notes receivable are related to advances granted to employees
for relocation. All amounts classified as current are due within
12 months. All amounts classified as long-term are due no
later than April 2008. All balances are believed to be
collectible and are stated at approximate fair value at
June 30, 2006.
Property and Equipment
The Company records property and equipment at cost and
calculates depreciation using the straight-line method over the
estimated useful lives of the respective assets. Machinery and
equipment includes external costs incurred for validation of the
equipment. The Company does not capitalize internal validation
expense. Computer equipment and software includes capitalized
computer software. All of the Company’s capitalized
software is purchased; the Company has not internally developed
computer software. Leasehold improvements are depreciated over
the shorter of the term of the lease or useful life of the
improvement.
The estimated useful lives of property and equipment are as
follows:
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
5 to 7 years
|
|
|
Furniture and fixtures
|
|
|
5 to 7 years
|
|
|
Lab equipment
|
|
|
5 to 7 years
|
|
|
Computer equipment and software
|
|
|
3 to 5 years
|
|
|
Leasehold improvements
|
|
|
5 to 17 years
|
|
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” the Company
reviews for impairment whenever events or changes in
circumstances indicate that the carrying amount of property and
equipment may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual
disposition. In the event that such cash flows are not expected
to be sufficient to recover the carrying amount of the assets,
the assets are written down to their
F-10
estimated fair values and the loss is recognized in the
Statements of Operations. The Company recorded an impairment
charge of $4.0 million during the six months ended
June 30, 2006 related to the anticipated sale of Intraject
related assets (see Note 11).
Revenue Recognition
Contract revenues consist of revenues from grants, collaboration
agreements and feasibility studies. The Company recognizes
revenue under the provisions of the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 104,
“Revenue Recognition.” Under the agreements, revenue
is recognized once costs are incurred and collectibility is
reasonably assured. Under some agreements the Company’s
collaborators have the right to withhold reimbursement of costs
incurred until the work performed under the agreement is
mutually agreed upon. For these agreements revenue is recognized
upon confirmation from the collaborator of acceptance of work
performed and payment amount. Deferred revenue represents the
portion of all refundable and nonrefundable research payments
received that have not been earned. In accordance with contract
terms, milestone payments from collaborative research agreements
are considered reimbursements for costs incurred under the
agreements and, accordingly, are generally recognized as revenue
either upon the completion of the milestone effort, when
payments are contingent upon completion of the effort, or are
based on actual efforts expended over the remaining term of the
agreements when payments precede the required efforts. Costs of
contract revenues are approximate to or are greater than such
revenues and are included in research and development expenses.
Refundable development and license fee payments are deferred
until the specified performance criteria are achieved.
Refundable development and license fee payments are generally
not refundable once the specific performance criteria are
achieved and accepted.
Research and Development
Research and development expenses consist of costs incurred for
company-sponsored, collaborative and contracted research and
development activities. These costs include direct and
research-related overhead expenses. Research and development
expenses under collaborative and government grants approximate
the revenue recognized under such agreements. The Company
expenses research and development costs as such costs are
incurred.
Advertising
Advertising costs are charged to general and administrative
expense as incurred. Advertising expenses for the years ended
December 31, 2005, 2004 and 2003 were $265,000, $223,000
and $199,000, respectively.
Stock-Based Compensation
Prior to January 1, 2006, the Company had elected to follow
Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”), and related
interpretations in accounting for its employee stock options.
Compensation expense is based on the difference, if any, between
the fair value of the Company’s common stock and the
exercise price of the option or share right on the measurement
date, which is typically the date of grant. In accordance with
SFAS 123, “Accounting for Stock-Based
Compensation,” as amended by SFAS 148,
“Accounting for Stock-Based Compensation —
Transition and Disclosure,” the Company has provided below
the pro forma disclosures of the effect on net
F-11
loss and loss per share as if SFAS 123 had been applied in
measuring compensation expense for all periods presented (in
thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
Six months
|
|
|
|
|
|
|
|
ended June 30,
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss — as reported
|
|
$
|
(25,970
|
)
|
|
$
|
(30,189
|
)
|
|
$
|
(29,215
|
)
|
|
$
|
(10,816
|
)
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based employee compensation expense included in reported
net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
|
|
7
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense determined under
fair value based method for all awards
|
|
|
(5,400
|
)
|
|
|
(4,585
|
)
|
|
|
(3,066
|
)
|
|
|
(1,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(31,370
|
)
|
|
$
|
(34,774
|
)
|
|
$
|
(32,260
|
)
|
|
$
|
(12,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(2.59
|
)
|
|
$
|
(2.37
|
)
|
|
$
|
(2.01
|
)
|
|
$
|
(0.75
|
)
|
|
|
Pro forma
|
|
$
|
(3.12
|
)
|
|
$
|
(2.73
|
)
|
|
$
|
(2.22
|
)
|
|
$
|
(0.85
|
)
|
Pro forma information regarding net loss and basic and diluted
net loss per common share is required by SFAS 123, which
also requires that the information be determined as if the
Company had accounted for its employee and non-employee director
stock options granted using the fair value method prescribed by
this statement. The fair value of options was estimated at the
date of grant using the
Black-Scholes
option
pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
Six months
|
|
|
|
December 31,
|
|
ended June 30,
|
|
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
Volatility factor
|
|
|
98.0
|
%
|
|
|
98.0
|
%
|
|
|
97.6
|
%
|
|
|
97.9
|
%
|
|
|
85.8
|
%
|
|
Risk-free interest rate
|
|
|
2.5
|
%
|
|
|
3.1
|
%
|
|
|
3.8
|
%
|
|
|
3.7
|
%
|
|
|
4.9
|
%
|
|
Expected life (years)
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
4.2
|
|
|
Weighted-average fair value of options granted during the periods
|
|
$
|
3.75
|
|
|
$
|
5.50
|
|
|
$
|
4.08
|
|
|
$
|
4.21
|
|
|
$
|
1.64
|
|
Additionally, the weighted average fair value of options granted
during 2005 with an exercise price greater than the fair value
of the Company’s common stock on the day of grant was $3.82.
The Company accounts for options and warrants issued to
non-employees under SFAS 123 and Emerging Issues Task Force
Issue No. (“EITF”) 96-18, “Accounting for Equity
Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services,” using the Black-Scholes option pricing model.
The value of such non-employee options and warrants are
periodically re-measured over their vesting terms. The fair
value of options and warrants was remeasured at period-end using
the Black-Scholes option pricing model with the following
assumptions: a risk-free interest rate of 2.0% to 4.0%, using
applicable United States Treasury rates; a dividend yield
of 0.0%; the annual volatility factor of 87% to 98%; and an
average expected life based on the terms of the option grant or
contractual term of the warrant of 1 to 4 years. Expense
recognized related to options and warrants issued to
non-employees was $117,000, $82,000, and $116,000 during the
years ended December 31, 2005, 2004, and 2003, respectively.
F-12
Adoption of SFAS No. 123R
The following table shows the effect of SFAS No. 123R
(revised 2004), “Share-based Payments,” stock-based
employee compensation expense included in the condensed
statement of operations for the six-month period ended
June 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
Six months
|
|
|
|
|
ended June 30,
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
Research and development
|
|
$
|
469
|
|
|
General and administrative
|
|
|
385
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
854
|
|
|
Impact on basic and diluted net loss per share
|
|
$
|
0.06
|
|
|
|
|
|
|
There was no capitalized stock-based employee compensation cost
as of June 30, 2006. Since the Company has an accumulated
net operating loss, there was no recognized tax benefit during
the six months ended June 30, 2006 associated with
stock-based compensation expense.
For restricted common stock issued at discounted prices, the
Company recognizes compensation expense over the vesting period
for the difference between the exercise or purchase price and
the fair market value on the measurement date. There are 117,562
restricted share awards issued and outstanding for the period
ended June 30, 2006. Total compensation expense for
restricted stock recognized in the Company’s financial
statements for stock-based awards under SFAS No. 123R
was $41,624 for the six-month period ended June 30, 2006.
During the six months ended June 30, 2006, the Company
granted stock options to purchase approximately
1,144,900 shares of common stock with an estimated
weighted-average grant-date fair value of $2.50 per share.
The Company granted an additional 787,500 shares, with the
grant date and the exercise price set as of the first date on
which the grants can be made, following issuance of a permit by
the California Department of Corporations for the Company’s
2005 Equity Incentive Plan. The Company expects that the permit
will be issued within the next quarter.
The weighted-average period over which compensation expense
related to options outstanding at June 30, 2006 is expected
to be recognized is 1.44 years.
Income Taxes
The Company uses the liability method to account for income
taxes as required by SFAS 109, “Accounting for Income
Taxes.” Under this method, deferred income taxes reflect
the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Net Loss Per Share
Basic net loss per share on a historical basis is computed using
the weighted-average number of shares of common stock
outstanding less the weighted-average number of shares subject
to repurchase. There were no shares subject to repurchase in the
years ended December 31, 2005, 2004 and 2003. No separate
diluted loss per share information has been presented in the
accompanying statements of operations since potential common
shares from stock options, warrants and convertible preferred
stock are antidilutive. For the years ended December 31,
2005, 2004 and 2003, the total number of shares excluded, based
on the treasury stock method, from diluted loss per share
relating to these securities was 1,241,936, 1,650,082, and
1,658,377 shares, respectively.
F-13
Significant Concentrations
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents and short-term investments. Risks associated with
these instruments are mitigated by banking with and only
purchasing commercial paper from creditworthy institutions. The
maximum amount of loss due to credit risk associated with these
financial instruments is their respective fair values as stated
in the balance sheet.
The Company has development arrangements with various
collaborators. For the years ended December 31, 2005, 2004
and 2003, the Novo Nordisk AERx iDMS program contributed
approximately 76%, 96% and 99% of total contract revenues,
respectively and $50,170 for the six months ended 2006. In
January 2005, the Company completed the restructuring of the
AERx iDMS program, pursuant to the Restructuring Agreement
entered into with Novo Nordisk A/S (“Novo Nordisk”)
and Novo Nordisk Delivery Technologies, Inc. (“NNDT”)
in September 2004. Under the Company’s current agreements
with Novo Nordisk, Novo Nordisk has assumed responsibility of
the completion of development, manufacturing and
commercialization of the AERx iDMS insulin product. The Company
will be entitled to receive royalties on any future sales of the
commercialized product. Novo Nordisk, a company publicly traded
in Denmark, is considered to be a related party due to its
ownership interest in the Company. Novo Nordisk owned
approximately 9.8% of the Company’s common stock on an
as-converted basis as of June 30, 2006.
Comprehensive Income (Loss)
SFAS 130, “Reporting Comprehensive Income,”
requires unrealized gains or losses on the Company’s
available-for-sales securities to be recorded in other
comprehensive income (loss). Total comprehensive loss has been
disclosed on the balance sheet and on the statement of
redeemable convertible preferred stock and shareholders’
equity.
Reclassifications
Certain reclassifications of prior year amounts have been made
to conform to current-year presentation. The Company
reclassified amounts from investing activity to operating
activity in order to separately disclose amortization and
accretion of investments on the statements of cash flows. The
Company made clarifications in regards to the liquidation
preference of preferred stock to include the accumulated
undeclared dividends of 6% in Note 6 and on the balance
sheet.
|
|
|
|
2.
|
Cash and Cash Equivalents and Investments
|
The following summarizes the fair value of cash and cash
equivalents and investments (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund
|
|
$
|
800
|
|
|
$
|
1,321
|
|
|
$
|
4,216
|
|
|
|
Commercial paper
|
|
|
13,508
|
|
|
|
26,373
|
|
|
|
4,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,308
|
|
|
$
|
27,694
|
|
|
$
|
8,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Corporate and government notes
|
|
|
2,455
|
|
|
|
—
|
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,455
|
|
|
$
|
—
|
|
|
$
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
All short-term investments at December 31, 2004 and
June 30, 2006 mature in less than one year.
F-14
As of June 30, 2006, December 31, 2005 and 2004, the
difference between the fair value and the amortized cost of
available-for-sale securities was $2,000 loss, $5,000 gain and
$10,000 loss, respectively. The individual gross unrealized
gains and individual gross unrealized losses for all periods
presented were immaterial.
|
|
|
|
3.
|
Property and Equipment
|
Property and equipment consist of the following (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Machinery and equipment
|
|
$
|
14,364
|
|
|
$
|
4,505
|
|
|
$
|
4,702
|
|
|
Furniture and fixtures
|
|
|
1,917
|
|
|
|
1,150
|
|
|
|
1,142
|
|
|
Lab equipment
|
|
|
4,086
|
|
|
|
2,539
|
|
|
|
2,658
|
|
|
Computer equipment and software
|
|
|
6,256
|
|
|
|
3,790
|
|
|
|
3,814
|
|
|
Leasehold improvements
|
|
|
12,225
|
|
|
|
1,564
|
|
|
|
1,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment at cost
|
|
|
38,848
|
|
|
|
13,548
|
|
|
|
13,384
|
|
|
Less accumulated depreciation and amortization
|
|
|
(27,740
|
)
|
|
|
(10,201
|
)
|
|
|
(10,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net depreciable assets
|
|
|
11,108
|
|
|
|
3,347
|
|
|
|
3,133
|
|
|
Construction in progress
|
|
|
49,447
|
|
|
|
6,528
|
|
|
|
3,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
60,555
|
|
|
$
|
9,875
|
|
|
$
|
6,294
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $1.4 million, $3.8 million
and $6.0 million in 2005, 2004 and 2003, respectively. For
the six months ended June 30, 2006, depreciation expense
was $549,000.
|
|
|
|
4.
|
Leases, Commitments and Contingencies
|
Subsequent to completion in January 2005 of the
restructuring transaction between the Company and Novo Nordisk,
the Company had commitments under two leases. The first lease is
for a building containing office, laboratory and manufacturing
facilities, and expires in 2016. A minor portion of this lease
expense is offset by a sublease to NNDT of $10,000 per
month through December 2006. The second lease, which
expired in December 2005, was for a warehouse.
Additionally, the Company entered into a new copier lease
agreement in July 2005 for $5,030 per month for
60 months. Future minimum lease payments non-cancelable at
December 31, 2005 for the remaining lease agreements are as
follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
leases
|
|
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
|
2006
|
|
$
|
1,660
|
|
|
2007
|
|
|
2,306
|
|
|
2008
|
|
|
2,371
|
|
|
2009
|
|
|
2,318
|
|
|
2010
|
|
|
2,223
|
|
|
2011 and thereafter
|
|
|
11,933
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
22,811
|
|
|
|
|
|
|
The Company’s operating lease has a rent escalation clause
and, accordingly, the Company recognizes rent expense on a
straight-line basis. At December 31, 2005 and 2004, the
Company had $714,000 and $1.9 million of deferred rent,
respectively. The overall reduction in deferred rent is due to
reversing of $1.4 million of expense associated with the
deferred rent on two buildings transferred to NNDT as part of
the restructuring agreement. A portion of the lease commitment
for 2006 is offset by a sublease to NNDT of $10,000 per
month through December 2006.
F-15
For the years ended December 31, 2005, 2004 and 2003,
building rent expense, net of sublease income, under operating
leases totaled $1.3 million, $5.5 million and
$5.4 million, respectively. For the six months ended
June 30, 2006, building rent expense totaled $985,000.
At December 31, 2005, the Company had contractual
non-cancelable purchase commitments for capital equipment
purchases of $1.0 million and for services of
$2.1 million.
The Company from time to time enters into contracts that
contingently require the Company to indemnify parties against
third party claims. These contracts primarily relate to:
(i) real estate leases, under which the Company may be
required to indemnify property owners for environmental and
other liabilities, and other claims arising from the
Company’s use of the applicable premises, and
(ii) agreements with the Company’s officers, directors
and employees, under which the Company may be required to
indemnify such persons from certain liabilities arising out of
such persons’ relationships with the Company. To date, the
Company has made no payments related to such indemnifications
and no liabilities have been recorded for these obligations on
the balance sheets as of June 30, 2006, and
December 31, 2005 or 2004.
From time to time, the Company is involved in litigation arising
out of the ordinary course of its business. Currently there are
no known claims or pending litigation expected to have a
material effect on the Company’s overall financial
position, results of operations, or liquidity.
|
|
|
|
5.
|
Convertible Preferred Stock and Common Stock Warrants
|
The Company completed a $48.4 million preferred stock
financing in December 2001. Under the terms of the financing the
Company sold to a group of investors 2,001,236 shares of
Series A convertible preferred stock (“preferred
stock”) at a purchase price of $24.20 per share. Each
share of preferred stock, together with accrued and unpaid
dividends, is convertible at the option of the holder into
0.8 shares of common stock. The Company also issued
warrants to the investors to purchase approximately
1,040,642 shares of common stock at an exercise price of
$34.85 per share. Issuance costs of approximately
$3.0 million were accounted for as a reduction to proceeds
from the preferred stock financing. The warrants are exercisable
through December 2006.
In March, June and July 2003, certain holders of shares of
the Company’s preferred stock elected to convert an
aggregate of 456,610 shares of preferred stock to common
stock. The Company issued 365,288 shares of common stock in
connection with those conversions.
During the two year period following the original issue dates
holders of preferred stock are entitled to dividends, at an
annual rate of 6%, payable only when and if declared by the
Board of Directors. Such dividends are cumulative and accrue
whether or not they are declared. At the option of the Company,
dividends may be paid in either cash or in shares of common
stock, which will be valued at a price equal to the then current
market price. The current market price of the common stock on
any dividend payment date shall be based on the closing price of
the Company’s common stock as quoted on the Nasdaq Capital
Market. There were no dividends declared as of December 31,
2005 or 2004, or June 30, 2006.
The conversion rate of the preferred stock is fixed and not
subject to any adjustments except for stock splits, stock
dividends, combinations, reorganizations, mergers or other
similar events. Each share of outstanding preferred stock will
automatically convert into common stock upon either the closing
of a registered underwritten public offering covering the offer
and sale of common stock with gross proceeds (before
underwriting discounts, commissions and fees) to the Company
exceeding $25.0 million or the date on which the common
stock closing bid price has been above $52.9375 per share
for at least 20 consecutive trading days.
Upon any “change of control,” liquidation,
dissolution, redemption or winding up of the Company, whether
voluntary or involuntary, the holders of outstanding preferred
stock will be entitled to a liquidation
F-16
preference of $41.9 million, equal to the original issue price
plus all accrued and unpaid dividends (as adjusted for any stock
dividends, combinations, splits, recapitalizations and other
similar events) to the holders of preferred stock. Any remaining
assets will be available for distribution to holders of common
stock. A “change of control” is defined for this
purpose as a consolidation or merger of the Company with or into
any other entity resulting in the Company’s shareholders
owning less than 50% of the voting power of the surviving
entity, any transaction or series of transactions to which the
Company is a party whereby more than 50% of the Company’s
voting power is transferred and any sale, lease or other
disposition of all or substantially all of the Company’s
assets.
Each holder of preferred stock has the number of votes equal to
the number of shares of common stock issuable upon conversion of
such holder’s shares of preferred stock and voting rights
and powers equal to the voting rights and powers of the
Company’s common stock.
Summary of Preferred Stock Accounting
The Company’s articles of incorporation, as amended,
provide that a mandatory redemption is triggered if a change in
control occurs. Accordingly, in accordance with
EITF
D-98,
“Classification and Measurement of Redeemable
Securities,” which clarifies
Rule
#5-02.28
of
Regulation
S-X
previously adopted in accounting series Release No. 268,
“Presentation in Financial Statements of Redeemable
Preferred Stock,” the Company has classified the preferred
stock outside of permanent equity.
In a private placement in December 2004, the Company issued
1,666,679 shares of common stock at a price of
$7.50 per share and warrants to purchase
416,669 shares of common stock at $10.50 per share,
for aggregate consideration of approximately $12.5 million.
The warrants are exercisable at the election of the warrant
holders for a four-year term. The Company valued the warrants as
of December 2004, the date of financing, using the
Black-Scholes option pricing model using the following
assumptions: estimated volatility of 88%, risk-free interest
rate of 3.6%, no dividend yield, and an expected life of four
years, and recorded approximately $2.3 million as issuance
costs related to the private placement. These warrants are
exercisable through December 2008.
In November 2003 the Company issued 1,556,110 shares
of common stock at $9.00 per share and warrants to
purchase 389,027 shares of common stock at
$12.50 per share to certain investors for an aggregate
purchase price of approximately $14.0 million in a private
placement. The warrants are exercisable at the election of the
warrant holders for a four-year term. The Company valued the
warrants as of November 2003, the date of financing, using
the Black-Scholes option pricing model using the following
assumptions: estimated volatility of 88%, risk-free interest
rate of 2.5%, no dividend yield, and an expected life of four
years, and recorded approximately $2.6 million as issuance
costs related to the private placement. These warrants are
exercisable through November 2007.
In March 2003, the Company issued 3,798,478 shares of
common stock at $3.95 per share and warrants to purchase
854,654 shares of common stock at $5.35 per share to
certain investors for an aggregate purchase price of
approximately $15.0 million in a private placement. The
warrants are exercisable at the election of the warrant holders
for a four-year term. The Company valued the warrants as of
March 2003, the date of financing, using the Black-Scholes
option pricing model using the following assumptions: estimated
volatility of 84%, risk-free interest rate of 2.5%, no dividend
yield, and an expected life of four years, and recorded
approximately $1.9 million as issuance costs related to the
private placement. In addition, in connection with this private
placement and as an inducement for investors to purchase shares
of common stock, the Company issued warrants (“replacement
warrants”) to purchase an aggregate of 803,205 shares
of its common stock at $5.60 per share to certain of the
investors in the private placement in exchange for the
cancellation of an equal number of warrants to purchase shares
of the common stock at $34.85 per share, held by the same
investors. The Company valued the replacement warrants as of
March 2003, the date of the replacement, using the Black-Scholes
option pricing model using the following assumptions: estimated
volatility of 84%, risk-free interest rate of 2.5%, no dividend
yield, and an expected life of 3.8 years, and recorded an
additional
F-17
$1.1 million as issuance costs related to the private
placement. These warrants are exercisable through
March 2007.
In June 2004, the Company filed a Certificate of Amendment
to the Company’s Amended and Restated Articles of
Incorporation with the Secretary of State of the State of
California to increase the Company’s authorized number of
shares of common stock from 100,000,000 to
150,000,000 shares. The additional shares of common stock
authorized by the amendment have rights identical to the common
stock of the Company outstanding immediately before the filing
of the amendment. Issuances of common stock from the additional
authorized shares do not affect the rights of the holders of the
Company’s common stock and preferred stock outstanding
immediately before the filing of the amendment, except for
effects that may be incidental to increasing the number of
shares of the Company’s common stock outstanding, such as
dilution of any earnings per share and voting rights of holders
of other common stock.
In January 2006, the Company filed a Certificate of
Amendment to the Company’s Amended and Restated Articles of
Incorporation with the Secretary of State of the State of
California to decrease the Company’s authorized number of
shares of common stock from 150,000,000 to
100,000,000 shares.
Reverse Stock Split
On January 4, 2006, the Company filed a Certificate of
Amendment to the Company’s Amended and Restated Articles of
Incorporation with the Secretary of State of the State of
California effecting a
1-for-5
reverse split
of the Company’s common stock. All share and per share
amounts have been retroactively restated in the financial
statements and these accompanying notes for all periods
presented.
Reserved Shares
At December 31, 2005, the Company had 2,119,766 shares
of its common stock reserved for issuance upon exercise of
common stock warrants, 2,649,095 shares reserved for
issuance upon exercise of options under all plans,
1,235,701 shares reserved for issuance upon conversion of
preferred stock and 452,400 available authorized shares under
the Employee Stock Purchase Plan.
Other Common Stock Warrants
During 2004 the Company received net proceeds of approximately
$304,000 and issued an aggregate of 74,200 shares of common
stock in connection with the exercise of warrants.
In January 2004, the Company amended the payment terms of
the operating lease for its primary offices. In consideration
for the amended lease agreement, Aradigm replaced common stock
warrants to purchase 27,000 shares of common stock at
$50.80 — $108.60 per share with new common stock
warrants with an exercise price equal to $8.55 per share.
The $88,000 incremental fair value of the replacement warrants,
as defined as the fair value of the new warrant less the fair
value of the old warrant on date of replacement, is being
amortized to operating expenses on a straight-line basis over
the remaining life of the lease. The fair value of the warrants
was measured as of January 2004, the date of the amendment,
using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rates between 1.3% and 2.4%; a
dividend yield of 0.0%; annual volatility factor of 88%; and a
weighted average expected life based on the contractual term of
the warrants from 1 to 3.5 years.
During 2003 the Company received net proceeds of approximately
$2.5 million and issued an aggregate of 482,810 shares
of common stock in connection with the exercise of warrants.
In March 2003, the Company issued warrants in connection
with a financial relations service agreement that entitle the
holder to purchase 5,000 shares of common stock, which are
exercisable at $6.55 per share and vest over the
48-month
service
period, of which 938 shares vested during the year ended
December 31, 2003. In 2004, the Company terminated the
financial relations service relationship and accelerated the
vesting schedule for all remaining 4,062 shares. The
Company valued the warrants as of March 2003, the date of
agreement, using the Black-Scholes option pricing model using
the following assumptions: estimated volatility of 88%,
risk-free interest rate of 2.0%, no dividend yield, and an
expected life of four years. The fair value
F-18
of these warrants is re-measured as the underlying warrants vest
and is being expensed over the vesting period of the warrants.
For the year ended December 31, 2004 the Company recorded
$22,000 of expense in connection with these warrants. These
warrants are exercisable through March 2008.
In October 2002, the Company issued warrants in connection
with a financial relations service agreement that entitles the
holder to purchase 15,000 shares of common stock, 5,000 of
which are exercisable at $9.95 per share, 5,000 shares
of which are exercisable at $11.95 per share and
5,000 shares of which are exercisable at $13.95 per
share. At the execution of the agreement 3,000 shares
immediately vested and the remaining shares shall vest based on
the achievement of various performance benchmarks set forth in
the agreement: all benchmarks were achieved as of
March 2004. The Company valued the warrants as of
October 2002, the date of agreement, using the
Black-Scholes option pricing model using the following
assumptions: estimated volatility of 88%, risk-free interest
rate of 2.0%, no dividend yield, and an expected life of four
years. The fair value of these warrants is re-measured as the
underlying warrants vest and is being expensed over the vesting
period of the warrants. For the year ended December 31,
2003 the Company recognized $77,000 of expense associated with
these warrants. In the year ended December 31, 2004, due to
all benchmarks being achieved during the year, the Company
reversed previously recognized expense of $48,000. The warrants
are exercisable through October 2007.
1996 Equity Incentive Plan, 2005 Equity Incentive Plan and
1996 Non-Employee Directors’ Plan
In April 1996, the Company’s Board of Directors
adopted and the Company’s shareholders approved the 1996
Equity Incentive Plan (the “1996 Plan”), which amended
and restated an earlier stock option plan. The 1996 Plan
reserved 960,000 shares for future grants. During
May 2001, the Company’s shareholders approved an
amendment to the Plan to include an evergreen provision. In
2003, the 1996 Plan was amended, to increase the maximum number
of shares available for issuance under the evergreen feature of
the 1996 Plan by 400,000 shares to 2,000,000 shares.
The evergreen provision automatically increased the number of
shares reserved under the 1996 Plan, subject to certain
limitations, by 6% of the issued and outstanding shares of
common stock of the Company or such lesser number of shares as
determined by the board of directors on the date of the annual
meeting of shareholders of each fiscal year beginning 2001 and
ending 2005.
Options granted under the 1996 Plan may be immediately
exercisable if permitted in the specific grant approved by the
Company’s board of directors and, if exercised early, the
issued shares may be subject to repurchase provisions. The
shares acquired generally vest over a period of four years from
the date of grant. The 1996 Plan also provides for a transition
from employee to consultant status without termination of the
vesting period as a result of such transition. Any unvested
stock issued is subject to repurchase agreements whereby the
Company has the option to repurchase unvested shares upon
termination of employment at the original issue price. The
common stock subject to repurchase has voting rights but does
not have resale rights prior to vesting. The Company has
repurchased a total of 7,658 shares in accordance with
these agreements through December 31, 1998. Subsequently,
no grants with early exercise provisions have been made under
the 1996 Plan and no shares have been repurchased. During 2005,
the Company granted options to purchase 279,420 shares of
common stock under the 1996 Plan. As of December 31, 2005,
the Company had 1,662,883 options outstanding under the 1996
Plan.
In March 2005, the Company’s board of directors
adopted and in May 2005 the Company’s shareholders
approved the 2005 Equity Incentive Plan (the “2005
Plan”), which amended, restated and retitled the 1996 Plan.
All outstanding awards granted under the 1996 Plan remain
subject to the terms of the 1996 Plan. All stock awards granted
on or after the adoption date are subject to the terms of the
2005 Plan. No shares were added to the share reserve under the
2005 Plan other than the shares available for future issuance
under the 1996 Plan. Pursuant to the 2005 Plan, the Company had
2,918,638 shares of common stock authorized for issuance.
Options (net of canceled or expired options) covering an
aggregate of 1,999,252 shares of the Company’s Common
Stock had been granted under the 1996 Plan, and
919,386 shares became available for future grant under the
2005 Plan. In March 2006 the Company’s board of directors
amended and in May 2006 the Company’s shareholders approved
the amendment to the 2005 Plan, increasing the shares of common
stock authorized for issuance by 2,000,000. As of June 30,
2006, 1,957,635 shares remained available for future grant.
F-19
Options granted under the 2005 Plan expire no later than
10 years from the date of grant. Options granted under the
2005 Plan may be either incentive or non-statutory stock
options. For incentive and non-statutory stock option grants,
the option price shall be at least 100% and 85%, respectively,
of the fair value on the date of grant, as determined by the
Company’s board of directors. If at any time the Company
grants an option, and the optionee directly or by attribution
owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, the option price
shall be at least 110% of the fair value and shall not be
exercisable more than five years after the date of grant.
Options granted under the 2005 Plan may be immediately
exercisable if permitted in the specific grant approved by the
board of directors and, if exercised early may be subject to
repurchase provisions. The shares acquired generally vest over a
period of four years from the date of grant. The 2005 Plan also
provides for a transition from employee to consultant status
without termination of the vesting period as a result of such
transition. Under the 2005 Plan, employees may exercise options
in exchange for a note payable to the Company, if permitted
under the applicable grant. As of December 31, 2005 there
were no outstanding notes receivable from shareholders. Any
unvested stock issued is subject to repurchase agreements
whereby the Company has the option to repurchase unvested shares
upon termination of employment at the original issue price. The
common stock subject to repurchase has voting rights but cannot
be resold prior to vesting. No grants with early exercise
provisions have been made under the 2005 Plan and no shares have
been repurchased. During 2005, the Company granted options to
purchase 46,040 shares of common stock under the 2005 Plan.
The 1996 Non-Employee Directors’ Stock Option Plan (the
“Directors’ Plan”) had 45,000 shares of
common stock authorized for issuance. Options granted under the
Directors’ Plan expire no later than 10 years from
date of grant. The option price shall be at 100% of the fair
value on the date of grant as determined by the board of
directors. The options generally vest quarterly over a period of
one year. During 2000, the board of directors approved the
termination of the Directors’ Plan. No more options can be
granted under the plan after its termination. The termination of
the Directors’ Plan will have no effect on the options
already outstanding. There was no activity in the
Directors’ Plan during the year ended December 31,
2005 and, as of December 31, 2005, 21,186 outstanding
options with exercise prices ranging from $41.25 —
$120.63 remained with no additional shares available for grant.
F-20
The following is a summary of activity under the 1996 Plan, the
2005 Plan and the Directors’ Plan as of June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Shares available
|
|
|
|
|
average
|
|
|
|
|
for grant of
|
|
|
Number of
|
|
|
|
|
exercise
|
|
|
|
|
option
|
|
|
shares
|
|
|
Price per share
|
|
|
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
117,619
|
|
|
|
1,175,752
|
|
|
$
|
1.65 — $120.65
|
|
|
$
|
40.25
|
|
|
|
Options authorized
|
|
|
608,524
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Options granted
|
|
|
(362,550
|
)
|
|
|
362,550
|
|
|
$
|
4.55 — $ 10.80
|
|
|
$
|
6.45
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(5,426
|
)
|
|
$
|
1.65 — $ 4.75
|
|
|
$
|
2.10
|
|
|
|
Options cancelled
|
|
|
236,111
|
|
|
|
(236,111
|
)
|
|
$
|
4.75 — $116.90
|
|
|
$
|
39.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
599,704
|
|
|
|
1,296,765
|
|
|
$
|
1.85 — $120.65
|
|
|
$
|
31.15
|
|
|
|
Options authorized
|
|
|
762,774
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Options granted
|
|
|
(697,760
|
)
|
|
|
697,760
|
|
|
$
|
3.80 — $ 12.00
|
|
|
$
|
7.75
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(81
|
)
|
|
$
|
4.75 — $ 7.10
|
|
|
$
|
6.20
|
|
|
|
Options cancelled
|
|
|
111,274
|
|
|
|
(111,274
|
)
|
|
$
|
1.85 — $117.85
|
|
|
$
|
31.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
775,992
|
|
|
|
1,883,170
|
|
|
$
|
2.15 — $120.65
|
|
|
$
|
22.20
|
|
|
|
Options authorized
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Options granted
|
|
|
(325,460
|
)
|
|
|
325,460
|
|
|
$
|
4.30 — $ 7.95
|
|
|
$
|
5.97
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(10,077
|
)
|
|
$
|
2.17 — $ 4.75
|
|
|
$
|
4.39
|
|
|
|
Adjustment for rounding for reverse stock split
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
468,854
|
|
|
|
(468,854
|
)
|
|
$
|
2.83 — $120.63
|
|
|
$
|
21.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
919,386
|
|
|
|
1,729,709
|
|
|
$
|
2.83 — $120.63
|
|
|
$
|
19.47
|
|
|
|
Options authorized (unaudited)
|
|
|
2,000,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Options granted (unaudited)
|
|
|
(1,144,900
|
)
|
|
|
1,144,900
|
|
|
$
|
1.29 — $ 3.77
|
|
|
$
|
2.50
|
|
|
|
Options exercised (unaudited)
|
|
|
—
|
|
|
|
(645
|
)
|
|
|
$ 2.83
|
|
|
$
|
2.83
|
|
|
|
Restricted stock awards granted, net (unaudited)
|
|
|
(117,562
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Options cancelled (unaudited)
|
|
|
300,711
|
|
|
|
(300,711
|
)
|
|
$
|
3.14 — $ 64.99
|
|
|
$
|
7.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 (unaudited)
|
|
|
1,957,635
|
|
|
|
2,573,253
|
|
|
$
|
1.29 — $120.63
|
|
|
$
|
13.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding and exercisable as of June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
Options exercisable
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Number
|
|
remaining
|
|
average
|
|
|
|
average
|
|
|
|
of
|
|
contractual
|
|
exercise
|
|
Number of
|
|
exercise
|
|
Exercise price range
|
|
shares
|
|
life (in years)
|
|
price
|
|
shares
|
|
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.29 — $1.29
|
|
|
300,000
|
|
|
|
9.99
|
|
|
$
|
1.29
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$1.52 — $1.70
|
|
|
316,000
|
|
|
|
9.94
|
|
|
|
1.69
|
|
|
|
—
|
|
|
|
—
|
|
|
$3.14 — $3.14
|
|
|
83,962
|
|
|
|
9.78
|
|
|
|
3.14
|
|
|
|
3,659
|
|
|
|
3.14
|
|
|
$3.63 — $3.77
|
|
|
338,062
|
|
|
|
9.68
|
|
|
|
3.77
|
|
|
|
874
|
|
|
|
3.63
|
|
|
$3.80 — $5.30
|
|
|
299,216
|
|
|
|
7.50
|
|
|
|
5.02
|
|
|
|
231,954
|
|
|
|
5.01
|
|
|
$5.35 — $5.95
|
|
|
295,890
|
|
|
|
8.48
|
|
|
|
5.89
|
|
|
|
129,430
|
|
|
|
5.88
|
|
|
$6.25 — $12.00
|
|
|
301,210
|
|
|
|
7.55
|
|
|
|
10.45
|
|
|
|
225,937
|
|
|
|
10.13
|
|
|
$13.00 — $24.10
|
|
|
341,268
|
|
|
|
5.64
|
|
|
|
20.67
|
|
|
|
339,072
|
|
|
|
20.72
|
|
|
$25.55 — $107.81
|
|
|
258,388
|
|
|
|
3.23
|
|
|
|
53.27
|
|
|
|
258,388
|
|
|
|
53.27
|
|
|
$112.50 — $120.63
|
|
|
39,496
|
|
|
|
3.65
|
|
|
|
113.96
|
|
|
|
39,496
|
|
|
|
113.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,573,253
|
|
|
|
7.83
|
|
|
$
|
13.28
|
|
|
|
1,228,810
|
|
|
$
|
24.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
The Company recorded deferred compensation of approximately
$21,000 for the difference between the grant price and the fair
value of certain of the Company’s common stock options
granted in 2005. Deferred compensation was fully amortized as of
December 31, 2005.
Employee Stock Purchase Plan
Employees generally are eligible to participate in the Employee
Stock Purchase Plan (the “Purchase Plan”) if they have
been continuously employed by the Company for at least
10 days prior to the first day of the offering period and
are customarily employed at least 20 hours per week and at
least five months per calendar year and are not a 5% or greater
shareholder. Shares may be purchased under the Purchase Plan at
85% of the lesser of the fair market value of the common stock
on the grant date or purchase date. Employee contributions,
through payroll deductions, are limited to the lesser of 15% of
earnings or $25,000.
As of June 30, 2006 a total of 682,086 shares have
been issued under the Purchase Plan, leaving a balance of
367,914 available authorized shares. Compensation expense for
the six months ended June 30, 2006 was $73,271. Under
SFAS No. 123, pro forma compensation cost is reported
for the fair value of the employees’ purchase rights, which
was estimated using the Black-Scholes model and the following
assumptions for 2005: expected volatility of 87.1%; risk-free
interest rates of 3.57%; an average expected life of
1.16 years and a dividend yield of 0.0%. The
weighted-average fair value of the purchase rights granted was
$2.90 per share in 2005 and in 2004 and $2.80 in 2003. Pro
forma compensation expense was $485,000, $623,000, and $245,000
for the years ended December 31, 2005, 2004, and 2003,
respectively, under the Employee Stock Purchase Plan.
|
|
|
|
7.
|
Employee Benefit Plans
|
The Company has a 401(k) Plan which stipulates that all
full-time employees with at least 30 days of employment can
elect to contribute to the 401(k) Plan, subject to certain
limitations, up to $14,000 annually on a pretax basis. Subject
to a maximum dollar match contribution of $7,000 per year,
the Company will match 50% of the first 6% of the
employee’s contribution on a pretax basis. The Company
expensed total employer matching contributions of $283,000,
$461,000, and $483,000 in 2005, 2004 and 2003, respectively. For
the six months ended June 30, 2005 and June 30, 2006
the Company expensed employer matching contributions of $146,000
and $170,000, respectively.
|
|
|
|
8.
|
Related Party Transactions
|
Novo Nordisk and its affiliate, Novo Nordisk Pharmaceuticals,
Inc., are considered related parties and at December 31,
2005 own 1,573,674 shares of the Company’s common
stock, representing 10.7% of the Company’s total
outstanding common stock (9.8% on an as-converted basis).
Development and License Agreement
In June 1998, the Company executed a development and
commercialization agreement with Novo Nordisk to jointly develop
a pulmonary delivery system for administering insulin by
inhalation. Under the terms of the agreement, Novo Nordisk has
been granted exclusive rights to worldwide sales and marketing
rights for any products developed under the terms of the
agreement. Through December 31, 2005, the Company received
from Novo Nordisk $150.1 million in product development and
milestone payments and, of this amount, the Company has
recognized all of these funds as contract revenues. Under the
terms of the development agreement in effect at
December 31, 2005 between the Company and Novo Nordisk,
prior to completion of the restructuring transaction noted
below, Novo Nordisk was to fund all product development costs
incurred by the Company under the terms of the agreement, and
the Company was to be the initial manufacturer of the product
and was to receive a share of the overall gross profits
resulting from Novo Nordisk’s sales of the product while
Novo Nordisk and the Company agreed to co-fund final development
of the AERx device.
On January 26, 2005, the Company completed a restructuring
of its AERx iDMS program, pursuant to a restructuring agreement
entered into with Novo Nordisk and NNDT, a newly created wholly
owned subsidiary
F-22
of Novo Nordisk. Under the terms of the restructuring agreement
the Company sold certain equipment, leasehold improvements and
other tangible assets currently utilized in the AERx iDMS
program to NNDT for $55.3 million, of which the Company
received net proceeds of $51.3 million after applying a
refund of cost advances of $4.0 million previously made by
Novo Nordisk. In addition, NNDT hired 126 Aradigm employees at
the closing of the restructuring transaction. The Company’s
expenses related to this transaction for legal and other
consulting costs were $1.1 million. In connection with the
restructuring transaction, the Company entered into various
related agreements with Novo Nordisk and NNDT, effective
January 26, 2005, including the following:
|
|
|
|
|
|
•
|
an amended and restated license agreement amending the
Development and License Agreement previously in place with Novo
Nordisk, expanding Novo Nordisk’s development and
manufacturing rights to the AERx iDMS program and providing for
royalties to the Company on future AERx iDMS net sales; and
|
|
|
|
|
•
|
a three-year agreement under which NNDT agreed to perform
contract manufacturing of AERx iDMS-identical devices and dosage
forms filled with compounds provided by the Company in support
of preclinical and initial clinical development by the Company
of other AERx products.
|
As a result of this transaction the Company was no longer
obligated to continue work related to a nonrefundable milestone
payment from Novo Nordisk related to the commercialization of
AERx. Upon consummation of the restructuring, the Company
recorded as revenue the outstanding deferred milestone revenue
held on the balance sheet at December 31, 2004 of
$5.2 million. Additionally, the Company was released from
its contractual obligation relating to future operating leases
payments for the two leases assigned to NNDT and accordingly
reversed to current period rent expense the deferred rent
expense related to the two buildings of $1.4 million. As a
result of the restructuring transaction, contract revenue from
the Company’s development agreement with Novo Nordisk
ceased in January 2005. For the years ended December 31,
2005, 2004 and 2003, the Company recognized contract revenues of
$8.0 million, $27.0 million, and $33.5 million,
respectively.
Receivables in the amount of $126,000 were due to the Company
from Novo Nordisk at December 31, 2005. Payables in the
amount of $237,000 were due to Novo Nordisk from the Company at
December 31, 2005. No amounts were due to the Company from
Novo Nordisk at December 31, 2004. For the six months ended
June 30, 2006 the Company received $50,170 related to its
iDMS consulting arrangement with Novo Nordisk.
F-23
Significant payments from collaborators, contract and milestone
revenues and deferred revenue are as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue — beginning balance
|
|
$
|
16,852
|
|
|
$
|
12,931
|
|
|
$
|
11,491
|
|
|
$
|
222
|
|
|
Payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Novo Nordisk
|
|
|
29,625
|
|
|
|
25,373
|
|
|
|
727
|
|
|
|
22
|
|
|
Other collaborator-funded programs
|
|
|
311
|
|
|
|
1,232
|
|
|
|
2,530
|
|
|
|
2,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
29,936
|
|
|
|
26,605
|
|
|
|
3,257
|
|
|
|
2,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Novo Nordisk
|
|
|
33,546
|
|
|
|
26,999
|
|
|
|
8,013
|
|
|
|
50
|
|
|
Other collaborator-funded programs
|
|
|
311
|
|
|
|
1,046
|
|
|
|
2,494
|
|
|
|
2,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contract revenues recognized
|
|
|
33,857
|
|
|
|
28,045
|
|
|
|
10,507
|
|
|
|
2,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue at December 31, 2004 recognized on
January 26, 2005 as payment for assets pursuant to the
restructuring agreement with Novo Nordisk
|
|
|
—
|
|
|
|
—
|
|
|
|
4,019
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue — ending balance
|
|
|
12,931
|
|
|
|
11,491
|
|
|
|
222
|
|
|
|
217
|
|
|
Less: noncurrent portion of deferred revenue
|
|
|
(5,040
|
)
|
|
|
(3,966
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of deferred revenue
|
|
$
|
7,891
|
|
|
$
|
7,525
|
|
|
$
|
222
|
|
|
$
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the restructuring transaction, the Company’s
contract revenues from its development agreement with Novo
Nordisk ceased in 2005. Of the amount recorded in deferred
revenue at December 31, 2004, the Company recorded
$11.3 million in the first quarter of 2005 as follows:
project development revenues of $2.1 million, deferred
milestone revenues of $5.2, and $4.0 million partial
payment for the sale of the insulin development program assets
in accordance with the restructuring agreement. The Company
receives revenues from other collaborator-funded programs. These
programs are generally early-stage feasibility programs and may
not necessarily develop into long-term development agreements
with the collaborators.
Securities Purchase Agreements
In 1998, the Company raised $5.0 million through the sale
of common stock to Novo Nordisk at a 25% premium to the market
price. In June 2001, the Company raised an additional
$5.0 million through the sale of common stock to Novo
Nordisk at the market price. In October 2001, the Company
entered into a new common stock purchase agreement with Novo
Nordisk Pharmaceuticals. Under the new agreement, Novo Nordisk
Pharmaceuticals committed to purchase up to $45.0 million
of the Company’s common stock at fair market value
specified in the agreement, of which $20.0 million was
invested initially. In July 2002, the Company raised
$5.0 million through the sale of common stock to Novo
Nordisk Pharmaceuticals under the terms of the agreement. Since
the inception of the collaboration in June 1998 through
December 31, 2005, the Company raised $35.0 million
through the sale of common stock to Novo Nordisk. In connection
with the restructuring transaction, the Company entered into an
amendment of the common stock purchase agreement in place with
Novo Nordisk, deleting the provisions whereby the Company can
require Novo Nordisk to purchase certain amounts of common stock
and imposing certain restriction on the ability of Novo Nordisk
to sell shares of the Company’s common stock that it holds.
There is no provision for income taxes because the Company has
incurred operating losses. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and
the amounts used for tax purposes.
F-24
Significant components of the Company’s deferred tax assets
are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
73,900
|
|
|
$
|
91,800
|
|
|
Deferred revenue
|
|
|
4,600
|
|
|
|
100
|
|
|
Research and development credits
|
|
|
14,400
|
|
|
|
14,400
|
|
|
Capitalized research and development
|
|
|
7,100
|
|
|
|
3,100
|
|
|
Other
|
|
|
1,800
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
101,800
|
|
|
|
110,700
|
|
|
Valuation allowance
|
|
|
(101,800
|
)
|
|
|
(110,700
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Management believes that, based on a number of factors, it is
more likely than not that the deferred tax asset will not be
realized. Accordingly, a full valuation allowance has been
recorded for all deferred tax assets at December 31, 2005
and 2004. The valuation allowance increased for each of the
years ended December 31 by $8.9 million for 2005,
$13.2 million for 2004, and $14.6 million for 2003.
As of December 31, 2005, the Company had federal net
operating loss carry forwards of approximately
$238.0 million and federal research and development tax
credits of approximately $9.8 million, which expire in the
years 2006 through 2025.
As of December 31, 2005, the Company had California net
operating loss carry forwards of approximately
$148.2 million, which expire in the years 2006 through
2015, and California research and development tax credits of
approximately $6.3 million, which do not expire, and
California Manufacturer’s Investment Credit of
approximately $700,000, which expire in the years 2006 through
2013.
The Tax Reform Act of 1986 limits the annual use of net
operating loss and tax credit carry forwards in certain
situations where changes occur in stock ownership of a company.
In the event the Company has a change in ownership, as defined,
the annual utilization of such carry forwards could be limited.
|
|
|
|
10.
|
Quarterly Results of Operations (unaudited)
|
Following is a summary of the quarterly results of operations
for the years ended December 31, 2005 and 2004 (amounts in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract and license revenues
|
|
$
|
7,714
|
|
|
$
|
1,212
|
|
|
$
|
719
|
|
|
$
|
862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
7,070
|
|
|
|
7,317
|
|
|
|
6,471
|
|
|
|
9,316
|
|
|
|
General and administrative
|
|
|
3,235
|
|
|
|
2,713
|
|
|
|
2,326
|
|
|
|
2,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
10,305
|
|
|
|
10,030
|
|
|
|
8,797
|
|
|
|
11,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,591
|
)
|
|
|
(8,818
|
)
|
|
|
(8,078
|
)
|
|
|
(11,075
|
)
|
|
Interest income
|
|
|
288
|
|
|
|
350
|
|
|
|
342
|
|
|
|
337
|
|
|
Other income and expense
|
|
|
(37
|
)
|
|
|
(8
|
)
|
|
|
8
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,340
|
)
|
|
|
(8,476
|
)
|
|
|
(7,728
|
)
|
|
|
(10,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
14,459
|
|
|
|
14,512
|
|
|
|
14,518
|
|
|
|
14,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract and license revenues
|
|
$
|
6,643
|
|
|
$
|
7,078
|
|
|
$
|
6,352
|
|
|
$
|
7,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,887
|
|
|
|
11,412
|
|
|
|
11,407
|
|
|
|
11,771
|
|
|
|
General and administrative
|
|
|
2,536
|
|
|
|
3,167
|
|
|
|
3,217
|
|
|
|
3,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
14,423
|
|
|
|
14,579
|
|
|
|
14,624
|
|
|
|
14,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,780
|
)
|
|
|
(7,501
|
)
|
|
|
(8,272
|
)
|
|
|
(6,813
|
)
|
|
Interest income
|
|
|
66
|
|
|
|
49
|
|
|
|
45
|
|
|
|
34
|
|
|
Interest expense
|
|
|
(10
|
)
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,724
|
)
|
|
|
(7,457
|
)
|
|
|
(8,230
|
)
|
|
|
(6,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.61
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
12,588
|
|
|
|
12,706
|
|
|
|
12,713
|
|
|
|
12,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Subsequent Events (unaudited)
|
On July 3, 2006, the Company and Novo Nordisk A/ S entered
into a Second Amended and Restated License Agreement (the
“License Agreement”) to reflect: (i) the transfer
by the Company of certain intellectual property, including all
right, title and interest to its patents that contain claims
that pertain generally to breath control or specifically to the
pulmonary delivery of monomeric insulin and monomeric insulin
analogs, together with interrelated patents, which are linked
via terminal disclaimers, as well as certain pending patent
applications and continuations thereof by the Company for a cash
payment to the Company of $12 million; (ii) a
reduction by 100 basis points of each royalty rate payable
by Novo Nordisk to the Company for a cash payment to the Company
of $8 million; and (iii) a loan to the Company in the
principal amount of $7.5 million with interest accruing at
5% per annum and payable in three installments of
$3.5 million on July 2, 2002, July 1, 2013 and
June 30, 2014, secured by a pledge of the net royalty
stream payable to the Company by Novo Nordisk pursuant to the
License Agreement.
The above description is qualified in its entirety by reference
to the License Agreement dated as of July 3, 2006 between
the Company and Novo Nordisk A/ S.
On August 10, 2006 the Company announced the appointment of
Igor Gonda, Ph.D. as its President and Chief Executive
Officer, effective immediately. Accordingly, Dr. Lawlis
stepped down from his position as President and Chief Executive
Officer and as a member of the Company’s Board of
Directors, effective immediately. Dr Lawlis became eligible for
severance benefits pursuant to the Company’s severance
program as set forth in the Company’s most recently filed
proxy statement and other SEC filings.
On August 25, 2006, the Company sold all of its assets
related to its Intraject technology platform and products to
Zogenix, a newly created private company, which will be
responsible for further development and commercialization
efforts. The Company received a $4 million initial payment
and will be entitled to a milestone payment upon initial
commercialization and royalty payments upon any
commercialization of products developed and sold by Zogenix
using the Intraject technology.
F-26
20,000,000 Shares
ARADIGM CORPORATION
Common Stock
PROSPECTUS
,
2006
PUNK, ZIEGEL & COMPANY
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
|
|
Item 13.
|
Other Expenses of Issuance and Distribution
|
The following table sets forth the fees and expenses, other than
the underwriting discount, payable in connection with the
registration of the common stock hereunder. All amounts are
estimates except the SEC registration fee, the NASD filing fee
and the Nasdaq Capital Market listing fee.
|
|
|
|
|
|
|
|
SEC Registration Fee
|
|
$
|
3,495
|
|
|
NASD Filing Fee
|
|
|
3,766
|
|
|
Legal Fees and Expenses
|
|
|
*
|
|
|
Accounting Fees and Expenses
|
|
|
*
|
|
|
Printing and Engraving Expenses
|
|
|
*
|
|
|
Blue Sky Fees and Expenses
|
|
|
*
|
|
|
Transfer Agent and Registrar Fees
|
|
|
*
|
|
|
Miscellaneous Expenses
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
To be completed by amendment.
|
|
|
|
|
Item 14.
|
Indemnification of Directors and Officers
|
Our articles of incorporation and bylaws include provisions to
(i) eliminate the personal liability of our directors for
monetary damages resulting from breaches of their fiduciary
duty, to the extent permitted by California law, and
(ii) permit us to indemnify our directors and officers,
employees and other agents to the fullest extent permitted by
the California Corporations Code. Pursuant to Section 317
of the California Corporations Code, a corporation generally has
the power to indemnify its present and former directors,
officers, employees and agents against any expenses incurred by
them in connection with any suit to which they are, or are
threatened to be made, a party by reason of their serving in
such positions, so long as they acted in good faith and in a
manner they reasonably believed to be in, or not opposed to, the
best interests of a corporation and, with respect to any
criminal action, they had no reasonable cause to believe their
conduct was unlawful. We believe that these provisions are
necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate liability for
breach of the directors’ duty of loyalty to us or our
shareholders, for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law,
for any transaction from which the director derived an improper
personal benefit or for any willful or negligent payment of any
unlawful dividend.
We have entered into indemnity agreements with certain officers
and directors that provide, among other things, that we will
indemnify such officer or director, under the circumstances and
to the extent provided for therein, for expenses, damages,
judgments, fines and settlements such officers and directors may
be required to pay in actions, suits or proceedings which they
are or may be made a party by reason of their position as a
director, officer or other agent of us, and otherwise to the
full extent permitted under California law and our bylaws.
We maintain insurance on behalf of any person who is or was a
director or officer against any loss arising from any claim
asserted against him or her and incurred by him or her in that
capacity, subject to certain exclusions and limits to the amount
of coverage.
|
|
|
|
Item 15.
|
Recent Sales of Unregistered Securities
|
In November 2003, we issued 1,556,110 shares of common
stock in a private placement at a price of $9.00 per share
and warrants to purchase approximately 389,027 shares of
our common stock at $12.50 per
II-1
share for an aggregate consideration of approximately
$14.0 million. The warrants are exercisable at the election
of the security holders on or prior to the fourth anniversary of
the date of issuance. These securities were not registered when
sold and were issued in reliance upon Regulation D of the
Securities Act of 1933, as amended.
In December 2004, we issued 1,666,679 shares of common
stock in a private placement at a price of $7.50 per share
and warrants to purchase approximately 416,669 shares of
our common stock at $10.50 per share for an aggregate
consideration of approximately $12.5 million. The warrants
are exercisable at the election of the security holders on or
prior to the fourth anniversary of the date of issuance. These
securities were not registered when sold and were issued in
reliance upon Regulation D of the Securities Act of 1933,
as amended.
|
|
|
|
Item 16.
|
Exhibits and Financial Statement Schedules
|
|
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
|
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement.
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of Incorporation of the Company.
|
|
|
3
|
.2(2)
|
|
Bylaws of the Company, as amended.
|
|
|
3
|
.3(3)
|
|
Certificate of Determination of Series A Junior
Participating Preferred Stock.
|
|
|
3
|
.4(4)
|
|
Amended and Restated Certificate of Determination of Preferences
of Series A Convertible Preferred Stock.
|
|
|
3
|
.5(3)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
|
3
|
.6(3)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
|
3
|
.7(5)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
|
3
|
.8(5)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
|
3
|
.9(6)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
|
4
|
.1
|
|
Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,
3.7, 3.8 and 3.9.
|
|
|
4
|
.2(1)
|
|
Specimen common stock certificate.
|
|
|
5
|
.1*
|
|
Opinion of Cooley Godward Kronish
llp.
|
|
|
10
|
.1(1)+
|
|
Form of Indemnity Agreement between the Registrant and each of
its directors and officers.
|
|
|
10
|
.2+
|
|
2005 Equity Incentive Plan, as amended.
|
|
|
10
|
.3(1)+
|
|
Form of the Company’s Incentive Stock Option Agreement
under the 2005 Equity Incentive Plan.
|
|
|
10
|
.4(1)+
|
|
Form of the Company’s Non-statutory Stock Option Agreement
under the 2005 Equity Incentive Plan.
|
|
|
10
|
.5(1)+
|
|
1996 Non-Employee Directors’ Stock Option Plan.
|
|
|
10
|
.6(1)+
|
|
Form of the Company’s Non-statutory Stock Option Agreement
under the 1996 Non-Employee Directors’ Stock Option Plan.
|
|
|
10
|
.7+
|
|
Employee Stock Purchase Plan, as amended.
|
|
|
10
|
.8(1)+
|
|
Form of the Company’s Employee Stock Purchase Plan Offering
Document.
|
|
|
10
|
.9(7)
|
|
Lease Agreement for the property located in Phase V of the
Britannia Point Eden Business Park in Hayward, California, dated
January 28, 1998, between the Company and Britannia Point
Eden, LLC.
|
|
|
10
|
.10(8)
|
|
Rights Agreement, dated as of August 31, 1998, between the
Company and ComputerShare Trust Company, N.A.
|
II-2
|
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
|
|
|
|
10
|
.10a(3)
|
|
Amendment to Rights Agreement, dated as of October 22,
2001, by and between the Company and ComputerShare Trust
Company, N.A.
|
|
|
10
|
.10b(3)
|
|
Amendment to Rights Agreement, dated as of December 6,
2001, by and between the Company and ComputerShare Trust
Company, N.A.
|
|
|
10
|
.11(9)
|
|
Securities Purchase Agreement, dated as of November 7,
2003, by and among the Company and the purchasers named therein.
|
|
|
10
|
.12(10)
|
|
Securities Purchase Agreement, dated as of November 14,
2003, by and among the Company and the purchaser named therein.
|
|
|
10
|
.13(11)#
|
|
Restructuring Agreement, dated as of September 28, 2004, by
and among the Company, Novo Nordisk A/ S and Novo Nordisk
Delivery Technologies, Inc.
|
|
|
10
|
.14(12)
|
|
Securities Purchase Agreement, dated as of December 17,
2004, by and among the Company and the purchasers named therein.
|
|
|
10
|
.15
|
|
Amended and Restated Stock Purchase Agreement, dated as of
January 26, 2005, by and among the Company, Novo Nordisk A/
S and Novo Nordisk Pharmaceuticals, Inc.
|
|
|
10
|
.16(13)+
|
|
Form of Change of Control Agreement entered into between the
Company and certain of the Company’s senior officers.
|
|
|
10
|
.17(13)+
|
|
Executive Officer Severance Benefit Plan.
|
|
|
10
|
.18(6)+
|
|
Form of the Company’s Restricted Stock Bonus Agreement
under the 2005 Equity Incentive Plan.
|
|
|
10
|
.19(14)@
|
|
Second Amended and Restated License Agreement, dated as of
July 3, 2006, by and between the Company and Novo Nordisk
A/ S.
|
|
|
10
|
.20
|
|
Promissory Note and Security Agreement, dated July 3, 2006,
by and between the Company and Novo Nordisk A/ S.
|
|
|
10
|
.21@
|
|
Asset Purchase Agreement, dated as of August 25, 2006, by
and between the Company and Zogenix, Inc.
|
|
|
10
|
.22+
|
|
Employment Agreement, dated as of August 10, 2006, with
Dr. Igor Gonda.
|
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
|
23
|
.2*
|
|
Consent of Counsel (included in Exhibit 5.1).
|
|
|
24
|
.1
|
|
Power of Attorney. Reference is made to the signature page.
|
|
|
|
|
@
|
The Company has sought confidential treatment for portions of
the referenced exhibit.
|
|
|
|
+
|
Represents a management contract or compensatory plan or
arrangement.
|
|
|
|
|
#
|
The Commission has granted the Company’s request for
confidential treatment with respect to portions of this exhibit.
|
|
|
|
*
|
To be filed by amendment.
|
|
|
|
|
(1)
|
Incorporated by reference to the Company’s
Form
S-1
(No.
333-4236)
filed on April 30, 1996, as amended.
|
|
|
|
(2)
|
Incorporated by reference to the Company’s
Form
10-Q
filed on
August 14, 1998.
|
|
|
|
(3)
|
Incorporated by reference to the Company’s
Form
10-K
filed on
March 29, 2002.
|
|
|
|
(4)
|
Incorporated by reference to the Company’s
Form
S-3
(No.
333-76584)
filed on January 11, 2002, as amended.
|
|
|
|
(5)
|
Incorporated by reference to the Company’s
Form
10-Q
filed on
August 13, 2004.
|
|
|
|
(6)
|
Incorporated by reference to the Company’s
Form
10-K
filed on
March 31, 2006.
|
|
|
|
(7)
|
Incorporated by reference to the Company’s
Form
10-K
filed on
March 24, 1998, as amended.
|
|
|
|
(8)
|
Incorporated by reference to the Company’s
Form
8-K
filed on
September 2, 1998.
|
|
|
|
(9)
|
Incorporated by reference to the Company’s
Form
8-K
filed on
November 12, 2003.
|
|
|
|
|
(10)
|
Incorporated by reference to the Company’s
Form
8-K
filed on
November 20, 2003.
|
|
|
|
(11)
|
Incorporated by reference to the Company’s
Form
10-Q
filed on
November 15, 2004.
|
|
|
|
(12)
|
Incorporated by reference to the Company’s
Form
8-K
filed on
December 23, 2004.
|
II-3
|
|
|
|
(13)
|
Incorporated by reference to the Company’s
Form
8-K
filed on
October 13, 2005.
|
|
|
|
(14)
|
Incorporated by reference to the Company’s
Form
10-Q
filed on
August 14, 2006.
|
|
|
|
|
|
|
(b)
|
Financial Statement Schedules
|
None.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
|
|
|
|
|
|
(a)
|
For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by
the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was
declared effective.
|
|
|
|
|
(b)
|
For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
|
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, Aradigm Corporation has duly caused this Registration
Statement on
Form
S-1
to be
signed on its behalf by the undersigned, thereunto duly
authorized, in Hayward, California on the 23rd day of
October, 2006.
|
|
|
|
|
|
|
|
Dr. Igor Gonda, President and Chief Executive Officer
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Dr. Igor
Gonda and Thomas C. Chesterman, and each of them, his true and
lawful
attorneys-in
-fact and
agents, each with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and
to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, as amended, and all post-effective
amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in
-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that such
attorneys-in
-fact and
agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement on
Form
S-1
has been
signed by the following persons in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
/s/
Igor Gonda
Igor
Gonda, Ph.D.
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
October 23, 2006
|
|
|
/s/
Thomas C.
Chesterman
Thomas
C. Chesterman
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
October 23, 2006
|
|
|
/s/
Virgil D. Thompson
Virgil
D. Thompson
|
|
Director
|
|
October 23, 2006
|
|
|
/s/
Frank H. Barker
Frank
H. Barker
|
|
Director
|
|
October 23, 2006
|
|
|
/s/
Stephen O. Jaeger
Stephen
O. Jaeger
|
|
Director
|
|
October 23, 2006
|
II-5
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
|
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement.
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of Incorporation of the Company.
|
|
|
3
|
.2(2)
|
|
Bylaws of the Company, as amended.
|
|
|
3
|
.3(3)
|
|
Certificate of Determination of Series A Junior
Participating Preferred Stock.
|
|
|
3
|
.4(4)
|
|
Amended and Restated Certificate of Determination of Preferences
of Series A Convertible Preferred Stock.
|
|
|
3
|
.5(3)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
|
3
|
.6(3)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
|
3
|
.7(5)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
|
3
|
.8(5)
|
|
Certificate of Amendment of Certificate of Determination of
Series A Junior Participating Preferred Stock.
|
|
|
3
|
.9(6)
|
|
Certificate of Amendment of Amended and Restated Articles of
Incorporation of the Company.
|
|
|
4
|
.1
|
|
Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,
3.7, 3.8 and 3.9.
|
|
|
4
|
.2(1)
|
|
Specimen common stock certificate.
|
|
|
5
|
.1*
|
|
Opinion of Cooley Godward Kronish
llp.
|
|
|
10
|
.1(1)+
|
|
Form of Indemnity Agreement between the Registrant and each of
its directors and officers.
|
|
|
10
|
.2+
|
|
2005 Equity Incentive Plan, as amended.
|
|
|
10
|
.3(1)+
|
|
Form of the Company’s Incentive Stock Option Agreement
under the 2005 Equity Incentive Plan.
|
|
|
10
|
.4(1)+
|
|
Form of the Company’s Non-statutory Stock Option Agreement
under the 2005 Equity Incentive Plan.
|
|
|
10
|
.5(1)+
|
|
1996 Non-Employee Directors’ Stock Option Plan.
|
|
|
10
|
.6(1)+
|
|
Form of the Company’s Non-statutory Stock Option Agreement
under the 1996 Non-Employee Directors’ Stock Option Plan.
|
|
|
10
|
.7+
|
|
Employee Stock Purchase Plan, as amended.
|
|
|
10
|
.8(1)+
|
|
Form of the Company’s Employee Stock Purchase Plan Offering
Document.
|
|
|
10
|
.9(7)
|
|
Lease Agreement for the property located in Phase V of the
Britannia Point Eden Business Park in Hayward, California, dated
January 28, 1998, between the Company and Britannia Point
Eden, LLC.
|
|
|
10
|
.10(8)
|
|
Rights Agreement, dated as of August 31, 1998, between the
Company and ComputerShare Trust Company, N.A.
|
|
|
10
|
.10a(3)
|
|
Amendment to Rights Agreement, dated as of October 22,
2001, by and between the Company and ComputerShare Trust
Company, N.A.
|
|
|
10
|
.10b(3)
|
|
Amendment to Rights Agreement, dated as of December 6,
2001, by and between the Company and ComputerShare Trust
Company, N.A.
|
|
|
10
|
.11(9)
|
|
Securities Purchase Agreement, dated as of November 7,
2003, by and among the Company and the purchasers named therein.
|
|
|
10
|
.12(10)
|
|
Securities Purchase Agreement, dated as of November 14,
2003, by and among the Company and the purchaser named therein.
|
|
|
10
|
.13(11)#
|
|
Restructuring Agreement, dated as of September 28, 2004, by
and among the Company, Novo Nordisk A/ S and Novo Nordisk
Delivery Technologies, Inc.
|
|
|
10
|
.14(12)
|
|
Securities Purchase Agreement, dated as of December 17,
2004, by and among the Company and the purchasers named therein.
|
|
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
|
|
|
|
10
|
.15
|
|
Amended and Restated Stock Purchase Agreement, dated as of
January 26, 2005, by and among the Company, Novo Nordisk A/
S and Novo Nordisk Pharmaceuticals, Inc.
|
|
|
10
|
.16(13)+
|
|
Form of Change of Control Agreement entered into between the
Company and certain of the Company’s senior officers.
|
|
|
10
|
.17(13)+
|
|
Executive Officer Severance Benefit Plan.
|
|
|
10
|
.18(6)+
|
|
Form of the Company’s Restricted Stock Bonus Agreement
under the 2005 Equity Incentive Plan.
|
|
|
10
|
.19(14)@
|
|
Second Amended and Restated License Agreement, dated as of
July 3, 2006, by and between the Company and Novo Nordisk
A/ S.
|
|
|
10
|
.20
|
|
Promissory Note and Security Agreement, dated July 3, 2006,
by and between the Company and Novo Nordisk A/ S.
|
|
|
10
|
.21@
|
|
Asset Purchase Agreement, dated as of August 25, 2006, by
and between the Company and Zogenix, Inc.
|
|
|
10
|
.22+
|
|
Employment Agreement, dated as of August 10, 2006, with
Dr. Igor Gonda.
|
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
|
23
|
.2*
|
|
Consent of Counsel (included in Exhibit 5.1).
|
|
|
24
|
.1
|
|
Power of Attorney. Reference is made to the signature page.
|
|
|
|
|
@
|
The Company has sought confidential treatment for portions of
the referenced exhibit.
|
|
|
|
+
|
Represents a management contract or compensatory plan or
arrangement.
|
|
|
|
|
#
|
The Commission has granted the Company’s request for
confidential treatment with respect to portions of this exhibit.
|
|
|
|
*
|
To be filed by amendment.
|
|
|
|
|
(1)
|
Incorporated by reference to the Company’s
Form
S-1
(No.
333-4236)
filed on April 30, 1996, as amended.
|
|
|
|
(2)
|
Incorporated by reference to the Company’s
Form
10-Q
filed on
August 14, 1998.
|
|
|
|
(3)
|
Incorporated by reference to the Company’s
Form
10-K
filed on
March 29, 2002.
|
|
|
|
(4)
|
Incorporated by reference to the Company’s
Form
S-3
(No.
333-76584)
filed on January 11, 2002, as amended.
|
|
|
|
(5)
|
Incorporated by reference to the Company’s
Form
10-Q
filed on
August 13, 2004.
|
|
|
|
(6)
|
Incorporated by reference to the Company’s
Form
10-K
filed on
March 31, 2006.
|
|
|
|
(7)
|
Incorporated by reference to the Company’s
Form
10-K
filed on
March 24, 1998, as amended.
|
|
|
|
(8)
|
Incorporated by reference to the Company’s
Form
8-K
filed on
September 2, 1998.
|
|
|
|
(9)
|
Incorporated by reference to the Company’s
Form
8-K
filed on
November 12, 2003.
|
|
|
|
|
(10)
|
Incorporated by reference to the Company’s
Form
8-K
filed on
November 20, 2003.
|
|
|
|
(11)
|
Incorporated by reference to the Company’s
Form
10-Q
filed on
November 15, 2004.
|
|
|
|
(12)
|
Incorporated by reference to the Company’s
Form
8-K
filed on
December 23, 2004.
|
|
|
|
(13)
|
Incorporated by reference to the Company’s
Form
8-K
filed on
October 13, 2005.
|
|
|
|
(14)
|
Incorporated by reference to the Company’s
Form
10-Q
filed on
August 14, 2006.
|
Exhibit
10.2
ARADIGM CORPORATION
2005 Equity Incentive Plan
Adopted: March 21, 2005
Approved By Shareholders: May 19, 2005
Termination Date: March 20, 2015
Amended by Board (including
to reflect January 2006 1-for-5 reverse stock split): March 30, 2006
Amendment Approved by Shareholders: May 18, 2006
Amended: August 8, 2006
1.
General.
(a)
Amendment and Restatement.
The Plan is a complete amendment and restatement of the
Company’s 1996 Equity Incentive Plan that was previously adopted in April 1996 (as thereafter
amended, the
“Prior Plan"
). All outstanding awards granted under the Prior Plan shall remain
subject to the terms of the Prior Plan. All Stock Awards granted on or after the effective date of
this Plan shall be subject to the terms of this Plan.
(b)
Eligible Stock Award Recipients.
The persons eligible to receive Stock Awards are
Employees, Directors and Consultants.
(c)
Available Stock Awards.
The Plan provides for the grant of the following Stock Awards:
(i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) Stock Purchase Awards, (iv)
Stock Bonus Awards, (v) Stock Appreciation Rights, (vi) Stock Unit Awards and (vii) Other Stock
Awards.
(d)
General Purpose.
The Company, by means of the Plan, seeks to secure and retain the
services of the group of persons eligible to receive Stock Awards as set forth in Section 1(a), to
provide incentives for such persons to exert maximum efforts for the success of the Company and any
Affiliate and to provide a means by which such eligible recipients may be given an opportunity to
benefit from increases in value of the Common Stock through the granting of Stock Awards.
2.
Definitions.
As used in the Plan, the following definitions shall apply to the capitalized terms indicated
below:
(a)
“Affiliate”
means (i) any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company, provided each corporation in the unbroken chain (other than
the Company) owns, at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other corporations in such
chain, and (ii) any corporation (other than the Company) in an
1
unbroken chain of corporations beginning with the Company, provided each corporation (other
than the last corporation) in the unbroken chain owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain. The Board shall have the authority to determine
(i) the time or times at which the ownership tests are applied, and (ii) whether “Affiliate”
includes entities other than corporations within the foregoing definition.
(b)
“Board”
means the Board of Directors of the Company.
(c)
“Capitalization Adjustment”
has the meaning ascribed to that term in Section 11(a).
(d)
“Cause”
means, with respect to a Participant, the occurrence of any of the following: (i)
such Participant’s commission of any felony or any crime involving fraud, dishonesty or moral
turpitude under the laws of the United States or any state thereof; (ii) such Participant’s
attempted commission of, or participation in, a fraud or act of dishonesty against the Company;
(iii) such Participant’s intentional, material violation of any material contract or agreement
between the Participant and the Company or any statutory duty owed to the Company; (iv) such
Participant’s unauthorized use or disclosure of the Company’s confidential information or trade
secrets; or (v) such Participant’s gross misconduct. The determination that a termination is for
Cause shall be made by the Company in its sole discretion. Any determination by the Company that
the Continuous Service of a Participant was terminated by reason of dismissal without Cause for the
purposes of outstanding Stock Awards held by such Participant shall have no effect upon any
determination of the rights or obligations of the Company or such Participant for any other
purpose.
(e)
“Change in Control”
means the occurrence, in a single transaction or in a series of
related transactions, of any one or more of the following events:
(i)
any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the
Company representing more than fifty percent (50%) of the combined voting power of the Company’s
then outstanding securities other than by virtue of a merger, consolidation or similar transaction.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur (A) on account of
the acquisition of securities of the Company by an investor, any affiliate thereof or any other
Exchange Act Person from the Company in a transaction or series of related transactions the primary
purpose of which is to obtain financing for the Company through the issuance of equity securities
or (B) solely because the level of Ownership held by any Exchange Act Person (the “
Subject Person
”)
exceeds the designated percentage threshold of the outstanding voting securities as a result of a
repurchase or other acquisition of voting securities by the Company reducing the number of shares
outstanding, provided that if a Change in Control would occur (but for the operation of this
sentence) as a result of the acquisition of voting securities by the Company, and after such share
acquisition, the Subject Person becomes the Owner of any additional voting securities that,
assuming the repurchase or other acquisition had not occurred, increases the percentage of the then
outstanding voting securities Owned by the Subject Person over the designated percentage threshold,
then a Change in Control shall be deemed to occur;
2
(ii)
there is consummated a merger, consolidation or similar transaction involving (directly
or indirectly) the Company and, immediately after the consummation of such merger, consolidation or
similar transaction, the shareholders of the Company immediately prior thereto do not Own, directly
or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%)
of the combined outstanding voting power of the surviving Entity in such merger, consolidation or
similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power
of the parent of the surviving Entity in such merger, consolidation or similar transaction, in each
case in substantially the same proportions as their Ownership of the outstanding voting securities
of the Company immediately prior to such transaction;
(iii)
the shareholders of the Company approve or the Board approves a plan of complete
dissolution or liquidation of the Company, or a complete dissolution or liquidation of the Company
shall otherwise occur;
(iv)
there is consummated a sale, lease, exclusive license or other disposition of all or
substantially all of the consolidated assets of the Company and its Subsidiaries, other than a
sale, lease, license or other disposition of all or substantially all of the consolidated assets of
the Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the combined voting
power of the voting securities of which are Owned by shareholders of the Company in substantially
the same proportions as their Ownership of the outstanding voting securities of the Company
immediately prior to such sale, lease, license or other disposition; or
(v)
individuals who, on the date this Plan is adopted by the Board, are members of the Board
(the “
Incumbent Board
”) cease for any reason to constitute at least a majority of the members of
the Board;
provided, however,
that if the appointment or election (or nomination for election) of
any new Board member was approved or recommended by a majority vote of the members of the Incumbent
Board then still in office, such new member shall, for purposes of this Plan, be considered as a
member of the Incumbent Board.
The term Change in Control shall not include a sale of assets, merger or other transaction
effected exclusively for the purpose of changing the domicile of the Company.
Notwithstanding the foregoing or any other provision of this Plan, the definition of Change in
Control (or any analogous term) in an individual written agreement between the Company or any
Affiliate and the Participant shall supersede the foregoing definition with respect to Stock Awards
subject to such agreement;
provided, however,
that if no definition of Change in Control or any
analogous term is set forth in such an individual written agreement, the foregoing definition shall
apply.
(f)
“Code”
means the Internal Revenue Code of 1986, as amended.
(g)
“Committee”
means a committee of one (1) or more members of the Board to whom authority
has been delegated by the Board in accordance with Section 3(c).
(h)
“Common Stock”
means the common stock of the Company.
(i)
“Company”
means Aradigm Corporation, a California corporation.
3
(j)
“Consultant”
means any person, including an advisor, who is (i) engaged by the Company or
an Affiliate to render consulting or advisory services and is compensated for such services or (ii)
serving as a member of the Board of Directors of an Affiliate and is compensated for such services.
However, service solely as a Director, or payment of a fee for such service, shall not cause a
Director to be considered a “Consultant” for purposes of the Plan.
(k)
“Continuous Service”
means that the Participant’s service with the Company or an
Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A
change in the capacity in which the Participant renders service to the Company or an Affiliate as
an Employee, Consultant or Director or a change in the entity for which the Participant renders
such service, provided that there is no interruption or termination of the Participant’s service
with the Company or an Affiliate, shall not terminate a Participant’s Continuous Service. For
example, a change in status from an employee of the Company to a consultant to an Affiliate or to a
Director shall not constitute an interruption of Continuous Service. To the extent permitted by
law, the Board or the chief executive officer of the Company, in that party’s sole discretion, may
determine whether Continuous Service shall be considered interrupted in the case of any leave of
absence approved by that party, including sick leave, military leave or any other personal leave.
Notwithstanding the foregoing, a leave of absence shall be treated as Continuous Service for
purposes of vesting in a Stock Award only to such extent as may be provided in the Company’s leave
of absence policy or in the written terms of the Participant’s leave of absence.
(l)
“Corporate Transaction”
means the occurrence, in a single transaction or in a series of
related transactions, of any one or more of the following events:
(i)
a sale or other disposition of all or substantially all, as determined by the Board in its
sole discretion, of the consolidated assets of the Company and its Subsidiaries;
(ii)
a sale or other disposition of at least ninety percent (90%
)
of the outstanding
securities of the Company;
(iii)
the consummation of a merger, consolidation or similar transaction following which the
Company is not the surviving corporation; or
(iv)
the consummation of a merger, consolidation or similar transaction following which the
Company is the surviving corporation but the shares of Common Stock outstanding immediately
preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of
the merger, consolidation or similar transaction into other property, whether in the form of
securities, cash or otherwise.
(m)
“Covered Employee”
means the chief executive officer and the four (4) other highest
compensated officers of the Company for whom total compensation is required to be reported to
shareholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code.
(n)
“Director”
means a member of the Board.
(o)
“Disability”
means the permanent and total disability of a person within the meaning of
Section 22(e)(3) of the Code; provided, however, that to the extent that Section
4
260.140.41 of Title 10 of the California Code of Regulations applies to an Option,
“Disability” shall mean the inability of a person, in the opinion of a qualified physician
acceptable to the Company, to perform the major duties of that person’s position with the Company
or an Affiliate because of the sickness or injury of the person and such inability results in
termination of employment by the Company or an Affiliate.
(p)
“Employee”
means any person employed by the Company or an Affiliate. However, service
solely as a Director, or payment of a fee for such services, shall not cause a Director to be
considered an “Employee” for purposes of the Plan.
(q)
“Entity”
means a corporation, partnership or other entity.
(r)
“Exchange Act”
means the Securities Exchange Act of 1934, as amended.
(s)
“Exchange Act Person”
means any natural person, Entity or “group” (within the meaning of
Section 13(d) or 14(d) of the Exchange Act), except that “Exchange Act Person” shall not include
(i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or
any Subsidiary of the Company or any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter
temporarily holding securities pursuant to an offering of such securities, (iv) an Entity Owned,
directly or indirectly, by the shareholders of the Company in substantially the same proportions as
their Ownership of stock of the Company; or (v) any natural person, Entity or “group” (within the
meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the effective date of the Plan
as set forth in Section 14, is the Owner, directly or indirectly, of securities of the Company
representing more than fifty percent (50%) of the combined voting power of the Company’s then
outstanding securities.
(t)
“Fair Market Value”
means, as of any date, the value of the Common Stock determined as
follows and in each case in a manner consistent with Section 260.140.50 of Title 10 of the
California Code of Regulations:
(i)
If the Common Stock is listed on any established stock exchange or traded on the Nasdaq
National Market, the Nasdaq SmallCap Market, the pink sheets or the Over The Counter Bulletin Board
System, the Fair Market Value of a share of Common Stock shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as quoted on such exchange, market or system
(or the exchange, market or system with the greatest volume of trading in the Common Stock) on the
date in question, as reported in
The Wall Street Journal
or such other source as the Board deems
reliable. Unless otherwise provided by the Board, if there is no closing sales price (or closing
bid if no sales were reported) for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price (or closing bid if no sales were reported) on the last
preceding date for which such quotation exists.
(ii)
In the absence of an established market or system for the Common Stock, the Fair Market
Value shall be determined by the Board in good faith.
(u)
“Incentive Stock Option”
means an Option intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
5
(v)
“Non-Employee Director”
means a Director who either (i) is not a current employee or
officer of the Company or an Affiliate, does not receive compensation, either directly or
indirectly, from the Company or an Affiliate for services rendered as a consultant or in any
capacity other than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
(“
Regulation S-K
”)), does not possess an interest in any other transaction for which disclosure
would be required under Item 404(a) of Regulation S-K, and is not engaged in a business
relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K; or
(ii) is otherwise considered a “non-employee director” for purposes of Rule 16b-3.
(w)
“Nonstatutory Stock Option”
means an Option not intended to qualify as an Incentive Stock
Option.
(x)
“Officer”
means a person who is an officer of the Company within the meaning of Section 16
of the Exchange Act and the rules and regulations promulgated thereunder.
(y)
“Option”
means an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares
of Common Stock granted pursuant to the Plan.
(z)
“Option Agreement”
means a written agreement between the Company and an Optionholder
evidencing the terms and conditions of an Option grant. Each Option Agreement shall be subject to
the terms and conditions of the Plan.
(aa)
“Optionholder”
means a person to whom an Option is granted pursuant to the Plan or, if
applicable, such other person who holds an outstanding Option.
(bb)
“Other Stock Award”
means an award based in whole or in part by reference to the Common
Stock which is granted pursuant to the terms and conditions of Section 7(e).
(cc)
“Other Stock Award Agreement”
means a written agreement between the Company and a holder
of an Other Stock Award evidencing the terms and conditions of an Other Stock Award grant. Each
Other Stock Award Agreement shall be subject to the terms and conditions of the Plan.
(dd)
“Outside Director”
means a Director who either (i) is not a current employee of the
Company or an “affiliated corporation” (within the meaning of Treasury Regulations promulgated
under Section 162(m) of the Code), is not a former employee of the Company or an “affiliated
corporation” who receives compensation for prior services (other than benefits under a
tax-qualified retirement plan) during the taxable year, has not been an officer of the Company or
an “affiliated corporation,” and does not receive remuneration from the Company or an “affiliated
corporation,” either directly or indirectly, in any capacity other than as a Director, or (ii) is
otherwise considered an “outside director” for purposes of Section 162(m) of the Code.
(ee)
“Own,” “Owned,” “Owner,” “Ownership”
A person or Entity shall be deemed to “Own,” to
have “Owned,” to be the “Owner” of, or to have acquired “Ownership” of securities if such person or
Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or
otherwise, has or shares voting power, which includes the power to vote or to direct the voting,
with respect to such securities.
6
(ff)
“Participant”
means a person to whom a Stock Award is granted pursuant to the Plan or, if
applicable, such other person who holds an outstanding Stock Award.
(gg)
“Performance Criteria”
means the one or more criteria that the Board shall select for
purposes of establishing the Performance Goals for a Performance Period. The Performance Criteria
that shall be used to establish such Performance Goals may be based on any one of, or combination
of, the following: (i) earnings per share; (ii) earnings before interest, taxes and depreciation;
(iii) earnings before interest, taxes, depreciation and amortization (EBITDA); (iv) net earnings;
(v) total shareholder return; (vi) return on equity; (vii) return on assets, investment or capital
employed; (viii) operating margin; (ix) gross margin; (x) operating income; (xi) net income (before
or after taxes); (xii) net operating income; (xiii) net operating income after tax; (xiv) pre- and
after-tax income; (xv) pre-tax profit; (xvi) operating cash flow; (xvii) sales or revenue targets;
(xviii) increases in revenue or product revenue; (xix) expenses and cost reduction goals; (xx)
improvement in or attainment of expense levels; (xxi) improvement in or attainment of working
capital levels; (xxii) economic value added (or an equivalent metric); (xxiii) market share; (xxiv)
cash flow; (xxv) cash flow per share; (xxvi) share price performance; (xxvii) debt reduction;
(xxviii) implementation or completion of projects or processes; (xxix) customer satisfaction; (xxx)
total shareholder return; (xxxi) shareholders’ equity; and (xxxii) other measures of performance
selected by the Board. Partial achievement of the specified criteria may result in the payment or
vesting corresponding to the degree of achievement as specified in the Stock Award Agreement. The
Board shall, in its sole discretion, define the manner of calculating the Performance Criteria it
selects to use for such Performance Period.
(hh)
“Performance Goals”
means, for a Performance Period, the one or more goals established by
the Board for the Performance Period based upon the Performance Criteria. The Board is authorized
at any time in its sole discretion, to adjust or modify the calculation of a Performance Goal for
such Performance Period in order to prevent the dilution or enlargement of the rights of
Participants, (a) in the event of, or in anticipation of, any unusual or extraordinary corporate
item, transaction, event or development; (b) in recognition of, or in anticipation of, any other
unusual or nonrecurring events affecting the Company, or the financial statements of the Company,
or in response to, or in anticipation of, changes in applicable laws, regulations, accounting
principles, or business conditions; or (c) in view of the Board’s assessment of the business
strategy of the Company, performance of comparable organizations, economic and business conditions,
and any other circumstances deemed relevant. Specifically, the Board is authorized to make
adjustment in the method of calculating attainment of Performance Goals and objectives for a
Performance Period as follows: (i) to exclude the dilutive effects of acquisitions or joint
ventures; (ii) to assume that any business divested by the Company achieved performance objectives
at targeted levels during the balance of a Performance Period following such divestiture; and (iii)
to exclude the effect of any change in the outstanding shares of common stock of the Company by
reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger,
consolidation, spin-off, combination or exchange of shares or other similar corporate change, or
any distributions to common shareholders other than regular cash dividends. In addition, the Board
is authorized to make adjustment in the method of calculating attainment of Performance Goals and
objectives for a Performance Period as follows: (i) to exclude restructuring and/or other
nonrecurring charges; (ii) to exclude exchange rate effects, as applicable, for non-U.S. dollar
denominated net sales and operating earnings; (iii) to exclude the effects of changes to generally
accepted accounting standards required by the
7
Financial Accounting Standards Board; (iv) to exclude the effects to any statutory adjustments
to corporate tax rates; (v) to exclude the impact of any “extraordinary items” as determined under
generally accepted accounting principles; and (vi) to exclude any other unusual, non-recurring gain
or loss or other extraordinary item.
(ii)
“Performance Period”
means the one or more periods of time, which may be of varying and
overlapping durations, as the Board may select, over which the attainment of one or more
Performance Goals will be measured for the purpose of determining a Participant’s right to and the
payment of a Stock Award.
(jj)
“Plan”
means this Aradigm Corporation 2005 Equity Incentive Plan.
(kk)
“Rule 16b-3”
means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule
16b-3, as in effect from time to time.
(ll)
“Securities Act”
means the Securities Act of 1933, as amended.
(mm)
“Stock Appreciation Right”
means a right to receive the appreciation on Common Stock that
is granted pursuant to the terms and conditions of Section 7(d).
(nn)
“Stock Appreciation Right Agreement”
means a written agreement between the Company and a
holder of a Stock Appreciation Right evidencing the terms and conditions of a Stock Appreciation
Right grant. Each Stock Appreciation Right Agreement shall be subject to the terms and conditions
of the Plan.
(oo)
“Stock Award”
means any right granted under the Plan, including an Option, a Stock
Purchase Award, Stock Bonus Award, a Stock Appreciation Right, a Stock Unit Award or any Other
Stock Award.
(pp)
“Stock Award Agreement”
means a written agreement between the Company and a Participant
evidencing the terms and conditions of a Stock Award grant. Each Stock Award Agreement shall be
subject to the terms and conditions of the Plan.
(qq)
“Stock Bonus Award”
means an award of shares of Common Stock which is granted pursuant to
the terms and conditions of Section 7(b).
(rr)
“Stock Bonus Award Agreement”
means a written agreement between the Company and a holder
of a Stock Bonus Award evidencing the terms and conditions of a Stock Bonus Award grant. Each
Stock Bonus Award Agreement shall be subject to the terms and conditions of the Plan.
(ss)
“Stock Purchase Award”
means an award of shares of Common Stock which is granted pursuant
to the terms and conditions of Section 7(a).
(tt)
“Stock Purchase Award Agreement”
means a written agreement between the Company and a
holder of a Stock Purchase Award evidencing the terms and conditions of a Stock Purchase Award
grant. Each Stock Purchase Award Agreement shall be subject to the terms and conditions of the
Plan.
8
(uu)
“Stock Unit Award”
means a right to receive shares of Common Stock which is granted
pursuant to the terms and conditions of Section 7(c).
(vv)
“Stock Unit Award Agreement”
means a written agreement between the Company and a holder
of a Stock Unit Award evidencing the terms and conditions of a Stock Unit Award grant. Each Stock
Unit Award Agreement shall be subject to the terms and conditions of the Plan.
(ww)
“Subsidiary”
means, with respect to the Company, (i) any corporation of which more than
fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a
majority of the board of directors of such corporation (irrespective of whether, at the time, stock
of any other class or classes of such corporation shall have or might have voting power by reason
of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company,
and (ii) any partnership in which the Company has a direct or indirect interest (whether in the
form of voting or participation in profits or capital contribution) of more than fifty percent
(50%).
(xx)
“Ten Percent Shareholder”
means either (i) a person who Owns (or is deemed to Own
pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Affiliate or (ii) a person who
Owns securities possessing more than 10% of the total combined voting power (as defined in Section
194.5 of the California Corporation Code) of all classes of securities of the issuer or its parent
or subsidiaries possessing voting power.
3.
Administration.
(a)
Administration by Board.
The Board shall administer the Plan unless and until the Board
delegates administration of the Plan to a Committee, as provided in Section 3(c).
(b)
Powers of Board.
The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(i)
To determine from time to time (1) which of the persons eligible under the Plan shall be
granted Stock Awards; (2) when and how each Stock Award shall be granted; (3) what type or
combination of types of Stock Award shall be granted; (4) the provisions of each Stock Award
granted (which need not be identical), including the time or times when a person shall be permitted
to receive Common Stock pursuant to a Stock Award; and (5) the number of shares of Common Stock
with respect to which a Stock Award shall be granted to each such person.
(ii)
To construe and interpret the Plan and Stock Awards granted under it, and to establish,
amend and revoke rules and regulations for its administration. The Board, in the exercise of this
power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award
Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan
fully effective.
(iii)
To amend the Plan or a Stock Award as provided in Section 12.
9
(iv)
To terminate or suspend the Plan as provided in Section 13.
(v)
Generally, to exercise such powers and to perform such acts as the Board deems necessary
or expedient to promote the best interests of the Company and that are not in conflict with the
provisions of the Plan.
(vi)
To adopt such procedures and sub-plans as are necessary or appropriate to permit
participation in the Plan by Employees who are foreign nationals or employed outside the United
States.
(c)
Delegation to Committee.
(i) General.
The Board may delegate some or all of the administration of the Plan to a
Committee or Committees. If administration is delegated to a Committee, the Committee shall have,
in connection with the administration of the Plan, the powers theretofore possessed by the Board
that have been delegated to the Committee, including the power to delegate to a subcommittee any of
the administrative powers the Committee is authorized to exercise (and references in this Plan to
the Board shall thereafter be to the Committee or subcommittee), subject, however, to such
resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time
by the Board. The Board may retain the authority to concurrently administer the Plan with the
Committee and may, at any time, revest in the Board some or all of the powers previously delegated.
(ii) Section 162(m) and Rule 16b-3 Compliance.
In the sole discretion of the Board, the
Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of
the Code, and/or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3. In
addition, the Board or the Committee, in its sole discretion, may (1) delegate to a committee of
one or more members of the Board who need not be Outside Directors the authority to grant Stock
Awards to eligible persons who are either (a) not then Covered Employees and are not expected to be
Covered Employees at the time of recognition of income resulting from such Stock Award or (b) not
persons with respect to whom the Company wishes to comply with Section 162(m) of the Code, and/or
(2) delegate to a committee of one or more members of the Board who need not be Non-Employee
Directors the authority to grant Stock Awards to eligible persons who are not then subject to
Section 16 of the Exchange Act.
(d)
Delegation to an Officer.
The Board may delegate to one or more Officers of the Company
the authority to do one or both of the following (i) designate Officers and Employees of the
Company or any of its Subsidiaries to be recipients of Stock Awards and the terms thereof, and (ii)
determine the number of shares of Common Stock to be subject to such Stock Awards granted to such
Officers and Employees of the Company;
provided, however,
that the Board resolutions regarding such
delegation shall specify the total number of shares of Common Stock that may be subject to the
Stock Awards granted by such Officer and that such Officer may not grant a Stock Award to himself
or herself. Notwithstanding anything to the contrary in this Section 3(d), the Board may not
delegate to an Officer authority to determine the Fair Market Value of the Common Stock pursuant to
Section 2(t)(ii) above.
10
(e)
Effect of Board’s Decision.
All determinations, interpretations and constructions made by
the Board in good faith shall not be subject to review by any person and shall be final, binding
and conclusive on all persons.
(f)
Cancellation and Re-Grant of Stock Awards
. Neither the Board nor any Committee shall have
the authority to: (i) reprice any outstanding Stock Awards under the Plan, or (ii) cancel and
re-grant any outstanding Stock Awards under the Plan, unless the shareholders of the Company have
approved such an action within twelve (12) months prior to such an event.
4.
Shares Subject to the Plan.
(a)
Share Reserve.
Subject to the provisions of Section 11(a) relating to Capitalization
Adjustments and subsection 4(d) below, the number of shares of Common Stock that may be issued
pursuant to Stock Awards shall not exceed, in the aggregate, four million six hundred thirty-seven
thousand five hundred twenty-seven (4,637,527) shares of Common Stock (including shares underlying
Stock Awards issued pursuant to the Prior Plan).
(b)
Reversion of Shares to the Share Reserve
. Any shares of Common Stock subject to
outstanding awards granted under the Prior Plan that would otherwise have reverted to the share
reserve of the Prior Plan shall revert to and again become available for issuance under this Plan.
If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without
having been exercised in full, or if any shares of Common Stock issued to a Participant pursuant to
a Stock Award are forfeited to or repurchased by the Company, including, but not limited to, any
repurchase or forfeiture caused by the failure to meet a contingency or condition required for the
vesting of such shares, then the shares of Common Stock not issued under such Stock Award, or
forfeited to or repurchased by the Company, shall revert to and again become available for issuance
under the Plan. If any shares subject to a Stock Award are not delivered to a Participant because
such shares are withheld for the payment of taxes, the number of shares that are not delivered to
the Participant shall remain available for issuance under the Plan. If the exercise price of any
Stock Award is satisfied by tendering shares of Common Stock held by the Participant (either by
actual delivery or attestation), then the number of shares so tendered shall remain available for
issuance under the Plan. Notwithstanding anything to the contrary in this Section 4(b), subject to
the provisions of Section 11(a) relating to Capitalization Adjustments the aggregate maximum number
of shares of Common Stock that may be issued pursuant to the exercise of Incentive Stock Options
shall be four million six hundred thirty-seven thousand five hundred twenty-seven (4,637,527)
shares of Common Stock plus the amount of any increase in the number of shares that may be
available for issuance pursuant to Stock Awards pursuant to Section 4(a).
(c)
Source of Shares.
The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the Company on the open
market.
(d)
Reserve Limitation.
Notwithstanding Section 4(a), if at the time of each grant of a Stock
Award under the Plan, the Company is subject to Section 260.140.45 of Title 10 of the California
Code of Regulations (“Section 260.140.45”), and to the extent required by Section 260.140.45 the
total number of securities issuable upon exercise of all outstanding options of the
11
Company and the total number of shares provided for under this Plan or any other equity
incentive, stock bonus or similar plan or agreement of the Company shall not exceed thirty percent
(30%) of the then outstanding capital stock of the Company (as measured as set forth in Section
260.140.45), unless stockholder approval to exceed thirty percent (30%) has been obtained in
compliance with Section 260.140.45, in which case the limit shall be such higher percentage as
approved by the stockholders.
5.
Eligibility.
(a)
Eligibility for Specific Stock Awards
. Incentive Stock Options may be granted only to
Employees. Stock Awards other than Incentive Stock Options may be granted to Employees, Directors
and Consultants.
(b)
Ten Percent Shareholders.
(i)
So long as the Company is subject to Section 260.140.41 of Title 10 of the California Code
of Regulations, no Ten Percent Shareholder shall be eligible for the grant of a Nonstatutory Stock
Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the
Fair Market Value of the Common Stock at the date of grant and the Option is not exercisable after
the expiration of five (5) years from the date of grant; provided, however, that a Nonstatutory
Stock Option may be granted at a lower exercise price and a longer term if a lower percentage of
the Fair Market Value of the Common Stock on the date of grant and a longer term is permitted by
Section 260.140.41 of Title 10 of the California Code of Regulations at the time of the grant of
the Nonstatutory Stock Option.
(ii)
A Ten Percent Shareholder shall not be granted an Incentive Stock Option unless the
exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value
of the Common Stock on the date of grant and the Option is not exercisable after the expiration of
five (5) years from the date of grant.
(iii)
So long as the Company is subject to Section 260.140.42 of Title 10 of the California
Code of Regulations, a Ten Percent Shareholder shall not be granted a Stock Purchase Award unless
the purchase price of the restricted stock is at least (A) one hundred percent (100%) of the Fair
Market Value of the Common Stock on the date of grant or (B) such lower percentage of the Fair
Market Value of the Common Stock on the date of grant as is permitted by Section 260.140.42 of
Title 10 of the California Code of Regulations at the time of the grant of the Stock Purchase
Award.
(iv)
So long as the Company is subject to Section 260.140.42 of Title 10 of the California
Code of Regulations, a Ten Percent Shareholder shall not be granted a Stock Appreciation Right
unless the strike price is at least (A) one hundred percent (100%) of the Fair Market Value of the
Common Stock on the date of grant or (B) such lower percentage of the Fair Market Value of the
Common Stock on the date of grant as is permitted by Section 260.140.42 of Title 10 of the
California Code of Regulations at the time of the grant of the Stock Appreciation Award.
(c)
Section 162(m)
Limitation on Annual Grants
. Subject to the provisions of Section 11(a)
relating to Capitalization Adjustments, at such time as the Company may be
12
subject to the applicable provisions of Section 162(m) of the Code, no Employee shall be
eligible to be granted Stock Awards whose value is determined by reference to an increase over an
exercise or strike price of at least one hundred percent (100%) of the Fair Market Value of the
Common Stock on the date the Stock Award is granted covering more than five hundred thousand
(500,000) shares of Common Stock during any calendar year.
(d)
Consultants.
A Consultant shall not be eligible for the grant of a Stock Award if, at the
time of grant, a Form S-8 Registration Statement under the Securities Act (
“Form S-8"
) is not
available to register either the offer or the sale of the Company’s securities to such Consultant
because of the nature of the services that the Consultant is providing to the Company, because the
Consultant is not a natural person, or because of any other rule governing the use of Form S-8.
6.
Option Provisions.
Each Option shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate. All Options shall be separately designated Incentive Stock Options or
Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate
certificate or certificates shall be issued for shares of Common Stock purchased on exercise of
each type of Option. The provisions of separate Options need not be identical;
provided, however
,
that each Option Agreement shall include (through incorporation of provisions hereof by reference
in the Option or otherwise) the substance of each of the following provisions:
(a)
Term.
The Board shall determine the term of an Option;
provided, however
, that subject
to the provisions of Section 5(b) regarding Ten Percent Shareholders, no Incentive Stock Option
shall be exercisable after the expiration of ten (10) years from the date of grant;
provided
further,
to the extent that the Company is subject to Section 260.140.41(c) of Title 10 of the
California Code of Regulations at the time of the grant of the Option, no Option shall be
exercisable after the expiration of ten (10) years from the date of grant.
(b)
Exercise Price of an Incentive Stock Option.
Subject to the provisions of Section 5(b)
regarding Ten Percent Shareholders, the exercise price of each Incentive Stock Option shall be not
less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the
Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option
may be granted with an exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for another option in a manner
consistent with the provisions of Section 424(a) of the Code.
(c)
Exercise Price of a Nonstatutory Stock Option.
Subject to the provisions of Section 5(b)
regarding Ten Percent Shareholders, the exercise price of each Nonstatutory Stock Option shall be
not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to
the Option on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock
Option may be granted with an exercise price lower than that set forth in the preceding sentence if
such Option is granted pursuant to an assumption or
13
substitution for another option in a manner consistent with the provisions of Section 424(a)
of the Code.
(d)
Consideration.
The purchase price of Common Stock acquired pursuant to the exercise of an
Option shall be paid, to the extent permitted by applicable law and as determined by the Board in
its sole discretion, by any combination of the methods of payment set forth below. The Board shall
have the authority to grant Options that do not permit all of the following methods of payment (or
otherwise restrict the ability to use certain methods) and to grant Options that require the
consent of the Company to utilize a particular method of payment. The methods of payment permitted
by this Section 6(d) are:
(i)
by cash or check;
(ii)
pursuant to a program developed under Regulation T as promulgated by the Federal Reserve
Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check)
by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to
the Company from the sales proceeds;
(iii)
by delivery to the Company (either by actual delivery or attestation) of shares of
Common Stock;
(iv)
according to a deferred payment or similar arrangement with the Optionholder;
provided,
however,
that interest shall compound at least annually and shall be charged at the minimum rate of
interest necessary to avoid (i) the imputation of interest income to the Company and compensation
income to the Optionholder under any applicable provisions of the Code and (ii) the treatment of
the Option as a variable award for financial accounting purposes; or
(v)
in any other form of legal consideration that may be acceptable to the Board.
(e)
Transferability of an Incentive Stock Option.
An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution and shall be exercisable
during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing,
(i) an Option may be transferred pursuant to a domestic relations order and (ii) the Optionholder
may, by delivering written notice to the Company, in a form satisfactory to the Company, designate
a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to
exercise the Option.
(f)
Transferability of a Nonstatutory Stock Option.
A Nonstatutory Stock Option shall be
transferable to the extent provided in the Option Agreement;
provided, however
, to the extent that
the Company is subject to Section 260.140.41(d) of Title 10 of the California Code of Regulations
at the time of the grant of the Nonstatutory Stock Option, the Nonstatutory Stock Option shall not
be transferable except by will or by the laws of descent and distribution and shall be exercisable
during the lifetime of the Optionholder only by the Optionholder. If the Nonstatutory Stock Option
does not provide for transferability, then the Nonstatutory Stock Option shall not be transferable
except by will or by the laws of descent and distribution and shall be exercisable during the
lifetime of the Optionholder only by the Optionholder.
14
Notwithstanding the foregoing, (i) an Option may be transferred pursuant to a domestic
relations order and (ii) the Optionholder may, by delivering written notice to the Company, in a
form satisfactory to the Company, designate a third party who, in the event of the death of the
Optionholder, shall thereafter be entitled to exercise the Option.
(g)
Vesting Generally.
The total number of shares of Common Stock subject to an Option may
vest and therefore become exercisable in periodic installments that may or may not be equal. The
Option may be subject to such other terms and conditions on the time or times when it may or may
not be exercised (which may be based on performance or other criteria) as the Board may deem
appropriate. The vesting provisions of individual Options may vary. The provisions of this
Section 6(g) are subject to any Option provisions governing the minimum number of shares of Common
Stock as to which an Option may be exercised. Notwithstanding the foregoing, to the extent that
the Company is subject to the restrictions on vesting under Section 260.140.41(f) of Title 10 of
the California Code of Regulations at the time of the grant of the Option, an Option granted to an
Employee who is not an officer, manager or Director on the date of grant shall provide for vesting
and exercisability of the total number of shares of Common Stock at a rate of at least twenty
percent (20%) per year over five (5) years from the date the Option was granted, subject to
reasonable conditions such as continued employment.
(h)
Termination of Continuous Service.
In the event that an Optionholder’s Continuous Service
terminates (other than upon the Optionholder’s death or Disability), the Optionholder may exercise
his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of
the date of termination of Continuous Service) but only within such period of time ending on the
earlier of (i) the date three (3) months following the termination of the Optionholder’s Continuous
Service (or such longer or shorter period specified in the Option Agreement, which period, for so
long as the Company is subject to Section 260.140.41(g) of Title 10 of the California Code of
Regulations, shall not be less than thirty (30) days unless such termination is for Cause) or (ii)
the expiration of the term of the Option as set forth in the Option Agreement. If, after
termination of Continuous Service, the Optionholder does not exercise his or her Option within the
time specified herein or in the Option Agreement (as applicable), the Option shall terminate.
(i)
Extension of Termination Date.
An Optionholder’s Option Agreement may provide that if the
exercise of the Option following the termination of the Optionholder’s Continuous Service (other
than upon the Optionholder’s death or Disability or upon a Change in Control) would be prohibited
at any time solely because the issuance of shares of Common Stock would violate the registration
requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the
expiration of a period of three (3) months after the termination of the Optionholder’s Continuous
Service during which the exercise of the Option would not be in violation of such registration
requirements or (ii) the expiration of the term of the Option as set forth in the Option Agreement.
(j)
Disability of Optionholder.
In the event that an Optionholder’s Continuous Service
terminates as a result of the Optionholder’s Disability, the Optionholder may exercise his or her
Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of
termination of Continuous Service), but only within such period of time ending on the earlier of
(i) the date twelve (12) months following such termination of Continuous Service (or
15
such longer or shorter period specified in the Option Agreement, which period, for so long as
the Company is subject to Section 260.140.41(g) of Title 10 of the California Code of Regulations,
shall not be less than six (6) months) or (ii) the expiration of the term of the Option as set
forth in the Option Agreement. If, after termination of Continuous Service, the Optionholder does
not exercise his or her Option within the time specified herein or in the Option Agreement (as
applicable), the Option shall terminate.
(k)
Death of Optionholder.
In the event that (i) an Optionholder’s Continuous Service
terminates as a result of the Optionholder’s death or (ii) the Optionholder dies within the period
(if any) specified in the Option Agreement after the termination of the Optionholder’s Continuous
Service for a reason other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder’s
estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a
person designated to exercise the option upon the Optionholder’s death, but only within the period
ending on the earlier of (i) the date eighteen (18) months following the date of death (or such
longer or shorter period specified in the Option Agreement, which period, for so long as the
Company is subject to Section 260.140.41(g) of Title 10 of the California Code of Regulations,
shall not be less than six (6) months) or (ii) the expiration of the term of such Option as set
forth in the Option Agreement. If, after the Optionholder’s death, the Option is not exercised
within the time specified herein or in the Option Agreement (as applicable), the Option shall
terminate.
(l)
Early Exercise.
The Option may include a provision whereby the Optionholder may elect at
any time before the Optionholder’s Continuous Service terminates to exercise the Option as to any
part or all of the shares of Common Stock subject to the Option prior to the full vesting of the
Option. Subject to the “Repurchase Limitation” of Section 10(j) (for so long as the Company is
subject to Sections 260.140.41 of Title 10 of the California Code of Regulations), any unvested
shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company
or to any other restriction the Board determines to be appropriate. The Company shall not be
required to exercise its repurchase option until at least six (6) months (or such longer or shorter
period of time required to avoid a charge to earnings for financial accounting purposes) have
elapsed following exercise of the Option unless the Board otherwise specifically provides in the
Option.
7.
Provisions of Stock Awards other than Options.
(a)
Stock Purchase Awards.
Each Stock Purchase Award Agreement shall be in such form and
shall contain such terms and conditions as the Board shall deem appropriate. At the Board’s
election, shares of Common Stock may be (i) held in book entry form subject to the Company’s
instructions until any restrictions relating to the Stock Purchase Award lapse or (ii) evidenced by
a certificate, which certificate shall be held in such form and manner as determined by the Board.
The terms and conditions of Stock Purchase Award Agreements may change from time to time, and the
terms and conditions of separate Stock Purchase Award Agreements need not be identical,
provided,
however,
that each Stock Purchase Award Agreement shall include (through incorporation of the
provisions hereof by reference in the agreement or otherwise) the substance of each of the
following provisions:
16
(i) Purchase Price.
Subject to the provisions of Section 5(b) regarding Ten Percent
Shareholders, at the time of the grant of a Stock Purchase Award, the Board will determine the
price to be paid by the Participant for each share subject to the Stock Purchase Award. To the
extent required by applicable law, the price to be paid by the Participant for each share of the
Stock Purchase Award will not be less than the par value of a share of Common Stock;
provided,
however,
to the extent that the Company is subject to Section 260.140.42(b) of Title 10 of the
California Code of Regulations at the time of the grant of the Stock Purchase Award, the purchase
price of the Stock Purchase Award shall be at least (A) eighty five percent (85%) of the Fair
Market Value of the Common Stock on the date of grant or (B) such lower percentage of the Fair
Market Value of the Common Stock on the date of grant as is permitted by Section 260.140.42 of
Title 10 of the California Code of Regulations at the time of the grant of the Stock Purchase
Award.
(ii) Consideration.
At the time of the grant of a Stock Purchase Award, the Board will
determine the consideration permissible for the payment of the purchase price of the Stock Purchase
Award. The purchase price of Common Stock acquired pursuant to the Stock Purchase Award shall be
paid either: (A) in cash or by check at the time of purchase, (B) at the discretion of the Board,
according to a deferred payment or other similar arrangement with the Participant, (C) by past
services rendered to the Company or (D) in any other form of legal consideration that may be
acceptable to the Board in its sole discretion and permissible under applicable law.
(iii) Vesting.
Subject to Section 10(j), shares of Common Stock acquired under a Stock
Purchase Award may be subject to a share repurchase right or option in favor of the Company in
accordance with a vesting schedule to be determined by the Board.
(iv) Termination of Participant’s Continuous Service.
Subject to Section 10(j), in the event
that a Participant’s Continuous Service terminates, the Company shall have the right, but not the
obligation, to repurchase or otherwise reacquire, any or all of the shares of Common Stock held by
the Participant that have not vested as of the date of termination under the terms of the Stock
Purchase Award Agreement. The Company shall not be required to exercise its repurchase or
reacquisition option until at least six (6) months (or such longer or shorter period of time
necessary to avoid a charge to earnings for financial accounting purposes) have elapsed following
the Participant’s purchase of the shares of stock acquired pursuant to the Stock Purchase Award
unless otherwise determined by the Board or provided in the Stock Purchase Award Agreement.
(v) Transferability.
Rights to purchase or receive shares of Common Stock under a Stock
Purchase Award shall be transferable by the Participant only upon such terms and conditions as are
set forth in the Stock Purchase Award Agreement, as the Board shall determine in its sole
discretion, and so long as Common Stock awarded under the Stock Purchase Award remains subject to
the terms of the Stock Purchase Award Agreement;
provided, however
, to the extent that the Company
is subject to Section 260.140.42(c) of Title 10 of the California Code of Regulations at the time
of the grant of the Stock Purchase Award, the right to purchase or receive shares of Common Stock
under the Stock Purchase Award shall not be transferable except by will or by the laws of descent
and distribution.
17
(b)
Stock Bonus Awards.
Each Stock Bonus Award Agreement shall be in such form and shall
contain such terms and conditions as the Board shall deem appropriate. At the Board’s election,
shares of Common Stock may be (i) held in book entry form subject to the Company’s instructions
until any restrictions relating to the Stock Bonus Award lapse or (ii) evidenced by a certificate,
which certificate shall be held in such form and manner as determined by the Board. The terms and
conditions of Stock Bonus Award Agreements may change from time to time, and the terms and
conditions of separate Stock Bonus Award Agreements need not be identical,
provided, however
, that
each Stock Bonus Award Agreement shall include (through incorporation of provisions hereof by
reference in the agreement or otherwise) the substance of each of the following provisions:
(i) Consideration.
A Stock Bonus Award may be awarded in consideration for (A) past services
actually rendered to the Company or an Affiliate, or (B) any other form of legal consideration that
may be acceptable to the Board in its sole discretion and permissible under applicable law.
(ii) Vesting.
Subject to Section 10(j), shares of Common Stock awarded under the Stock Bonus
Award Agreement may be subject to forfeiture to the Company in accordance with a vesting schedule
to be determined by the Board.
(iii) Termination of Participant’s Continuous Service.
Subject to Section 10(j), in the event
a Participant’s Continuous Service terminates, the Company may receive via a forfeiture condition,
any or all of the shares of Common Stock held by the Participant which have not vested as of the
date of termination of Continuous Service under the terms of the Stock Bonus Award Agreement.
(iv) Transferability.
Rights to acquire shares of Common Stock under the Stock Bonus Award
Agreement shall be transferable by the Participant only upon such terms and conditions as are set
forth in the Stock Bonus Award Agreement, as the Board shall determine in its sole discretion, so
long as Common Stock awarded under the Stock Bonus Award Agreement remains subject to the terms of
the Stock Bonus Award Agreement;
provided, however
, to the extent that the Company is subject to
Section 260.140.42(c) of Title 10 of the California Code of Regulations at the time of the grant of
the Stock Bonus Award, the right to acquire shares of Common Stock under the Stock Bonus Award
shall not be transferable except by will or by the laws of descent and distribution.
(c)
Stock Unit Awards.
Each Stock Unit Award Agreement shall be in such form and shall
contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of
Stock Unit Award Agreements may change from time to time, and the terms and conditions of separate
Stock Unit Award Agreements need not be identical,
provided, however,
that each Stock Unit Award
Agreement shall include (through incorporation of the provisions hereof by reference in the
agreement or otherwise) the substance of each of the following provisions:
(i) Consideration.
At the time of grant of a Stock Unit Award, the Board will determine the
consideration, if any, to be paid by the Participant upon delivery of each share of Common Stock
subject to the Stock Unit Award. The consideration to be paid (if any) by the
18
Participant for each share of Common Stock subject to a Stock Unit Award may be paid in any
form of legal consideration that may be acceptable to the Board in its sole discretion and
permissible under applicable law.
(ii) Vesting.
Subject to Section 10(j), at the time of the grant of a Stock Unit Award, the
Board may impose such restrictions or conditions to the vesting of the Stock Unit Award as it, in
its sole discretion, deems appropriate.
(iii) Payment
. A Stock Unit Award may be settled by the delivery of shares of Common Stock,
their cash equivalent, any combination thereof or in any other form of consideration, as determined
by the Board and contained in the Stock Unit Award Agreement.
(iv) Additional Restrictions.
At the time of the grant of a Stock Unit Award, the Board, as
it deems appropriate, may impose such restrictions or conditions that delay the delivery of the
shares of Common Stock (or their cash equivalent) subject to a Stock Unit Award after the vesting
of such Stock Unit Award.
(v) Dividend Equivalents.
Dividend equivalents may be credited in respect of shares of Common
Stock covered by a Stock Unit Award, as determined by the Board and contained in the Stock Unit
Award Agreement. At the sole discretion of the Board, such dividend equivalents may be converted
into additional shares of Common Stock covered by the Stock Unit Award in such manner as determined
by the Board. Any additional shares covered by the Stock Unit Award credited by reason of such
dividend equivalents will be subject to all the terms and conditions of the underlying Stock Unit
Award Agreement to which they relate.
(vi) Termination of Participant’s Continuous Service.
Subject to Section 10(j), and except as
otherwise provided in the applicable Stock Unit Award Agreement, such portion of the Stock Unit
Award that has not vested will be forfeited upon the Participant’s termination of Continuous
Service.
(vii) Transferability.
Rights to receive payment or shares of Common Stock under the Stock
Unit Award Agreement shall be transferable by the Participant only upon such terms and conditions
as are set forth in the Stock Unit Award Agreement, as the Board shall determine in its sole
discretion;
provided, however
, to the extent that the Company is subject to Section 260.140.42(c)
of Title 10 of the California Code of Regulations at the time of the grant of the Stock Unit Award,
the right to receive payment or shares of Common Stock under the Stock Unit Award shall not be
transferable except by will or by the laws of descent and distribution.
(d)
Stock Appreciation Rights.
Each Stock Appreciation Right Agreement shall be in such form
and shall contain such terms and conditions as the Board shall deem appropriate. The terms and
conditions of Stock Appreciation Right Agreements may change from time to time, and the terms and
conditions of separate Stock Appreciation Right Agreements need not be identical;
provided,
however
, that each Stock Appreciation Right Agreement shall include (through incorporation of the
provisions hereof by reference in the agreement or otherwise) the substance of each of the
following provisions:
19
(i) Strike Price.
Subject to the provisions of Section 5(b) regarding Ten Percent
Shareholders, at the time of the grant of a Stock Appreciation Right, the Board shall determine, at
its discretion, the strike price for such Stock Appreciation Right;
provided, however,
to the
extent that the Company is subject to Section 260.140.42(b) of Title 10 of the California Code of
Regulations at the time of the grant of the Stock Appreciation Right, the strike price of the Stock
Appreciation Right shall be at least (A) eighty five percent (85%) of the Fair Market Value of the
Common Stock on the date of grant or (B) such lower percentage of the Fair Market Value of the
Common Stock on the date of grant as is permitted by Section 260.140.42 of Title 10 of the
California Code of Regulations at the time of the grant of the Stock Appreciation Right.
(ii) Calculation of Appreciation.
Each Stock Appreciation Right will be denominated in shares
of Common Stock equivalents. The appreciation distribution payable on the exercise of a Stock
Appreciation Right will be not greater than an amount equal to the excess of (A) the aggregate Fair
Market Value (on the date of the exercise of the Stock Appreciation Right) of a number of shares of
Common Stock equal to the number of share of Common Stock equivalents in which the Participant is
vested under such Stock Appreciation Right, and with respect to which the Participant is exercising
the Stock Appreciation Right on such date, over (B) the strike price determined by the Board at the
time of grant of the Stock Appreciation Right.
(iii) Vesting.
Subject to Section 10(j), at the time of the grant of a Stock Appreciation
Right, the Board may impose such restrictions or conditions to the vesting of such Stock
Appreciation Right as it, in its sole discretion, deems appropriate.
(iv) Exercise.
To exercise any outstanding Stock Appreciation Right, the Participant must
provide written notice of exercise to the Company in compliance with the provisions of the Stock
Appreciation Right Agreement evidencing such Stock Appreciation Right.
(v) Payment
. The appreciation distribution in respect to a Stock Appreciation Right may be
paid in Common Stock, in cash, in any combination of the two or in any other form of consideration,
as determined by the Board and contained in the Stock Appreciation Right Agreement evidencing such
Stock Appreciation Right.
(vi) Termination of Continuous Service.
Subject to Section 10(j) in the event that a
Participant’s Continuous Service terminates, the Participant may exercise his or her Stock
Appreciation Right (to the extent that the Participant was entitled to exercise such Stock
Appreciation Right as of the date of termination) but only within such period of time ending on the
earlier of (i) the date three (3) months following the termination of the Participant’s Continuous
Service (or such longer or shorter period specified in the Stock Appreciation Right Agreement) or
(ii) the expiration of the term of the Stock Appreciation Right as set forth in the Stock
Appreciation Right Agreement. If, after termination, the Participant does not exercise his or her
Stock Appreciation Right within the time specified herein or in the Stock Appreciation Right
Agreement (as applicable), the Stock Appreciation Right shall terminate.
(vii) Transferability.
Rights to receive payment or shares of Common Stock under the Stock
Appreciation Right Agreement shall be transferable by the Participant only upon
20
such terms and conditions as are set forth in the Stock Appreciation Right Agreement, as the
Board shall determine in its sole discretion;
provided, however
, to the extent that the Company is
subject to Section 260.140.42(c) of Title 10 of the California Code of Regulations at the time of
the grant of the Stock Appreciation Right, the right to receive payment or shares of Common Stock
under the Stock Appreciation Right shall not be transferable except by will or by the laws of
descent and distribution.
(e)
Other Stock Awards
. Other forms of Stock Awards valued in whole or in part by reference
to, or otherwise based on, Common Stock may be granted either alone or in addition to Stock Awards
provided for under Section 6 and the preceding provisions of this Section 7. Subject to the
provisions of the Plan, the Board shall have sole and complete authority to determine the persons
to whom and the time or times at which such Other Stock Awards will be granted, the number of
shares of Common Stock (or the cash equivalent thereof) to be granted pursuant to such Other Stock
Awards and all other terms and conditions of such Other Stock Awards;
provided, however
, to the
extent that the Company is subject to Section 260.140.42(b), (c) and (h) of Title 10 of the
California Code of Regulations at the time of the grant of the Other Stock Award, the Other Stock
Award shall comply with the applicable restrictions set forth therein.
8.
Covenants of the Company.
(a)
Availability of Shares.
During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of Common Stock required to satisfy such Stock Awards.
(b)
Securities Law Compliance.
The Company shall seek to obtain from each regulatory
commission or agency having jurisdiction over the Plan such authority as may be required to grant
Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards;
provided, however,
that this undertaking shall not require the Company to register under the
Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any
such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such
regulatory commission or agency the authority that counsel for the Company deems necessary for the
lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and
until such authority is obtained.
9.
Use of Proceeds from Sales of Common Stock.
Proceeds from the sale of shares of Common Stock pursuant to Stock Awards shall constitute
general funds of the Company.
10.
Miscellaneous.
(a)
Acceleration of Exercisability and Vesting.
The Board shall have the power to accelerate
the time at which a Stock Award may first be exercised or the time during which a Stock Award or
any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock
Award stating the time at which it may first be exercised or the time during which it will vest.
21
(b)
Shareholder Rights.
No Participant shall be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award
unless and until such Participant has satisfied all requirements for exercise of the Stock Award
pursuant to its terms.
(c)
No Employment or Other Service Rights.
Nothing in the Plan, any Stock Award Agreement or
other instrument executed thereunder or any Stock Award granted pursuant thereto shall confer upon
any Participant any right to continue to serve the Company or an Affiliate in the capacity in
effect at the time the Stock Award was granted or shall affect the right of the Company or an
Affiliate to terminate (i) the employment of an Employee with or without notice and with or without
cause, (ii) the service of a Consultant pursuant to the terms of such Consultant’s agreement with
the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the
Company or an Affiliate, and any applicable provisions of the corporate law of the state in which
the Company or the Affiliate is incorporated, as the case may be.
(d)
Incentive Stock Option $100,000 Limitation.
To the extent that the aggregate Fair Market
Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by any Optionholder during any calendar year (under all
plans of the Company and any Affiliates) exceeds one hundred thousand dollars ($100,000), the
Options or portions thereof that exceed such limit (according to the order in which they were
granted) shall be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of
the applicable Option Agreement(s).
(e)
Investment Assurances.
The Company may require a Participant, as a condition of
exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances
satisfactory to the Company as to the Participant’s knowledge and experience in financial and
business matters and/or to employ a purchaser representative reasonably satisfactory to the Company
who is knowledgeable and experienced in financial and business matters and that he or she is
capable of evaluating, alone or together with the purchaser representative, the merits and risks of
exercising the Stock Award and (ii) to give written assurances satisfactory to the Company stating
that the Participant is acquiring Common Stock subject to the Stock Award for the Participant’s own
account and not with any present intention of selling or otherwise distributing the Common Stock.
The foregoing requirements, and any assurances given pursuant to such requirements, shall be
inoperative if (i) the issuance of the shares upon the exercise or acquisition of Common Stock
under the Stock Award has been registered under a then currently effective registration statement
under the Securities Act or (ii) as to any particular requirement, a determination is made by
counsel for the Company that such requirement need not be met in the circumstances under the then
applicable securities laws. The Company may, upon advice of counsel to the Company, place legends
on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order
to comply with applicable securities laws, including, but not limited to, legends restricting the
transfer of the Common Stock.
(f)
Withholding Obligations.
To the extent provided by the terms of a Stock Award Agreement,
the Company may, in its sole discretion, satisfy any federal, state or local tax withholding
obligation relating to a Stock Award by any of the following means (in addition to the Company’s
right to withhold from any compensation paid to the Participant by the Company)
22
or by a combination of such means: (i) causing the Participant to tender a cash payment; (ii)
withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to
the Participant in connection with the Stock Award; or (iii) by such other method as may be set
forth in the Stock Award Agreement.
(g)
Information Obligation.
To the extent required by Section 260.140.46 of Title 10 of the
California Code of Regulations, the Company shall deliver financial statements to Participants at
least annually. This Section 10(g) shall not apply to key Employees whose duties in connection
with the Company assure them access to equivalent information.
(h)
Electronic Delivery.
Any reference herein to a “written” agreement or document shall
include any agreement or document delivered electronically or posted on the Company’s intranet.
(i)
Performance Stock Awards.
A Stock Award may be granted, may vest, or may be exercised
based upon service conditions, upon the attainment during a Performance Period of certain
Performance Goals, or both. The length of any Performance Period, the Performance Goals to be
achieved during the Performance Period, and the measure of whether and to what degree such
Performance Goals have been attained shall be conclusively determined by the Board in its sole
discretion. The maximum benefit to be received by any individual in any calendar year attributable
to Stock Awards described in this Section 10(h) shall not exceed the value of one hundred thousand
(100,000) shares of Common Stock.
(j)
Repurchase Limitation.
The terms of any repurchase option shall be specified in the Stock
Award, and the repurchase price may be either the Fair Market Value of the shares of Common Stock
on the date of termination of Continuous Service or the lower of (i) the Fair Market Value of the
shares of Common Stock on the date of repurchase or (ii) their original purchase price. To the
extent required by Section 260.140.41 and Section 260.140.42 of Title 10 of the California Code of
Regulations at the time a Stock Award is made, any repurchase option contained in a Stock Award
granted to a person who is not an officer, manager, Director or Consultant shall be upon the terms
described below:
(i) Fair Market Value.
If the repurchase option gives the Company the right to repurchase the
shares of Common Stock upon termination of Continuous Service at not less than the Fair Market
Value of the shares of Common Stock to be purchased on the date of termination of Continuous
Service, then (A) the right to repurchase shall be exercised for cash or cancellation of purchase
money indebtedness for the shares of Common Stock within ninety (90) days of termination of
Continuous Service (or in the case of shares of Common Stock issued upon exercise of Stock Awards
after such date of termination, within ninety (90) days after the date of the exercise) or such
longer period as may be agreed to by the Company and the Participant (for example, for purposes of
satisfying the requirements of Section 1202(c)(3) of the Code regarding “qualified small business
stock”) and (B) the right terminates when the shares of Common Stock become publicly traded.
(ii) Original Purchase Price.
If the repurchase option gives the Company the right to
repurchase the shares of Common Stock upon termination of Continuous Service at the lower of (A)
the Fair Market Value of the shares of Common Stock on the date of repurchase or
23
(B) their original purchase price, then (i) the right to repurchase at the original purchase
price shall lapse at the rate of at least twenty percent (20%) of the shares of Common Stock per
year over five (5) years from the date the Stock Award is granted (without respect to the date the
Stock Award was exercised or became exercisable) and (ii) the right to repurchase shall be
exercised for cash or cancellation of purchase money indebtedness for the shares of Common Stock
within ninety (90) days of termination of Continuous Service (or in the case of shares of Common
Stock issued upon exercise of Options after such date of termination, within ninety (90) days after
the date of the exercise) or such longer period as may be agreed to by the Company and the
Participant (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the
Code regarding “qualified small business stock”).
11.
Adjustments upon Changes in Common Stock; Corporate Transactions.
(a)
Capitalization Adjustments
. If any change is made in, or other events occur with respect
to, the Common Stock subject to the Plan or subject to any Stock Award after the effective date of
the Plan set forth in Section 14 without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend
in property other than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the receipt of
consideration by the Company (each a “
Capitalization Adjustment
”)), the Plan shall be appropriately
adjusted in: (i) the class(es) and maximum number of securities subject to the Plan pursuant to
Sections 4(a) and 4(b), (ii) the class(es) and maximum number of securities that may be issued
pursuant to the exercise of Incentive Stock Options pursuant to Section 4(b), (iii) the maximum
number of securities that may be awarded to any person pursuant to Sections 5(c) and 10(h) and (iv)
the class(es) and number of securities and price per share of stock subject to outstanding Stock
Awards. The Board shall make such adjustments, and its determination shall be final, binding and
conclusive. (Notwithstanding the foregoing, the conversion of any convertible securities of the
Company shall not be treated as a transaction “without receipt of consideration” by the Company.)
(b)
Dissolution or Liquidation
. In the event of a dissolution or liquidation of the Company,
all outstanding Stock Awards (other than Stock Awards consisting of vested and outstanding shares
of Common Stock not subject to the Company’s right of repurchase) shall terminate immediately prior
to the completion of such dissolution or liquidation, and the shares of Common Stock subject to the
Company’s repurchase option may be repurchased by the Company notwithstanding the fact that the
holder of such Stock Award is providing Continuous Service,
provided, however,
that the Board may,
in its sole discretion, cause some or all Stock Awards to become fully vested, exercisable and/or
no longer subject to repurchase or forfeiture (to the extent such Stock Awards have not previously
expired or terminated) before the dissolution or liquidation is completed but contingent on its
completion.
(c)
Corporate Transaction
. The following provisions shall apply to Stock Awards in the event
of a Corporate Transaction unless otherwise provided in a written agreement between the Company or
any Affiliate and the holder of the Stock Award:
(i) Stock Awards May Be Assumed.
In the event of a Corporate Transaction, any surviving
corporation or acquiring corporation (or the surviving or acquiring
24
corporation’s parent company) may assume or continue any or all Stock Awards outstanding under
the Plan or may substitute similar stock awards for Stock Awards outstanding under the Plan
(including but not limited to, awards to acquire the same consideration paid to the shareholders of
the Company pursuant to the Corporate Transaction), and any reacquisition or repurchase rights held
by the Company in respect of Common Stock issued pursuant to Stock Awards may be assigned by the
Company to the successor of the Company (or the successor’s parent company, if any), in connection
with such Corporate Transaction. A surviving corporation or acquiring corporation may choose to
assume or continue only a portion of a Stock Award or substitute a similar stock award for only a
portion of a Stock Award. The terms of any assumption, continuation or substitution shall be set
by the Board in accordance with the provisions of Section 3.
(ii) Stock Awards Held by Current Participants.
In the event of a Corporate Transaction in
which the surviving corporation or acquiring corporation (or its parent company) does not assume or
continue such outstanding Stock Awards or substitute similar stock awards for such outstanding
Stock Awards, then with respect to Stock Awards that have not been assumed, continued or
substituted and that are held by Participants whose Continuous Service has not terminated prior to
the effective time of the Corporate Transaction (referred to as the
“Current Participants
”), the
vesting of such Stock Awards (and, if applicable, the time at which such Stock Awards may be
exercised) shall (contingent upon the effectiveness of the Corporate Transaction) be accelerated in
full to a date prior to the effective time of such Corporate Transaction as the Board shall
determine (or, if the Board shall not determine such a date, to the date that is five (5) days
prior to the effective time of the Corporate Transaction), and such Stock Awards shall terminate if
not exercised (if applicable) at or prior to the effective time of the Corporate Transaction, and
any reacquisition or repurchase rights held by the Company with respect to such Stock Awards shall
lapse (contingent upon the effectiveness of the Corporate Transaction).
(iii) Stock Awards Held by Persons other than Current Participants.
In the event of a
Corporate Transaction in which the surviving corporation or acquiring corporation (or its parent
company) does not assume or continue such outstanding Stock Awards or substitute similar stock
awards for such outstanding Stock Awards, then with respect to Stock Awards that have not been
assumed, continued or substituted and that are held by persons other than Current Participants, the
vesting of such Stock Awards (and, if applicable, the time at which such Stock Award may be
exercised) shall not be accelerated and such Stock Awards (other than a Stock Award consisting of
vested and outstanding shares of Common Stock not subject to the Company’s right of repurchase)
shall terminate if not exercised (if applicable) prior to the effective time of the Corporate
Transaction;
provided, however,
that any reacquisition or repurchase rights held by the Company
with respect to such Stock Awards shall not terminate and may continue to be exercised
notwithstanding the Corporate Transaction.
(iv) Payment for Stock Awards in Lieu of Exercise.
Notwithstanding the foregoing, in the
event a Stock Award will terminate if not exercised prior to the effective time of a Corporate
Transaction, the Board may provide, in its sole discretion, that the holder of such Stock Award may
not exercise such Stock Award but will receive a payment, in such form as may be determined by the
Board, equal in value to the excess, if any, of (A) the value of the
25
property the holder of the Stock Award would have received upon the exercise of the Stock
Award, over (B) any exercise price payable by such holder in connection with such exercise.
(d)
Change in Control.
A Stock Award may be subject to additional acceleration of vesting and
exercisability upon or after a Change in Control as may be provided in the Stock Award Agreement
for such Stock Award or as may be provided in any other written agreement between the Company or
any Affiliate and the Participant, but in the absence of such provision, no such acceleration shall
occur.
12.
Amendment of the Plan and Stock Awards.
(a)
Amendment of Plan.
Subject to the limitations, if any, of applicable law, the Board at
any time, and from time to time, may amend the Plan. However, except as provided in Section 11(a)
relating to Capitalization Adjustments, no amendment shall be effective unless approved by the
shareholders of the Company to the extent shareholder approval is necessary to satisfy applicable
law.
(b)
Shareholder Approval.
The Board, in its sole discretion, may submit any other amendment
to the Plan for shareholder approval, including, but not limited to, amendments to the Plan
intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder
regarding the exclusion of performance-based compensation from the limit on corporate deductibility
of compensation paid to Covered Employees.
(c)
Contemplated Amendments.
It is expressly contemplated that the Board may amend the Plan
in any respect the Board deems necessary or advisable to provide eligible Employees with the
maximum benefits provided or to be provided under the provisions of the Code and the regulations
promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
(d)
No Impairment of Rights.
Rights under any Stock Award granted before amendment of the
Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent
of the affected Participant and (ii) such Participant consents in writing.
(e)
Amendment of Stock Awards.
The Board, at any time and from time to time, may amend the
terms of any one or more Stock Awards, including, but not limited to, amendments to provide terms
more favorable than previously provided in the Stock Award Agreement, subject to any specified
limits in the Plan that are not subject to Board discretion;
provided, however,
that the rights
under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests
the consent of the affected Participant and (ii) such Participant consents in writing.
13.
Termination or Suspension of the Plan.
(a)
Plan Term.
The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the
Plan is adopted by the Board or approved by the shareholders of the Company,
26
whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is
suspended or after it is terminated.
(b)
No Impairment of Rights.
Suspension or termination of the Plan shall not impair rights
and obligations under any Stock Award granted while the Plan is in effect except with the written
consent of the affected Participant.
14.
Effective Date of Plan.
This Plan (as an amendment and restatement of the Prior Plan) shall become effective on the
date that the Plan is adopted by the Board, but no Stock Award shall be exercised (or, in the case
of a Stock Purchase Award, Stock Bonus Award, Stock Unit Award, or Other Stock Award shall be
granted) unless and until the Plan has been approved by the shareholders of the Company, which
approval shall be within twelve (12) months before or after the date the Plan is adopted by the
Board.
15.
Choice of Law.
The law of the State of California shall govern all questions concerning the construction,
validity and interpretation of this Plan, without regard to such state’s conflict of laws rules.
27
[ **** ] = Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities and Exchange Commission
pursuant to Rule 406 of the Securities Act of 1933, as amended.
Exhibit 10.21
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
ARADIGM CORPORATION.
AND
SJ2 THERAPEUTICS, INC.
Dated as of August 25, 2006
Table of Contents
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Page
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ARTICLE I DEFINITIONS
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1
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Section 1.01
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Certain Definitions
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1
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Section 1.02
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Additional Definitions
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5
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ARTICLE II ASSIGNMENT, TRANSFER AND LICENSE
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6
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Section 2.01
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Assignment of Assigned Assets to Purchaser
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6
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Section 2.02
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Asset Transfer
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6
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Section 2.03
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Coordination Leads
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6
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Section 2.04
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Transitional Services
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6
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Section 2.05
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Assumption of Liabilities
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7
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Section 2.06
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Consideration
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7
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Section 2.07
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Closing, Closing Place, Time and Date
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9
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Section 2.08
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Nontransferable Assets
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10
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Section 2.10
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Taking of Necessary Action; Further Action
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11
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ARTICLE III REPRESENTATIONS AND WARRANTIES OF ARADIGM
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11
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Section 3.01
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Organization, Qualification, and Corporate Power
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11
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Section 3.02
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Authorization
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12
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Section 3.03
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Assets
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12
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Section 3.04
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Transferred Books and Records
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12
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Section 3.05
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Transferred Contracts
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12
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Section 3.06
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Transferred Intellectual Property
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13
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ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER
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14
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Section 4.01
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Organization, Qualification, and Corporate Power
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14
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Section 4.02
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Authorization
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15
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ARTICLE V OTHER AGREEMENTS AND COVENANTS
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15
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Section 5.01
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Additional Documents and Further Assurances
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15
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Section 5.02
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Reasonable Cooperation of Purchaser
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15
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Section 5.03
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Reasonable Efforts
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15
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Section 5.04
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Indemnification
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15
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-i-
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Page
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ARTICLE VI MISCELLANEOUS
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17
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Section 6.01
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Press Releases and Public Announcements
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17
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Section 6.02
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No Third-Party Beneficiaries
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17
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Section 6.03
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Force Majeure
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17
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Section 6.04
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Limitation of Liability
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17
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Section 6.05
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Entire Agreement and Modification
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17
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Section 6.06
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Amendment
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18
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Section 6.07
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Waivers
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18
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Section 6.08
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Successors and Assigns
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18
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Section 6.09
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Counterparts
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18
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Section 6.10
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Interpretation
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18
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Section 6.11
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Notices
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19
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Section 6.12
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Governing Law
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20
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Section 6.13
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Severability
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20
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Section 6.14
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Construction
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20
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Section 6.15
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Attorneys’ Fees
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20
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Section 6.16
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Further Assurances
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20
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-ii-
EXHIBITS
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EXHIBIT A
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Transferred Assets (including Transferred Technology)
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EXHIBIT B
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Transferred Books and Records
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EXHIBIT C
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Transferred Contracts
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EXHIBIT D
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Transferred Intellectual Property
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EXHIBIT E
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General Assignment and Bill of Sale
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EXHIBIT F
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Assumed Liabilities
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EXHIBIT G
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Transfer Plan
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EXHIBIT H
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Transitional Services Agreement
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EXHIBIT I
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Intraject Delivery System
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EXHIBIT J
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Nontransferable Assets
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this “
Agreement
”) is made and entered into as of August 25,
2006 by and between Aradigm Corporation, a California corporation (“
Aradigm
”), and SJ2
Therapeutics, Inc., a Delaware corporation (“
Purchaser
”). Aradigm and Purchaser are sometimes
referred to herein individually as a “
Party
” and collectively as the “
Parties
.”
RECITALS
A. Aradigm desires to assign and transfer to Purchaser, and Purchaser desires to accept
assignment and transfer from Aradigm, on the terms and subject to the conditions set forth herein,
those certain assets of Aradigm related to the Intraject Delivery System.
B. Furthermore, Aradigm and Purchaser desire to make certain representations, warranties,
covenants and other agreements in connection with the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the covenants and representations set forth herein, and
for other good and valuable consideration, the parties agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01
Certain Definitions
. As used in this Agreement, the following terms have
the following meanings (terms defined in the singular to have a correlative meaning when used in
the plural and vice versa). Certain other terms are defined in the text of this Agreement.
(a) “
Affiliate
” means a corporation or any other entity that directly, or indirectly through
one or more intermediaries, controls, is controlled by, or is under common control with, the
designated Party, but only for so long as such control exists. As used in this definition only,
“control” shall mean ownership of shares of stock having at least 50% of the voting power entitled
to vote for the election of directors in the case of a corporation (or, in the case of an entity
that is not a corporation, in the election of the corresponding managing authority), or otherwise
having the power to directly or indirectly control the management of such entity.
(b) “
Assigned Assets
” shall mean any and all of Aradigm’s right, title and interest in and to
the following:
(i) any and all tangible assets owned or otherwise transferable by Aradigm as of the Closing
Date, in each case to the extent exclusively used or held for use in the Business, including those
assets listed on
Exhibit A
(collectively, “
Transferred Assets
”);
(ii) the Books and Records listed on
Exhibit B
(collectively, “
Transferred Books and
Records
”);
1.
(iii) all agreements listed on
Exhibit C
(collectively, “
Transferred Contracts
”);
(iv) all Patents (including in each case all rights to Prosecute and Enforce the same) listed
on
Exhibit D
(collectively, “
Transferred Patents
”);
(v) all Trademarks (including in each case all rights to Prosecute and Enforce the same)
listed on
Exhibit D
(collectively, “
Transferred Trademarks
”);
(vi) any and all Technology owned or otherwise transferable by Aradigm as of the Closing Date,
other than the Transferred Patents and Transferred Trademarks, in each case to the extent
exclusively used or held for use in the Business, including that Technology listed on
Exhibit
A
(collectively, “
Transferred Technology
”); and
(vii) any and all right to recover past, present and future damages for the breach,
infringement or misappropriation, as the case may be, of any of the foregoing.
(c) “
Books and Records
” shall mean all papers and records (in any format including paper or
electronic) kept or maintained including any and all laboratory notebooks, invention disclosures,
purchasing and sales records, all data and communications relating to ongoing business development
activities, preclinical and clinical data, all Regulatory Documents, vendor lists, accounting and
financial records, product documentation, product specifications, marketing documents and the like,
in each case pertaining to the Business or the Assigned Assets.
(d) “
Business
” shall mean the research, development, commercialization, manufacture,
marketing, distribution, sale, support and other use and commercial exploitation of the Intraject
Delivery System.
(e) “
Business Intellectual Property
” shall mean any and all Technology and any and all
Intellectual Property Rights, including Registered Intellectual Property Rights, that is or are
owned (in whole or in part) by or exclusively licensed to Aradigm, as of the Closing Date, in each
case that are used in or necessary to the Business.
(f) “
Dollars
” shall refer to United States currency unless expressly specified otherwise.
(g) “
Governmental Body
” shall mean any: (i) nation, province, state, county, city, town,
village, district, or other jurisdiction of any nature; (ii) federal, provincial, state, local,
municipal, foreign, or other government; (iii) governmental or quasi-governmental authority of any
nature (including any governmental agency, branch, department, official, or entity and any court or
other tribunal); (iv) multi-national organization or body; or (v) body exercising, or entitled to
exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing
authority or power of any nature.
(h) “
Intraject Delivery System
” shall mean Aradigm’s Intraject
®
needle-free injection delivery
system as more fully described in
Exhibit I
(the “Existing Delivery System”)
2.
or any modified, improved or derivative version thereof, in each case that includes one or
more material elements of the Existing Delivery System.
(i) “
Intellectual Property Rights
” shall mean any or all of the following and all rights in,
arising out of, or associated therewith: (i) all United States and foreign patents and utility
models and applications therefor and all reissues, divisionals, re examinations, renewals,
extensions, provisionals, supplementary protection certificates, continuations and continuations
in-part thereof, and equivalent or similar registered rights anywhere in the world (“
Patents
”);
(ii) all trade secrets and other rights in know-how and confidential or proprietary information,
inventions and discoveries, including without limitation invention disclosures; (iii) all
copyrights, works of authorship, copyright registrations and applications therefor and all other
rights corresponding thereto throughout the world (“
Copyrights
”); (iv) all rights in Uniform
Resource Locators, World Wide Web addresses and domain names and applications and registrations
therefor (“
Internet Property Rights
”); (v) all trade names, logos, common law trademarks and
service marks, trademark and service mark registrations and applications therefor and all goodwill
associated therewith throughout the world (“
Trademarks
”); and (vi) any similar, corresponding or
equivalent rights to any of the foregoing anywhere in the world, including, without limitation,
moral rights.
(j) “
Licensee
” shall mean a Person other than an Affiliate to whom Purchaser or its Affiliate
has granted the right, or to whom such a Person has sublicensed the right, to (i) make and sell any
Product or (ii) sell any Product, provided that distributors, wholesalers and resellers as to which
Purchaser does not receive compensation on resales of Products by such entity shall not be
considered Licensees.
(k) “
Lien
” shall mean any mortgage, pledge, lien, charge, claim, security interest, adverse
claims of ownership or use, restrictions on transfer, defect of title or other encumbrance of any
sort, other than (i) mechanic’s, materialmen’s, and similar liens with respect to any amounts not
yet due and payable, and (ii) liens for taxes not yet due and payable.
(l) “
Net Sales
” shall mean the amounts actually received by Purchaser, its Affiliates, or
Licensees, in consideration of their sales of Product to Third Party customers, less: (i) normal
and customary trade, cash and other discounts; (ii) credits or allowances for damaged goods,
returns, rejections or recalls of Product; (iii) sales taxes, value added taxes, withholding,
import/export taxes or other similar taxes (excluding taxes on the income of the selling entity)
actually paid; (iv) normal and customary charge back payments or rebates; and (v) packaging,
handling fees, prepaid freight, insurance and the like to the extent separately identified on the
invoice. Sales between or among Purchaser, its Affiliates or Licensees for resale shall be
excluded from the computation of Net Sales, but the subsequent re sale of such Products by
Purchaser, its Affiliates or Licensees to an end user shall be included within the computation of
Net Sales. Net Sales shall not include amounts in respect of Product sold or used for development
applications (including for clinical trials) or commercial samples (i.e., items provided for free
or at or below cost plus a nominal profit for promotional purposes).
(m) “
Nontransferable Asset
” shall have the meaning ascribed to the term in Section 9.
3.
(n) “
Non-Sumatriptan Product
” shall mean any Product comprising the Intraject Delivery System
combined with an applicable drug formulation, other than Sumatriptan.
(o) “
Person
” shall mean any individual, corporation (including any non-profit corporation),
general or limited partnership, limited liability company, joint venture, estate, trust,
association, organization, labor union, Governmental Body or other entity.
(p) “
Product
” shall mean any pharmaceutical product comprising the Intraject Delivery System
combined with Sumatriptan or other applicable drug formulation.
(q) “
Prosecution and Enforcement
” shall mean (i) the preparation, filing for, prosecution,
maintenance of registrations thereof and applications for any such registration (ii) the conduct of
interferences, re examinations, reissues, oppositions or requests for term extensions with respect
thereto and (iii) the conduct of any enforcement proceeding with respect thereto (whether
infringement, misuse, misappropriation or otherwise) or any declaratory judgment proceeding with
respect thereto; and “
Prosecute and Enforce
” shall have the correlative meaning.
(r) “
Pulmonary Field
” shall mean the delivery of one or more aerosolized active pharmaceutical
ingredients directly into the bronchia or lungs.
(s) “
Registered Intellectual Property Rights
” shall mean all United States, international and
foreign: (i) Patents, including applications therefor (each a “
Registered Patent
”); (ii) registered
Trademarks, applications to register Trademarks, including intent-to use applications, or other
registrations or applications related to Trademarks; (iii) Copyright registrations and applications
to register Copyrights; and (iv) any other Technology or Intellectual Property Rights that is the
subject of an application, certificate, filing, registration or other document issued by, filed
with, or recorded by, any state, government or other public or private legal authority at any time.
(t) “
Regulatory Documents
” shall mean any and all regulatory submissions (whether completed or
in process) to any Governmental Body anywhere in the world submitted by or on behalf of Aradigm
relating to the Business (including any product developed in connection therewith), including all
annual reports, adverse event reports, and other adverse event submission tracking information, and
amendments and supplements to any of the foregoing. For purposes of clarity, “Regulatory
Documents” shall not include any filing or other submission made to the United States Securities
and Exchange Commission, the National Association of Securities Dealers, the Nasdaq Stock Exchange
or any similar entity.
(u) “
Representatives
” shall mean, with respect to a Person, that Person’s officers, directors,
employees, accountants, counsel, investment bankers, financial advisors, agents and other
representatives.
(v) “
Royalty Revenue
” shall mean running royalties actually received by Purchaser from a
Licensee for sales of Non-Sumatriptan Products by or under authority of such Licensee, plus any
license fees or milestone or other payments receive by Purchaser from a Licensee to the extent not
allocable to recovery of development or other costs incurred by Purchaser specific to
4.
the applicable Product. For clarity, Royalty Revenue shall exclude: (i) payments in
consideration of goods (including Products) or services at Purchaser’s fully-burdened cost therefor
(any amounts in excess of the fully-burdened cost shall be included in Royalty Revenue), (ii)
payments in consideration for equity at the fair market value therefor (any amounts in excess of
the fair market value shall be included in Royalty Revenue) and (iii) amounts received by Purchaser
in consideration for a sale of all, or substantially all, of the business or assets of Purchaser
(whether by way of merger, sale of stock, sale of assets or otherwise), if the successor to such
business or assets has assumed the obligations under Section 2.06(a) of this Agreement.
(w) “
Royalty Term
” shall mean, for a given Product, the period commencing on the Closing Date
and continuing until the later of (i) the ten-year anniversary of the first commercial sale of such
Product in the United States, but no more than twenty years after the Closing Date and (ii) the
later of expiration or abandonment of the last Valid Claim of the Transferred Patents covering the
manufacture, use or sale of such Product.
(x) “
Sumatriptan Product
” shall mean any Product comprising the Intraject Delivery System
combined with Sumatriptan.
(y) “
Technology
” shall mean any or all of the following: (i) works of authorship including,
without limitation, computer programs, source code and executable code, whether embodied in
software, firmware or otherwise, documentation, designs, files, net lists, records, data and mask
works; (ii) inventions (whether or not patentable), improvements, and technology; (iii) proprietary
and confidential information, including technical data and customer and supplier lists, trade
secrets and know how; (iv) databases, data compilations and collections and technical data; (v)
logos, trade names, trade dress, trademarks, service marks; (vi) World Wide Web addresses, domain
names and sites; (vii) protocols, methods and processes; and (viii) all instantiations of the
foregoing in any form and embodied in any media.
(z) “
Territory
” shall mean the entire world.
(aa) “
Third Party
” shall mean any Person other than Purchaser or Aradigm, or their respective
Affiliates.
(bb) “
Transfer Plan
” shall mean the plan for the transfer of the Assigned Assets attached
hereto as
Exhibit G
.
(cc) “
Valid Claim
” shall mean (i) a claim of an issued and unexpired patent, which has not
been held unenforceable, unpatentable or invalid by a court or other governmental agency of
competent jurisdiction, and which has not been admitted to be invalid or unenforceable through
reissue, disclaimer or otherwise, or (ii) a claim in a pending patent application being prosecuted
in good faith that has not been abandoned or finally rejected and that has been pending for fewer
than five years after the earliest priority date to which it is entitled.
Section 1.02
Additional Definitions
. Each of the following definitions shall have the
meanings defined in the corresponding sections of this Agreement indicated below:
5.
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Definition
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Section
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Agreement
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Preamble
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Aradigm Indemnities
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Section 6.04(b)
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Assumed Liabilities
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Section 2.05(b)
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Claim
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Section 6.04(a)
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Closing Date
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Section 2.07
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Coordination Lead
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Section 2.03
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Excluded Liabilities
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Section 2.05(c)
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Indemnitee
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Section 6.04(c)
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Indemnitor
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Section 6.04(c)
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Party
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Preamble
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PTO
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Section 4.06(a)
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Purchaser Indemnities
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Section 6.04(a)
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ARTICLE II
ASSIGNMENT, TRANSFER AND LICENSE
Section 2.01
Assignment of Assigned Assets to Purchaser
. Upon the terms and subject
to the conditions set forth herein, Aradigm hereby assigns, conveys and transfers to Purchaser, at
the Closing, all of Aradigm’s right, title and interest in and to the Assigned Assets, subject to
the reservation on behalf of Aradigm of a perpetual, worldwide, royalty-free, non-exclusive
license, under the Transferred Patents and Transferred Technology solely for purposes of the
Pulmonary Field, which retained license shall include the right to grant sublicenses to Persons
solely within the scope of such retained license in connection with the grant to such Persons of
licenses under other Patents owned or controlled by Aradigm.
Section 2.02
Asset Transfer
. Subject to the terms and conditions set forth in this
Agreement, on the Closing Date, Aradigm shall transfer all Assigned Assets, in the shape, manner
and form of their existence as of the date such Assigned Assets are transferred to Purchaser, in
accordance with the Transfer Plan. Without limiting the specifics of the Transfer Plan, Aradigm
shall promptly transfer those assets (to the extent not previously transferred to the Transferee
hereunder) to Purchaser as required in the Transfer Plan and this Section 2.02. Unless otherwise
specified in the Transfer Plan, the mode of such transfer shall be determined by the Coordination
Leads with the goal of efficiency and cost-effectiveness. Without limiting the foregoing and in
connection with such transfers of assets pursuant to this Section 2.02, Aradigm shall make
available such personnel reasonably familiar with the Assigned Assets to consult with and assist
Purchaser in implementing such assets at mutually agreeable times.
Section 2.03
Coordination Leads
. In order to facilitate the transfer of assets
pursuant to Section 2.02, each Party shall appoint, from time to time, by written notice to the
other Party, one of its personnel as its coordination lead (each, a “
Coordination Lead
”). The
Coordination Leads shall be responsible for oversight and coordination of the transfer of assets in
accordance with Section 2.02 and the Transfer Plan. The Coordination Leads shall carry out their
responsibilities by any reasonable means or practices as the Parties may mutually agree.
6.
Section 2.04
Transitional Services
. Aradigm shall provide all reasonable transitional
services to Purchaser, including facilities, furnishings, access to systems, document control,
quality systems, IT support, accounting, payroll, administration and other such services as the
Parties may mutually agree, until December 31, 2006 or until such later date as mutually agreed to
by the Parties, as more fully described in
Exhibit H
, and Purchaser shall pay the fees
therefor set forth in
Exhibit H
in accordance with the schedule set forth therein.
Section 2.05
Assumption of Liabilities
.
(a)
Assumption
. Upon the terms and subject to the conditions set forth herein, at the
Closing, Purchaser shall assume from Aradigm, and Aradigm shall irrevocably convey, transfer and
assign to Purchaser, all of the Assumed Liabilities (as defined in Section 2.05(b) hereof).
Purchaser shall not assume any liabilities of Aradigm pursuant hereto, other than the Assumed
Liabilities.
(b)
Definition of Assumed Liabilities
. For all purposes of and under this Agreement,
the term “
Assumed Liabilities
” shall mean, refer to and include only those liabilities listed on
Exhibit F
.
(c)
Definition of Excluded Liabilities
. Except for the Assumed Liabilities, Purchaser
does not assume and is not assuming any debt, liability, duty or other obligation (of any kind) of
Aradigm, whether known or unknown, fixed or contingent, and regardless of when such liabilities or
obligations may arise or may have arisen or when asserted, including any liabilities, or
obligations related to the Assigned Assets which are outstanding or unpaid as of the Closing (the
“
Excluded Liabilities
”), and Aradigm shall remain responsible for the Excluded Liabilities.
Section 2.06
Consideration
. On the terms and subject to the conditions set forth in
this Agreement, in addition to the payments contemplated by Section 2.07(a), the consideration for
the Assigned Assets shall be the following:
(a)
Royalties
.
(i) In consideration for the assignment and transfer of the Assigned Assets, with respect to
Net Sales Purchaser shall pay to Aradigm, during the Royalty Term:
(1) For each Non-Sumatriptan Product, [****] percent ([****]%) of Net Sales of such
Non-Sumatriptan Product, provided that in the event and to the extent such Non-Sumatriptan Product
is commercialized by a Licensee Purchaser may at its election pay to Aradigm either [****] percent
([****]%) of such Licensee’s Net Sales of such Non-Sumatriptan Product or [****] percent ([****]%)
of Purchaser’s Royalty Revenues from such Licensee in respect of such Non-Sumatriptan Product.
Purchaser shall make its election with respect to each such Non-Sumatriptan Product by written
notice to Aradigm of its election on or before the date its first payment would be due under
Section 2.06(a)(vi) in respect of such Non-Sumatriptan Product under either of the foregoing
alternatives.
(2) For Sumatriptan Products, [ **** ] percent ([ **** ]%) of Net Sales of Sumatriptan Products.
[ **** ] = Certain confidential information contained in this document, marked by brackets, has
been omitted and filed separately with the Securities and Exchange Commission pursuant to
Rule 406 of the Securities Act of 1933, as amended.
7.
(ii)
Combination Products
. In the event that a Product is sold in the form of a
combination product (a “
Combination Product
”) containing both (1) such Product and (2) another
product or service for which no royalty would be due hereunder if sold separately, the Net Sales
from such combination sales for purposes of calculating the amounts due under this Section 2.06(a)
shall be calculated by multiplying Net Sales of the Combination Product by a fraction that
reasonably reflects the fair value of the contribution of the Product in the Combination Product to
the total market value of such Combination Product, which fraction shall be established by the
Purchaser and Aradigm through good faith negotiations and mutual agreement, on a Combination
Product-by-Combination Product basis.
(iii)
Single Royalty
. Only one royalty shall be paid with respect to each unit of
Product that is subject to royalties under this Section 2.06(a), without regard to the number of
transfers or otherwise. In no event shall more than one royalty be due under this Section 2.06(a)
with respect to any Product unit.
(iv)
Milestone Payment
. Purchaser shall pay Aradigm $[****] within 30 days of the
first U.S. commercial sale of the Sumatriptan Product.
(v)
Records
. During the term of this Agreement and for a period of three years
thereafter, Purchaser and its Affiliates shall keep, and shall cause its licensees and sublicensees
to keep, complete and accurate records of their Net Sales in sufficient detail to enable the
amounts payable under this Section 2.06(a) to be determined. Upon Aradigm’s written request, but
not more frequently than once per calendar year, Purchaser shall permit representatives or agents
of Aradigm, at Aradigm’s expense, to examine such records during Purchaser’s regular business hours
for the purpose of and to the extent necessary to verify any report required under this Agreement
with respect to Net Sales received not more than three years prior to the date of Aradigm’s
request. In the event that the amounts due to Aradigm are determined to have been underpaid,
Purchaser shall promptly pay to Aradigm any amount due and unpaid. In the event that it is
determined, as a result of such examination, that the amount underpaid with respect to a given
payment is in excess of 5% of the total amount of such payment, then Purchaser shall reimburse
Aradigm for all costs incurred by Aradigm in conducting such examination.
(vi)
Reports
. Beginning with the first accrual of royalties or other payments due
hereunder, Purchaser shall provide to Aradigm a quarterly royalty report as follows: Within 60 days
after the end of each quarterly period, Purchaser shall deliver to Aradigm a true and accurate
report, giving such particulars of the business conducted by Purchaser, its Affiliates and
Licensees, during such quarterly period as are pertinent to account for payments due under this
Section 2.06(a). Such report shall include, as applicable, at least (A) the total of Net Sales
during such quarterly period; (B) the calculation of royalties; (C) the calculation of Royalty
Revenue for each applicable Non-Sumatriptan Product and (D) the total royalties and other payments
due Aradigm. Simultaneously with the delivery of each such report, Purchaser shall pay to Aradigm
the total amount, if any, due to Aradigm for the period of such report. If no payment is due,
Purchaser shall so report. Aradigm shall not provide to Third Parties any information contained in
reports provided to Aradigm under this Section 2.06(a)(v), or learned by Aradigm under Section
2.06(a)(iii) above.
[ **** ] = Certain confidential information contained in this document, marked by brackets, has
been omitted and filed separately with the Securities and Exchange Commission pursuant to
Rule 406 of the Securities Act of 1933, as amended.
8.
(vii)
Payments
. All amounts payable hereunder by Purchaser shall be payable in
Dollars to Aradigm. If any currency conversion shall be required in connection with the payment of
royalties hereunder, such conversion shall be made by using the exchange rates reported in the Wall
Street Journal on the last business day of the quarter in respect of which such payment is made.
(viii)
Taxes
. Any withholding or other tax that is required by law to be withheld on
behalf of Aradigm with respect to payments owed by Purchaser pursuant to this Agreement shall be
deducted by Purchaser from such payment prior to remittance. Purchaser shall promptly furnish
Aradigm evidence of any such taxes withheld.
(ix) Without limiting Section 2.06(a)(v) above, Purchaser shall take reasonable measures to
keep Aradigm informed as to the progress of the development and commercialization of the Intraject
Delivery System and Products arising therefrom until such time as Purchaser has fulfilled its
royalty obligations to Aradigm pursuant to Section 2.06(a).
Section 2.07
Closing, Closing Place, Time and Date
.
The closing of the transactions
contemplated by this Agreement (the “Closing”) shall be held at the offices of Cooley Godward
llp,
3175 Hanover Street, Palo Alto, California, at 10:00 a.m. on the date of the
Agreement (the actual date on which the Closing shall occur being referred to herein as the
“
Closing Date
”).
(a)
Closing Deliveries
.
(i) At the Closing, Purchaser shall deliver, or cause to be delivered, to Aradigm the
following, dated as of the date of this Agreement and, where relevant, executed for and on behalf
of Purchaser by a duly authorized officer thereof:
(1) any and all instruments, certificates and agreements as Aradigm may reasonably request in
order to effectively make Purchaser responsible for all Assumed Liabilities pursuant hereto to the
fullest extent permitted by applicable law;
(2) Purchaser shall have provided Aradigm with evidence demonstrating that Purchaser has
obtained at least $15 million in equity financing;
(3) Purchaser shall have paid to Aradigm, by wire transfer, $4,000,000 in cash;
(4) Purchaser shall have reimbursed Aradigm for all documented expenses actually incurred by
Aradigm from July 1, 2006 through the Closing Date, that were pre-approved in writing by Purchaser,
up to $515,036;
(5) Each of Steve Farr and John Turanin shall have provided Aradigm with a release of all
claims over or rights to any severance payments relating to their cessation of services to Aradigm,
in a form that is reasonably acceptable to Aradigm and including mutually agreed consideration for
such releases; and
(6) the Transitional Services Agreement.
9.
(ii) At the Closing, Aradigm shall deliver, or cause to be delivered, to Purchaser the
following, dated as of the date of this Agreement and executed for and on behalf of Aradigm by a
duly authorized officer thereof:
(1) a general assignment and bill of sale with respect to the Assigned Assets in the form
attached hereto as
Exhibit F
;
(2) one or more instruments of assignment and assumption, in customary form and substance
reasonably satisfactory to Purchaser and Aradigm and their respective counsel;
(3) an instrument of assignment of the Transferred Patents, the Transferred Trademarks, and
any other Registered Intellectual Property Rights included in the Assigned Assets, in customary
form and substance reasonably satisfactory to Purchaser and Aradigm and their respective counsel;
(4) any and all required third party consents including those consents necessary for the valid
assignment and transfer of the Transferred Contracts;
(5) any and all other instruments, certificates and agreements as Purchaser may reasonably
request in order to effectively transfer to Purchaser all of the Assigned Assets pursuant hereto
and to the Transfer Plan to the fullest extent permitted by applicable law; and
(6) the Transitional Services Agreement.
(b)
Closing
. From and after the Closing, the Assigned Assets shall be held for the
account and benefit, and at the risk, of Purchaser.
Section 2.08
Nontransferable Assets
. To the extent that any Assigned Asset or Assumed
Liability to be sold, conveyed, assigned, transferred, delivered or assumed to or by Purchaser
pursuant hereto, or any claim, right or benefit arising thereunder or resulting therefrom, is not
capable of being sold, conveyed, assigned, transferred or delivered without the approval, consent
or waiver of the issuer thereof or the other Party thereto, or any third Person (including a
Governmental Body), or if such sale, conveyance, assignment, transfer or delivery or attempted
sale, conveyance, assignment, transfer or delivery would constitute a breach (or give rise to a
termination right) thereof or a violation of any law, decree, order, regulation or other
governmental edict (collectively, with respect to such Assigned Assets as set forth on
Exhibit
J
, the “
Nontransferable Assets
”), except as expressly otherwise provided herein, this Agreement
shall not constitute a sale, conveyance, assignment, transfer or delivery thereof, or an attempted
sale, conveyance, assignment, transfer or delivery thereof absent such approvals, consents or
waivers. If any such approval, consent or waiver shall not be obtained, or if an attempted
assignment of any such Assigned Asset or the assumption of any Assumed Liability by Purchaser would
be ineffective so that Purchaser would not in fact receive all the Nontransferable Assets or assume
all such Assumed Liabilities pursuant hereto, Aradigm and Purchaser shall cooperate in a mutually
agreeable arrangement under which Purchaser would obtain the benefits and assume the obligations of
such Assigned Assets and Assumed Liabilities,
10.
respectively, in accordance with this Agreement, including subcontracting, sub-licensing, or
sub-leasing to Purchaser, or under which Aradigm, at Purchaser’s expense, would enforce for the
benefit of Purchaser, with Purchaser assuming all of Aradigm’s obligations thereunder, any and all
rights of Aradigm against a Third Party thereto.
Section 2.09
FTO Licenses
.
(a)
To Purchaser
. Aradigm hereby grants to Purchaser a non-exclusive, fully-paid,
world-wide, perpetual, irrevocable, transferable, sublicensable license to fully exercise any
Intellectual Property Rights that are (i) owned, controlled or employed by Aradigm at any time
prior to the Closing (or that arises thereafter to the extent covering Technology created, owned,
controlled or employed by Aradigm prior to the Closing), (ii) necessary or useful for the operation
of the Business and (iii) not included in the Assigned Assets that are actually assigned to
Purchaser.
(b)
To Aradigm
. Purchaser hereby grants to Aradigm a non-exclusive, fully-paid,
world-wide, perpetual, irrevocable, transferable, sublicensable license to fully exercise any
Intellectual Property Rights that are (i) owned, controlled or employed by Purchaser as of the
Closing (or that arises thereafter to the extent covering Technology created, owned, controlled or
employed by Aradigm as of the Closing) and (ii) solely for use in the Pulmonary Field.
Section 2.10
Taking of Necessary Action; Further Action
. From time to time after the
Closing, at the request of either Party, the Parties hereto shall execute and deliver such other
instruments of sale, transfer, conveyance, assignment and confirmation and take such action as the
Parties may reasonably determine is necessary to transfer, convey and assign to Purchaser, and to
confirm Purchaser’s title to or interest in the Assigned Assets, to put Purchaser in actual
possession and operating control thereof and to assist Purchaser in exercising all rights with
respect thereto. Aradigm hereby constitutes and appoints Purchaser and its successors and assigns
as its true and lawful attorney in fact in connection with the transactions contemplated by this
Agreement, with full power of substitution, in the name and stead of Aradigm but on behalf of and
for the benefit of Purchaser and its successors and assigns, to demand and receive any and all of
the Assigned Assets and to give receipt and releases for and in respect of the same and any part
thereof, and from time to time to institute and prosecute, in the name of Aradigm or otherwise, for
the benefit of Purchaser or its successors and assigns, proceedings at law, in equity, or
otherwise, which Purchaser or its successors or assigns reasonably deem proper in order to collect
or reduce to possession or endorse any of the Assigned Assets and to do all acts and things in
relation to the Assigned Assets which Purchaser or its successors or assigns reasonably deem
desirable.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ARADIGM
Aradigm hereby represents and warrants to Purchaser as follows:
Section 3.01
Organization, Qualification, and Corporate Power
. Aradigm (a) is a
corporation duly organized, validly existing, and in good standing under the laws of the State of
11.
California, (b) has obtained all necessary corporate approvals to enter into and execute this
Agreement and (c) has the full right, power and authority to enter into this Agreement.
Section 3.02
Authorization
. Aradigm has full power and authority to execute and
deliver this Agreement, and to consummate the transactions contemplated hereunder and to perform
its obligations hereunder, and no other proceedings on the part of Aradigm are necessary to
authorize the execution, delivery and performance of this Agreement. This Agreement constitutes
the valid and legally binding obligations of Aradigm, enforceable against Aradigm in accordance
with its terms and conditions, except as such enforceability may be limited by principles of public
policy and subject to the laws of general application relating to bankruptcy, insolvency and the
relief of debtors and rules of law governing specific performance, injunctive relief or other
equitable remedies.
Section 3.03
Assets
.
(a) The Assigned Assets include all assets of Aradigm and its Affiliates that are used or held
for use by Aradigm and its Affiliates primarily in the operation or conduct of the Business.
(b) Following the consummation of the transactions contemplated by this Agreement and the
related agreements, and the execution of the instruments of transfer contemplated hereby and
thereby, Purchaser will own, with good, valid and marketable title, or lease, under valid and
subsisting leases, or otherwise acquire the interests of Aradigm in the Assigned Assets, free and
clear of any Liens, and without incurring any penalty or similar transfer fee.
Section 3.04
Transferred Books and Records
. The Transferred Books and Records listed
on
Exhibit B
are all of the Books and Records maintained by Aradigm that pertain to the
Business and the Assigned Assets.
Section 3.05
Transferred Contracts
. The Transferred Contracts listed on
Exhibit
C
are all of the contracts between Aradigm and any Third Party currently necessary for or
primarily related to, the operation of the Business, and true and complete copies of all such
Transferred Contracts have been delivered or made available to Purchaser or its representatives.
Each Transferred Contract is in full force and effect and, to Aradigm’s knowledge, Aradigm is not
subject to any default thereunder, nor, to Aradigm’s knowledge, is any party obligated to Aradigm
pursuant to any such Transferred Contract subject to any default thereunder. Aradigm has neither
breached, violated or defaulted under, nor received notice that Aradigm has breached, violated or
defaulted under, any of the terms or conditions of any Transferred Contract. Aradigm has obtained,
or will obtain prior to the Closing, all necessary consents, waivers and approvals of parties to
any Transferred Contract as are required thereunder in connection with the Closing, or for any such
Transferred Contract to be transferred to Purchaser, and to remain in full force and effect without
limitation, modification or alteration after the Closing. Following the Closing, Purchaser will be
permitted to exercise all of the rights Aradigm had under the Transferred Contracts without the
payment of any additional amounts or consideration other than ongoing fees, royalties or payments
which Aradigm would otherwise be required to pay pursuant to the terms of such Transferred
Contracts had the transactions contemplated by this Agreement not occurred.
12.
Section 3.06
Transferred Intellectual Property
.
(a) The Exhibits listing the Transferred Patents and the Transferred Trademarks are, to
Aradigm’s knowledge, complete and accurate. With respect to Transferred Patents, those Transferred
Patents that are Registered Patents are currently in compliance with formal legal requirements
(including payment of filing, examination and maintenance fees and proofs of use), and are not
subject to any unpaid maintenance fees or taxes falling due within 90 days after the Closing Date.
There are no proceedings or actions known to Aradigm before any court, tribunal (including the
United States Patent and Trademark Office (the “
PTO
”) or equivalent authority anywhere in the
world) related to any such Registered Patent.
(b) To Aradigm’s knowledge, each Registered Patent that is a Transferred Patent is properly
filed and is currently pending or issued, and all necessary registration, maintenance and renewal
fees in connection with such Registered Patent that is a Transferred Patent have been paid and all
necessary documents and certificates in connection with such Registered Patent have been filed with
the relevant patent authorities in the United States or foreign jurisdictions in which Aradigm has
elected to pursue such Registered Patent, as the case may be, for the purposes of maintaining such
Registered Patent. There are, to Aradigm’s knowledge, no actions that must be taken by Aradigm
within 90 days after the Closing Date, including the payment of any registration, maintenance or
renewal fees or the filing of any responses to PTO office actions, documents, applications or
certificates for the purposes of obtaining, maintaining, perfecting or preserving or renewing any
such Registered Patent. To the extent Aradigm has acquired from any Person any Technology or
Intellectual Property Right, in each case that are included in the Assigned Assets, Aradigm has
obtained a valid and enforceable assignment sufficient to irrevocably transfer all rights in such
Technology and Intellectual Property Rights (including the right to seek past and future damages
with respect thereto) to Aradigm. To the maximum extent provided for by, and in accordance with,
applicable laws and regulations, Aradigm has recorded each such assignment of a Registered
Intellectual Property Right assigned to Aradigm with the relevant Governmental Body, including the
PTO, the U.S. Copyright Office, or their respective equivalents in any relevant foreign
jurisdiction, as the case may be. Aradigm has not claimed a particular status, including “Small
Entity Status,” in the application for any Registered Patent that is a Transferred Patent, which
claim of status was not at the time made, or which has since become, inaccurate or false or that
will no longer be true and accurate as of the Closing Date.
(c) Aradigm has no knowledge of any misrepresentation regarding, or failure to disclose, any
fact or circumstances in any application for any Registered Patent that is a Transferred Patent
that would materially and adversely affect the validity or enforceability of such Registered Patent
that is a Transferred Patent.
(d) All Registered Intellectual Property Rights included in the Assigned Assets are free and
clear of any Liens. Immediately prior to the Closing, Aradigm is the exclusive owner or exclusive
licensee of all Business Intellectual Property.
(e) Schedule 3.06(e) sets forth a list of all Regulatory Documents.
13.
(f) All Assigned Assets will be fully transferable, alienable or licensable by Purchaser
without restriction and without payment of any kind to any Third Party, including royalty
obligations, other than those restrictions and payments Aradigm would be subject to as of the
Closing Date with respect to such Assigned Assets had the transactions contemplated by this
Agreement not occurred.
(g) Each material item of Technology used in the conduct of the Business by Aradigm was (i)
written and created by then-current employees of Aradigm acting within the scope of their
employment or (ii) acquired or licensed by Aradigm from Third Parties who have validly and
irrevocably assigned such item to Aradigm, or granted Aradigm a license to use such item of a
sufficient scope to cover Aradigm’s use or prior use of thereof in the Business.
(h) To Aradigm’s knowledge, the conduct of the Business by Aradigm as it was previously
conducted does not, infringe or misappropriate any Intellectual Property Right of any person, or
constitute unfair competition or trade practices under the laws of any jurisdiction, and Aradigm
has not received notice from any person claiming that such conduct by Aradigm infringes or
misappropriates any Intellectual Property Right of any person or constitutes unfair competition or
trade practices under the laws of any jurisdiction.
(i) Each employee and consultant of Aradigm that provides services to Aradigm in connection
with the Business has entered into a valid and binding written agreement with Aradigm sufficient to
vest title in Aradigm of all Technology and Intellectual Property Rights included in the Assigned
Assets and created by such employee or consultant in the scope of his or her services or employment
for Aradigm.
(j) Aradigm has not transferred ownership of, nor granted any exclusive license of or
exclusive right to use, or authorized the retention of any exclusive rights to use or joint
ownership of, any Technology or Intellectual Property Right that is or was used in connection with
the Business, to any other person.
(k) To Aradigm’s knowledge, no person is infringing or misappropriating any Intellectual
Property Right included in the Assigned Assets.
(l) No Business Intellectual Property is subject to any proceeding or outstanding decree,
order, judgment or settlement agreement or stipulation against Aradigm or, to Aradigm’s knowledge,
against any Third Parties from whom Aradigm acquired or licensed Business Intellectual Property
that restricts in any material way the use, transfer or licensing of such Business Intellectual
Property by Aradigm or is reasonably likely to affect the validity, use or enforceability of such
Business Intellectual Property.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Aradigm as follows:
14.
Section 4.01
Organization, Qualification, and Corporate Power
. Purchaser (a) is a
corporation duly organized, validly existing, and in good standing under the laws of the State of
Delaware, (b) has obtained all necessary corporate approvals to enter into and execute this
Agreement and (c) has the full right, power and authority to enter into this Agreement.
Section 4.02
Authorization
. Purchaser has full power and authority to execute and
deliver this Agreement, and to consummate the transactions contemplated hereunder and to perform
its obligations hereunder, and no other proceedings on the part of Purchaser are necessary to
authorize the execution, delivery and performance of this Agreement. This Agreement constitutes
the valid and legally binding obligations of Purchaser, enforceable against Purchaser in accordance
with its terms and conditions, except as such enforceability may be limited by principles of public
policy and subject to the laws of general application relating to bankruptcy, insolvency and the
relief of debtors and rules of law governing specific performance, injunctive relief or other
equitable remedies.
ARTICLE V
OTHER AGREEMENTS AND COVENANTS
Section 5.01
Additional Documents and Further Assurances
. Each Party hereto, at the
request of another Party hereto, shall execute and deliver such other instruments and do and
perform such other acts and things as may be reasonably requested for effecting completely the
consummation of the transactions contemplated hereby.
Section 5.02
Reasonable Cooperation of Purchaser
. Purchaser shall cooperate, to the
extent reasonable, with Aradigm’s efforts to obtain any Third Party consents; provided, however,
that this Section 6.02 shall not obligate Purchaser to incur any additional expense or liability.
Section 5.03
Reasonable Efforts
. Each of the Parties will use their reasonable
efforts to take all action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement.
Section 5.04
Indemnification
.
(a)
Indemnification of Purchaser
.
(i) Aradigm shall indemnify and hold harmless each of Purchaser and its Affiliates, and the
directors, officers, and employees of Purchaser and of such Affiliates, and the successors and
assigns of any of the foregoing (collectively, the “
Purchaser Indemnitees
”), from and against any
and all liabilities, damages, settlements, claims, actions, suits, penalties, fines, costs and
expenses (including, without limitation, reasonable attorneys’ fees and other expenses of
settlement) (any of the foregoing, a “
Claim
”) incurred by any Purchaser Indemnitee, based upon a
Claim of a Third Party, to the extent resulting from the breach of any of Aradigm’s express
representations and warranties set forth in Article III of this Agreement. Aradigm’s obligations
to the Purchaser Indemnitees pursuant to this Section 5.04(a)(i) shall be limited, in the
aggregate, to amounts actually received by Aradigm by operation of Section 2.06(a)(i).
Notwithstanding the foregoing, Aradigm shall not have any obligation to the Purchaser
15.
Indemnitees in respect of any breach of representations and warranties as to which Purchaser
has actual knowledge (including for this purpose the actual knowledge of Steve Farr, John Turanin
or Jonathan Rigby) prior to the Closing.
(b) Aradigm shall indemnify and hold harmless the Purchaser Indemnitees from and against all
Claims arising from the Excluded Liabilities.
(c)
Indemnification of Aradigm
. Purchaser shall indemnify and hold harmless each of
Aradigm and its Affiliates, and the directors, officers, and employees of Aradigm and of such
Affiliates, and the successors and assigns of any of the foregoing (collectively, the “
Aradigm
Indemnitees
”), from and against any and all liabilities, damages, settlements, claims, actions,
suits, penalties, fines, costs and expenses (including, without limitation, reasonable attorneys’
fees and other expenses of settlement) incurred by any Aradigm Indemnitee, based upon (i) a Claim
of a Third Party, to the extent resulting from the breach of any of Purchaser’s express
representations and warranties set forth in Article IV of this Agreement, (ii) a Claim relating to
product liability concerning any of the Assigned Assets or (iii) a Claim relating to the Assumed
Liabilities.
(d)
Procedure
. A Party that intends to claim indemnification under this Section 5.04
(the “
Indemnitee
”) shall promptly notify the other Party (the “
Indemnitor
”) in writing of any Claim
in respect of which the Indemnitee intends to require such indemnification, and the Indemnitor
shall have sole control of the defense and/or settlement thereof; provided that the Indemnitee
shall have the right to participate, at its own expense, with counsel of its own choosing in the
defense and/or settlement of such Claim. The indemnification obligations of the Parties in this
Section 5.04 shall not apply to amounts paid in settlement of any Claim if such settlement is
effected without the consent of the Indemnitor, which consent shall not be unreasonably withheld or
delayed. The failure to deliver written notice to the Indemnitor within a reasonable time after
the commencement of any such Claim, if prejudicial to Indemnitor’s ability to defend such action,
shall relieve such Indemnitor of any liability to the Indemnitee under this Section 5.04, but the
omission to so deliver written notice to the Indemnitor shall not relieve the Indemnitor of any
liability to any Indemnitee otherwise than under this Section 5.04. The Indemnitee under this
Section 5.04 and its directors, officers and employees shall cooperate fully with the Indemnitor
and its legal representatives and provide full information in the investigation of any Claim
covered by this indemnification.
(e)
Sole Remedy
. The indemnification rights provided for in this Article V shall
constitute the sole and exclusive remedy and the sole basis and means of recourse among the Aradigm
Indemnities and the Purchaser Indemnities with respect to Claims arising out of or in connection
with any breach of or inaccuracy in any representation, warranty, covenant or agreement contained
in this Agreement.
Section 5.05
Covenant Not to Compete
. Aradigm and its Affiliates agree for a period
of four (4) years after the Closing Date (the “
Initial Period
”) not to (i) conduct, participate in
or sponsor, directly or indirectly, any activities directed toward the research, development of
technologies or products for the delivery of one or more active pharmaceutical ingredients via
needle free injection or the manufacture, marketing or distribution of such products (each, a
"
Competing Activity
”) or (ii) appoint, license or otherwise authorize any Third Party, whether
16.
pursuant to such license, appointment, or authorization or otherwise to perform any Competing
Activities; provided that during the Initial Period, Purchaser (itself or through one or more Third
Parties) is diligently pursuing the development (including preclinical development) or
commercialization of one or more Products. Thereafter during the Royalty Term, Aradigm and its
Affiliates agree not to develop or commercialize any product for needle free injection of any
active pharmaceutical ingredient for which Purchaser (itself or through one or more Third Parties)
is then actively developing or commercializing a Product incorporating such active pharmaceutical
ingredient (or any prodrug, metabolite, degradant, intermediate, salt form, hydrate, ester, isomer
thereof).
ARTICLE VI
MISCELLANEOUS
Section 6.01
Press Releases and Public Announcements
. No Party shall issue any press
release or make any public announcement relating to the subject matter of this Agreement prior to
the Closing without the prior written approval of the other Party; provided, however, that (a)
either Party may make any public disclosure it believes in good faith is required by applicable law
and (b) Aradigm may correspond with Third Parties in writings in form and substance reasonably
satisfactory to Purchaser with respect to obtaining consents from such Third Parties. In
furtherance of the foregoing sentence, the Parties agree and acknowledge that either party may
issue a press release regarding this Agreement and the transactions contemplated herein at a time
to be mutually agreed after the Closing Date, which press release shall not provide the financial
terms of the Agreement. The Parties will provide to each other a copy of such press release at
least five business days prior to its release and such press release shall be subject to written
approval of the receiving Party, which approval shall not be unreasonably withheld or delayed.
Section 6.02
No Third-Party Beneficiaries
. This Agreement shall not confer any rights
or remedies upon any Person other than the Parties, and their respective successors and permitted
assigns.
Section 6.03
Force Majeure
. Except with respect to the payment of money, in the event
either Party hereto is prevented from or delayed in the performance of any of its obligations
hereunder by reason of acts of God, terrorism, war, invasion, strikes, riots, earthquakes, storms,
fires, energy shortage, acts of government or governmental agencies, or any other cause whatsoever
beyond the reasonable control of the Party, the Party so prevented or delayed shall be excused from
the performance of any such obligation to the extent and during the period of such prevention or
delay.
Section 6.04
Limitation of Liability
. NEITHER PARTY SHALL BE LIABLE TO THE OTHER
PARTY OR ANY THIRD PARTY FOR ANY SPECIAL, CONSEQUENTIAL, EXEMPLARY OR INCIDENTAL DAMAGES (INCLUDING
LOST OR ANTICIPATED REVENUES OR PROFITS RELATING TO THE SAME), ARISING FROM ANY CLAIM RELATING TO
THIS AGREEMENT, WHETHER SUCH CLAIM IS BASED ON CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE,
EVEN IF AN AUTHORIZED REPRESENTATIVE OF SUCH PARTY IS ADVISED OF THE POSSIBILITY OR LIKELIHOOD OF
SAME.
17.
Section 6.05
Entire Agreement and Modification
. This Agreement (including the
exhibits hereto) constitutes the entire agreement among the Parties with respect to the subject
matter hereof and supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, to the extent they related in any way to the subject matter hereof.
This Agreement may not be amended except by a written agreement executed by all Parties.
Section 6.06
Amendment
. This Agreement may be amended by Purchaser and Aradigm or any
successor thereto by execution by each Party (or their successors) of an instrument in writing.
Section 6.07
Waivers
. The rights and remedies of the Parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by any Party in exercising any
right, power or privilege under this Agreement or the documents referred to in this Agreement will
operate as a waiver of such right, power or privilege, and no single or partial exercise of such
right, power, or privilege will preclude any other or further exercise of such right, power, or
privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted
by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to
in this Agreement can be discharged by one Party, in whole or in part, by a waiver or renunciation
of the claim or right unless in writing signed by the other Party, (b) no waiver that may be given
by a Party will be applicable except in the specific instance for which it is given and (c) no
notice to or demand on one Party will be deemed to be a waiver of any obligation of such Party or
of the right of the Party giving such notice or demand to take further action without notice or
demand as provided in this Agreement or the documents referred to in this Agreement.
Section 6.08
Successors and Assigns
. This Agreement shall be binding upon and inure
to the benefit of the Parties named herein and their respective successors and permitted assigns.
This Agreement shall not be assigned by either Party without the prior written consent of the other
Party, except that either Party may assign this Agreement, in whole or in part, to an Affiliate of
such Party or to the successor (including the surviving company in any consolidation,
reorganization or merger) or assignee of all or substantially all of its business pertaining
hereto. This Agreement will be binding upon any permitted assignee of either Party. No assignment
shall have the effect of relieving any Party to this Agreement of any of its obligations hereunder.
Section 6.09
Counterparts
. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which together will constitute one and the same
instrument.
Section 6.10
Interpretation
. The captions and headings to this Agreement are for
convenience only, and are to be of no force or effect in construing or interpreting any of the
provisions of this Agreement. Unless specified to the contrary, references to Articles, Sections
or Exhibits mean the particular Articles, Sections and Exhibits to this Agreement and references to
this Agreement include all such subparts. Unless context otherwise clearly requires, whenever used
in this Agreement: (a) the words “include” or “including” shall be construed as incorporating,
also, “but not limited to” or “without limitation”; (b) the word “day” or “year” means a calendar
day or year unless otherwise specified; (c) the word “notice” means notice in writing (whether or
not specifically stated) and shall include notices, consents, approvals and
18.
other written communications contemplated under this Agreement; (d) the words “hereof,”
“herein,” “hereby” and derivative or similar words refer to this Agreement (including any and all
subparts); (e) the word “or” shall be construed as the inclusive meaning identified with the phrase
“and/or”; (f) provisions that require that a Party, the Parties or any committee hereunder “agree,”
“consent” or “approve” or the like shall require that such agreement, consent or approval be
specific and in writing, whether by written agreement, letter, approved minutes or otherwise; (g)
words of any gender include the other gender; (h) words using the singular or plural number also
include the plural or singular number, respectively; and (i) references to any specific Law or
article, section or other division thereof shall be deemed to include the then-current amendments
thereto or any replacement Law thereof.
Section 6.11
Notices
. All notices and other communications required or permitted
hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to
be given upon receipt or, if earlier, (a) five days after deposit with the U.S. Postal Service or
other applicable postal service, if delivered by certified or registered first class mail, postage
prepaid, return receipt requested, (b) upon delivery, if delivered by hand, (c) one (1) business
day after the business day of deposit with Federal Express or similar overnight courier, freight
prepaid or (d) one business day after the business day of facsimile transmission, if delivered by
facsimile transmission with copy by certified or registered first class mail, postage prepaid,
return receipt requested and shall be addressed to the intended recipient as set forth below:
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If to Purchaser:
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Addressed to:
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SJ2 Therapeutics, Inc.
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3929 Point Eden Way
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Hayward, California 94545
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Attention: President
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Facsimile: (510) 265 0277
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With a copy to:
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Wilson, Sonsini, Goodrich & Rosati
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650 Page Mill Rd
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Palo Alto, California 94304-1050
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Attn: J. Casey McGlynn, Esq.
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Facsimile: (650) 493-6811
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If to Aradigm:
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Addressed to:
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Aradigm Corporation.
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3929 Point Eden Way
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Hayward, California 94545
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Attention: Chief Financial Officer
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Facsimile: (510) 265 0277
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With a copy to:
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Cooley Godward
llp
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3175 Hanover Street
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Palo Alto, CA 94304-1130
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19.
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Attn: James Kitch, Esq.
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Facsimile: (650) 843-5027
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Any Party may change the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other Party ten days’ advance written
notice to the other Party pursuant to the provisions above.
Section 6.12
Governing Law
. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of California without giving effect to any choice or
conflict of law provision or rule (whether of the State of California or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the State of
California.
Section 6.13
Severability
. Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability
of the remaining terms and provisions hereof or the validity or enforceability of the offending
term or provision in any other situation or in any other jurisdiction.
Section 6.14
Construction
. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation
arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption
or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any
of the provisions of this Agreement. Any reference to any federal, state, local, or foreign
statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder,
unless the context requires otherwise.
Section 6.15
Attorneys’ Fees
. If any legal proceeding or other action relating to
this Agreement is brought or otherwise initiated, the prevailing Party shall be entitled to recover
reasonable attorney’s fees, costs and disbursements (in addition to any other relief to which the
prevailing Party may be entitled).
Section 6.16
Further Assurances
. The Parties agree (a) to furnish upon request to
each other such further information, (b) to execute and deliver to each other such other documents
and (c) to do such other acts and things, all as the other Party may reasonably request for the
purpose of carrying out the intent of this Agreement and the documents referred to in this
Agreement.
[The remainder of this page left intentionally blank; signature page follows]
20.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on of the date first above
written.
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ARADIGM CORPORATION
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By:
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/s/ Thomas C. Chesterman
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Name:
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Thomas C. Chesterman
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Title:
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Senior Vice President & CFO
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SJ2 THERAPEUTICS, INC.
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By:
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/s/ Stephen J. Farr
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Name:
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Stephen J. Farr
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Title:
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President
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Schedule 3.06(e)
Regulatory Documents
[****]
[ **** ] =
Certain confidential information contained in
this document, marked by brackets, has been omitted and filed separately with
the Securities and Exchange Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended.
EXHIBIT A
Transferred Assets (including Transferred Technology)
[****]
[ **** ] =
Certain confidential information contained in
this document, marked by brackets, has been omitted and filed separately with
the Securities and Exchange Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended.
EXHIBIT B
Transferred Books and Records
[****]
[ **** ] =
Certain confidential information contained in
this document, marked by brackets, has been omitted and filed separately with
the Securities and Exchange Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended.
EXHIBIT C
Transferred Contracts
[****]
[ **** ] =
Certain confidential information contained in
this document, marked by brackets, has been omitted and filed separately with
the Securities and Exchange Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended.
EXHIBIT D
Transferred Intellectual Property
[****]
[ **** ] =
Certain confidential information contained in
this document, marked by brackets, has been omitted and filed separately with
the Securities and Exchange Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended.
EXHIBIT E
General Assignment and Bill of Sale
FORM OF BILL OF SALE AND ASSIGNMENT AGREEMENT
This Bill of Sale and Assignment Agreement is made effective as of August 25, 2006, by and
between SJ2 Therapeutics, Inc., a Delaware corporation (“
Purchaser
”), and Aradigm Corporation, a
California corporation (“
Aradigm
”). All capitalized words and terms used in this Agreement and not
defined herein shall have the respective meanings ascribed to them in the Asset Purchase Agreement
dated August 25, 2006 between Aradigm and the Purchaser (the “
Asset Purchase Agreement
”).
BACKGROUND
WHEREAS
, Aradigm and Purchaser have entered into the Asset Purchase Agreement, under which
Aradigm has agreed to sell, convey, assign, transfer and deliver the Assigned Assets to Purchaser
or its assigns.
AGREEMENT
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1.
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Sale
. Aradigm does hereby sell, convey, assign, transfer and deliver to Purchaser,
and Purchaser does hereby purchase, acquire and accept from Aradigm, all of Aradigm’s right,
title and interest in and to the Assigned Assets, subject to the licensed reserved on behalf
of Aradigm pursuant to Section 2.01 of the Asset Purchase Agreement.
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2.
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Representations
. All representations, warranties, agreements and indemnities of
Aradigm with respect to the Assigned Assets set forth in the Asset Purchase Agreement will
continue in effect as provided therein and will not be deemed to be amended, modified,
terminated or superseded by or merged with this Bill of Sale and Assignment Agreement.
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3.
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Miscellaneous Provisions
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3.1
Amendments; Waiver
. The terms, provisions and conditions of this Bill of Sale
and Assignment Agreement may be amended only by agreement in writing of all parties. No
waiver of any provision nor consent to any exception to the terms of this Bill of Sale and
Assignment Agreement or any agreement contemplated hereby will be effective unless in
writing and signed by the party to be bound and then only to the specific purpose, extent
and instance so provided.
3.2
Further Assurances
. Each party will execute and deliver, both before and after
the Closing Date, such further certificates, agreements and other documents and take such
other actions as the other party may reasonably request or as may be necessary or
appropriate to consummate or implement the Transactions, including to more effectively
transfer the Assigned Assets, or to evidence such events or matters.
3.3
Assignment
. Neither this Bill of Sale and Assignment Agreement nor any rights
or obligations under it are assignable by one party without the prior written consent of the
other party.
2.
3.4
Descriptive Headings
. The descriptive headings of the sections and subsections
of this Bill of Sale and Assignment Agreement are for convenience only and do not constitute
a part of this Bill of Sale and Assignment Agreement.
3.5
Counterparts
. This Bill of Sale and Assignment Agreement and any amendment
hereto or any other agreement delivered pursuant hereto may be executed in one or more
counterparts and by different parties in separate counterparts. All counterparts will
constitute one and the same agreement and will become effective when one or more
counterparts have been signed by each party and delivered to the other party. A facsimile
signature page will be deemed an original.
3.6
Governing Laws
. This Bill of Sale and Assignment Agreement and the legal
relations between the parties will be governed by and construed in accordance with the laws
of the State of California applicable to contracts made and performed in such State and
without regard to conflicts of law doctrines unless certain matters are preempted by federal
law.
3.7
Waiver
. No failure on the part of any party to exercise or delay in exercising
any right hereunder will be deemed a waiver thereof, nor will any single or partial exercise
preclude any further or other exercise of such or any other right.
3.8
Representation By Counsel; Interpretation
. The parties each acknowledge that
each has been represented by counsel in connection with this Bill of Sale and Assignment
Agreement and the transactions contemplated by the Asset Purchase Agreement. Accordingly,
any rule of law or any legal decision that would require interpretation of any claimed
ambiguities in this Bill of Sale and Assignment Agreement against the party that drafted it
has no application and is expressly waived. The provisions of this Agreement will be
interpreted in a reasonable manner to effect the intent of the parties hereto.
3.9
Severability
. If any provision of this Bill of Sale and Assignment Agreement is
held to be unenforceable for any reason, it will be adjusted rather than voided, if
possible, to achieve the intent of the parties. All other provisions of this Bill of Sale
and Assignment Agreement will be deemed valid and enforceable to the extent possible.
[
signature page to follow
]
3.
IN WITNESS WHEREOF
, Aradigm and Purchaser have caused this Bill of Sale and Assignment
Agreement to be duly executed as of the day and year first above written.
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PURCHASER:
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ARADIGM:
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SJ2 THERAPEUTICS, INC.
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ARADIGM CORPORATION
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By:
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By:
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Name:
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Name:
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Title:
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Title:
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4.
EXHIBIT F
Assumed Liabilities
1. All obligations under Assumed Contracts, other than obligations due and owing as of the
date of the Agreement to Third Parties that are parties to such Assumed Contracts.
2. Liabilities (other than Excluded Liabilities) incurred in the use of the Assigned Assets
following the Closing Date.
3. See attached list for additional items.
EXHIBIT G
Transfer Plan
[****]
[ **** ] =
Certain confidential information contained in
this document, marked by brackets, has been omitted and filed separately with
the Securities and Exchange Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended.
EXHIBIT H
Transitional Services Agreement
[Aradigm Letterhead]
August 25, 2006
SJ2 Therapeutics, Inc.
Ladies and Gentlemen:
SJ2 Therapeutics, Inc. (“SJ2”) and Aradigm Corporation (“Aradigm”) are entering into an Asset
Purchase Agreement (the “APA”) dated as of the date of this letter (the “Effective Date”), which,
among other things, provides for the sale to SJ2 of certain Aradigm assets related to the
development, manufacture, and commercialization of Aradigm’s Intraject Delivery System.
1. Services.
On the terms and subject to the conditions contained herein, Aradigm shall
provide, or shall cause third parties designated or hired by it (such designated third parties,
together with Aradigm, the “Service Providers”) to provide to SJ2 the following services
(collectively, the “Services”) for the time period through December 31, 2006 (“Expiration Date”):
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(a)
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General information technology services and support (e.g., e-mail access, computer equipment
and software support, network access and support to SJ2’s server only, and other general
computer technologies support) within Aradigm’s current systems and procedures until SJ2
vacates Aradigm’s facilities or the Expiration date, which ever is earlier,
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(b)
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Telephone and fax services and support,
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(c)
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Aradigm will provide SJ2 with document control support for the activities documented in
Aradigm’s current document control processes, using Aradigm’s Document Control System (DCS)
database. Aradigm has assumed that SJ2 will purchase the DCS on or shortly after the
Effective Date. It is Aradigm’s intention to hire a temporary senior level Document Control
Specialist, on or shortly after the Effective Date, who will be fully funded by SJ2, to allow
Aradigm’s current document control personnel to provide document control support to SJ2
consistent with Aradigm’s current Document Control processes. If Aradigm is unable to hire a
temporary senior level Document Control Specialist, or should the temporary employee hired
leave Aradigm for any reason, Aradigm will not be able to provide the services described in
this section 1(c).
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(d)
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Human resources services and support for Aradigm consultants transferring to SJ2,
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(e)
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Payment for individual Aradigm consultants transferring to SJ2,
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(f)
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Technical consulting as available and approved in writing by both parties,
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(g)
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Office facilities, furnishings, and services (e.g., utilities, maintenance, mail, etc.), and
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(h)
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Such other services as Aradigm and SJ2 may agree to as set forth in paragraph 4.
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2. Current Invoices.
Exhibit A to this letter contains an invoice for transitional services
provided by Aradigm to SJ2 through the months of July and August 2006. The parties acknowledge
that a secondary invoice will be provided to SJ2 relating to transitional service provided at the
time of closing Aradigm’s August accounting records. As Aradigm’s August accounting records have
not been closed as of the Effective Date,
3. Term of Agreement.
Except for the services performed prior to the Effective Date as
referenced in paragraph 2, all services to be provided under this Agreement shall begin as of the
Effective Date and shall terminate on the Expiration Date. Aradigm and SJ2 will negotiate in good
faith if SJ2 needs to extend the term of this letter and/or any provision of any Service beyond the
Expiration Date (and the parties hereby acknowledge that the negotiation of any such extension may
involve a renegotiation of the charges with respect to any such Services). This letter may be
extended upon the mutual agreement of the parties hereto in writing, either in whole or with
respect to one or more of the Services; provided that, such extension shall only apply to the
specific Services for which this letter was extended. Services shall be provided up to and
including the applicable Expiration Date, subject to earlier termination as provided in this
letter.
4. Additional Services.
From time to time after the Effective Date, Aradigm and SJ2 may
identify and mutually agree upon additional services to be provided to SJ2 in accordance with the
terms of this letter (the “Additional Services”). At such times, the parties shall execute an
addendum to this Agreement setting forth a description of any Additional Service, the time period
during which such Additional Service will be provided, the charge for such Additional Service and
any other terms applicable. Aradigm and SJ2 acknowledge that charges for Additional Services will
include a profit margin consistent with industry standards for the provision of similar services.
Additional Services may include, but shall not be limited to, regulatory consulting for the
Intraject Sumatriptan NDA, clinical training of the CRO selected to conduct the Intraject
bioequivalence study, submission of the Intraject Sumatriptan IND on behalf of SJ2 and assistance
with R&D efforts.
5. Provision of Services.
Aradigm will use commercially reasonable efforts to ensure that
employees and Service Providers are available to perform its obligations hereunder. Aradigm shall
provide the Services in accordance with the policies, procedures and practices in effect as of
immediately prior to the Effective Date. Aradigm and SJ2 will use their commercially reasonable
efforts to promote a smooth and efficient transition of operations.
6. No Warranties.
ARADIGM WILL USE COMMERCIALLY REASONABLE EFFORTS TO CAUSE THE SERVICES TO
BE PERFORMED IN A PROFESSIONAL AND COMPETENT MANNER; HOWEVER, ARADIGM DOES NOT MAKE ANY WARRANTIES,
EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF
MERCHANTABILITY, BUSINESS CONTINUITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE
SERVICES, MATERIALS OR OTHER DELIVERABLES PROVIDED, OR CAUSED TO BE PROVIDED, BY IT UNDER THIS
LETTER.
7. Transition to SJ2 Systems and Personnel.
During the term of this letter, Aradigm will use
reasonable efforts to provide to SJ2, at SJ2’s expense, consultation, assistance and information as
reasonably requested by SJ2, and will otherwise perform the Services, so as to effect a smooth
transition from SJ2’s utilization of Aradigm’s systems and personnel to SJ2’s utilization of its
own systems and personnel in
connection with the development of the Intraject Delivery System prior to the termination or
expiration of this letter.
8. Payments.
SJ2 shall pay Aradigm on a monthly basis for documented actual charges for the
performance of the Services. Aradigm will invoice SJ2 for its representatives’ activities using an
hourly rate based on salary, benefits and overhead of the Aradigm representatives performing the
Services. Aradigm will not apply a profit to its representatives’ hourly rates through the
Expiration Date.
9. Discontinuation of Services.
If SJ2 chooses to discontinue any Service prior to the
Expiration Date, SJ2 shall give at least 30 days prior written notice, of its intent to terminate
this letter as to that particular Service, which termination as to that particular service shall be
effective on the last day of the month on which the 30 days prior written notice lapses. SJ2 will
pay Aradigm hereto the fees and costs of any terminated Service up until the effective date of
termination of such Service.
10. Termination.
Notwithstanding anything to the contrary contained in this letter, this
letter may be terminated, in whole or in part, at any time: (a) by the mutual consent of SJ2 and
Aradigm; or (b) by either SJ2 or Aradigm in the event of any material breach or default by the
other party of any of its obligations under this letter and the failure of such defaulting party to
cure, or to take substantial steps towards the curing of, such breach or default within 14 days
after receipt of written notice from the non-defaulting party requesting such breach or default to
be cured.
11. No Implied Responsibilities or Obligations.
NO PARTY HERETO ASSUMES ANY RESPONSIBILITY OR
OBLIGATIONS WHATSOEVER, OTHER THAN THE RESPONSIBILITIES AND OBLIGATIONS EXPRESSLY SET FORTH IN THIS
LETTER OR A SEPARATE WRITTEN AGREEMENT BETWEEN THE PARTIES. NOTWITHSTANDING ANYTHING CONTAINED IN
THIS LETTER TO THE CONTRARY, IN NO EVENT SHALL ANY PARTY BE LIABLE TO ANY OTHER PARTY FOR ANY LOST
PROFITS, LOSS OF DATA, LOSS OF USE, BUSINESS INTERRUPTION OR OTHER SPECIAL, INCIDENTAL, INDIRECT OR
CONSEQUENTIAL DAMAGES.
12. Independent Contractors.
The relationship between SJ2 and Aradigm established under this
letter is that of independent contractors and no party shall be deemed an employee, agent, partner,
or joint venturer of or with the other. Each Service Provider will be solely responsible for any
employment-related taxes, insurance premiums or other employment benefits respecting its
personnel’s performance of any Services. SJ2 agrees to grant to any applicable Service Provider’s
personnel reasonable access to sites, systems and information as necessary for the Service Provider
to perform its obligations under this letter. The personnel of SJ2 and Aradigm shall agree to obey
any and all security regulations and other published policies of the other party relevant to the
provision or receipt of any Services.
13. Confidentiality.
Any information from time to time communicated or delivered by SJ2 or
Aradigm to the other party, including without limitation trade secrets, business methods, and cost,
supplier, manufacturing and customer information, shall be treated by SJ2 and Aradigm,
respectively, as confidential information of the other party, and shall not be disclosed or
revealed to any third party whatsoever or used in any manner except as expressly provided for in
this letter; provided, however that such confidential information shall not be subject to the
restrictions and prohibitions set forth in this paragraph 13 to the extent that such confidential
information: (a) is available to the public in public literature or otherwise, or after disclosure
by one party to the
other becomes public knowledge through no default of the party receiving such confidential
information; or (b) was known to the party (as demonstrated by the written records of such party)
receiving such confidential information with no obligation to maintain confidentiality prior to the
receipt of such confidential information by such party, whether received before or after the date
of this letter; or (c) is obtained by the party receiving such confidential information from a
third party not subject to a requirement of confidentiality with respect to such confidential
information. For the avoidance of doubt, information will not be considered to be available to the
public, in the public literature, or in the prior possession of the receiving party merely because
individual elements thereof are available to the public, in the public literature, or in the prior
possession of the receiving party, unless the combination of such elements is available to the
public, in the public literature, or in the prior possession of the receiving party. SJ2 and
Aradigm shall take all such precautions as it normally takes with its own confidential information
to prevent any improper disclosure of such confidential information to any third party;
provided that
, such confidential information may be disclosed: (x) pursuant to any order of
a court or government entity having jurisdiction and power to order such information to be released
or made public; (y) within the limits required to obtain any authorization from any governmental or
regulatory agency; or (z) with the prior written consent of the other party, which shall not be
unreasonably withheld, as may otherwise be required in connection with the purposes of this letter.
14. Access to Aradigm Computer Systems.
If SJ2 is given access to any computer equipment,
computer, software, network, electronic files, or electronic data storage system owned or
controlled by Aradigm (“Aradigm Computer Systems”), then SJ2 shall limit access and use of such
Aradigm Computer Systems solely to receive Services under this letter and shall not access, attempt
to access or use any Aradigm Computer Systems, other than those specifically required to receive
the Services. All user identification numbers and passwords disclosed to SJ2 and any of Aradigm’s
confidential information obtained by SJ2 as a result of its access to and use of any such Aradigm
Computer Systems shall be deemed to be, and shall be treated as, Aradigm’s confidential information
under applicable provisions of this letter. SJ2 agrees to cooperate with Aradigm in the
investigation of any apparent unauthorized access by SJ2 or its representatives to any Aradigm
Computer Systems, or any apparent unauthorized release of Aradigm’s confidential information by the
employees, contractors or advisers of SJ2.
15. Indemnification.
SJ2 indemnifies Aradigm and its affiliates against, and agrees to hold
each of them harmless from, any and all damage, loss, liability and expense (including reasonable
expenses of investigation and reasonable attorneys’ fees and any incidental, indirect or
consequential damages, losses, liabilities or expenses) (“Damages”) incurred or suffered by Aradigm
or any of its affiliates (other than Damages incurred or suffered by Aradigm or any of its
affiliates arising from any claims made by employees of Aradigm) that arise from any third-party
claim for personal injury or damage to property based upon the performance of the Services by any
of Aradigm’s employees, except to the extent such third-party claim arises out of such employee’s
negligence, willful misconduct or breach of obligations under this letter. Aradigm indemnifies SJ2
and its affiliates against, and agrees to hold each of them harmless from, any and all Damages
incurred or suffered by SJ2 or any of its affiliates (other than Damages incurred or suffered by
SJ2 or any of its affiliates arising from any claims made by employees of SJ2) that arise from any
third-party claim for personal injury or damage to property based upon actions by any of SJ2’s
employees under the terms of this letter, except to the extent such third-party claim arises out of
such employee’s negligence, willful misconduct or breach of obligations under this letter.
16. Existing Ownership Rights Unaffected.
Neither SJ2 nor Aradigm will gain, by virtue of
this letter, any rights or ownership of copyrights, patents, know-how, trade secrets, trademarks or
any other intellectual property rights owned by the other party.
17. Dispute Resolution.
All disputes arising out of this letter shall be settled as far as
possible by negotiations between SJ2 and Aradigm. If SJ2 and Aradigm cannot agree on an amicable
settlement within 30 days from written submission of the matter by one party to the other, the
matter shall be shall be settled by binding arbitration in the County of Hayward in the State of
California in accordance with the Commercial Arbitration Rules then in effect of JAMS/Endispute.
Arbitration will be conducted by one arbitrator, mutually selected by SJ2 and Aradigm. If Aradigm
and SJ2 fail to mutually select an arbitrator within 15 days following the submission of the matter
to JAMS/Endispute, then arbitration will be conducted by three arbitrators: one selected by
Aradigm; one selected by SJ2; and the third selected by the first two arbitrators. If SJ2 or
Aradigm fails to select an arbitrator within ten days following the expiration of the initial 15
day period, then the other shall be entitled to select the second arbitrator. SJ2 and Aradigm
agree to use all reasonable efforts to cause the arbitration hearing to be conducted within 75 days
after the appointment of the mutually selected arbitrator or the last of the three arbitrators, as
the case may be, and to use all reasonable efforts to cause the decision of the arbitrators to be
furnished within 95 days after the appointment of the mutually selected arbitrator or the last of
the three arbitrators, as the case may be. SJ2 and Aradigm further agree that discovery shall be
completed at least 10 days prior to the date of the arbitration hearing. The final decision of the
arbitrators shall be furnished to SJ2 and Aradigm in writing and shall constitute a conclusive
determination of the issues in question, binding upon SJ2 and Aradigm and shall not be contested by
any of them. The non-prevailing party in any arbitration shall pay the reasonable expenses
(including attorneys’ fees) of the prevailing party and the fees and expenses associated with the
arbitration (including the arbitrators’ fees and expenses). For purposes of this paragraph 17, the
non-prevailing party shall be determined solely by the arbitrators.
18. No Third Party Beneficiaries.
This letter shall not confer any rights or remedies upon
any person or entity other than SJ2 or Aradigm and their respective successors and permitted
assigns.
19. Counterparts and Facsimile Signature.
This letter may be executed in counterparts, each
of which shall be deemed an original but all of which together shall constitute one and the same
instrument. This letter may be executed by facsimile signature.
20. Notices.
All notices and other communications under this letter will be in writing and
deemed to have been duly given if given in accordance with Section 6.11 of the APA.
21. Successors and Assigns.
The provisions of this letter shall be binding upon and inure to
the benefit of SJ2 and Aradigm and their respective successors and assigns; provided, however, that
except as expressly provided in this letter, no party may assign, delegate or otherwise transfer
any of its rights or obligations under this letter without the consent of each other party.
If you are in agreement with the terms of this letter, please execute this letter where
indicated below and return a copy of the signed letter to Aradigm.
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Aradigm Corporation
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Name:
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Title:
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ACCEPTED AND AGREED TO:
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SJ2 Technologies, Inc.
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By:
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Name:
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Title:
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EXHIBIT I
Intraject Delivery System
EXHIBIT J
Nontransferable Assets
None.
Exhibit 10.22
July 14, 2006
Dr. Igor Gonda
Re: Employment Terms
Dear Igor:
Aradigm Corporation (the “Company”), is pleased to offer you the position of President and Chief
Executive Officer (“CEO”), on the following terms. Your employment shall commence as soon as
possible on a date to be mutually agreed upon by you and the Company (the “Employment Commencement
Date”), and in any event is anticipated to be no later than August 8, 2006.
Position
You will serve in an executive capacity and shall perform the duties of CEO as commonly associated
with this position, as specified in the Bylaws of the Company, and as required by the Board of
Directors of the Company (the “Board”). You will report to the Board. As a current director, you
will continue to serve on the Board. However, if your employment with the Company terminates, you
agree to promptly tender your resignation from the Board if you are requested to do so by a
majority of the Board in writing.
You will work at the Company’s corporate headquarters which are currently located in Hayward,
California, subject to necessary business travel. During your employment with the Company, you
will devote your best efforts and substantially all of your business time and attention (except for
vacation periods and reasonable periods of illness or other incapacity permitted by the Company’s
general employment policies) to the business of the Company. Your employment relationship with the
Company shall also be governed by, and you will be required to comply with, the general employment
policies and practices of the Company (except that if the terms of this letter differ from or are
in conflict with the Company’s general employment policies or practices, this letter will control),
including but not limited to the policies set forth in the Company’s Employee Handbook, as may be
in effect from time to time. The Company reserves the right to change the Company’s general
employment policies and procedures, from time to time in its discretion.
Compensation
Your initial annual base salary will be $320,000, less standard payroll deductions and
withholdings. You will be paid in bi-weekly installments on the Company’s standard paydays in
accordance with Company practice and policy. Although the Board will consider increasing your
annual base salary after you have been employed for at least one year, it is not required to
increase your base salary.
The Company will also pay you a special “sign on” bonus of $100,000, which will be paid to you on
your first day of employment with the Company, less standard deductions and withholdings.
In addition, you will be eligible to earn an annual performance bonus of up to $160,000, consisting
of two separate components, as follows:
Bonus Based on Corporate Performance Goals
: You will be eligible to earn an annual bonus
(up to $80,000 or 25% of base pay, whichever is greater), based on corporate performance goals, as
determined by the Board and CEO annually. For purposes of calculating this bonus, performance
levels will be determined as having been either “minimum,” “expected,” or “maximum” levels
(computed as 8.3%, 16.7% or 25% of base salary, respectively). As defined herein, and referred to
in the Company’s Change of Control Agreement and Executive Officer Severance Plan, CEO’s “target
bonus” based on Corporate Performance Goals is 16.7% of CEO’s base salary.
Bonus Based on Personal Performance Goals
: You will also be eligible to earn an annual
bonus (up to $80,000 or 25% of base pay, whichever is greater), based upon your meeting personal
performance goals that the Board and CEO agree to in writing on an annual basis (including, by way
of example only, certain financial, business and management goals). For purposes of calculating
this bonus, performance levels will be determined as having been either “minimum,” “expected,” or
“maximum” levels (computed as 8.3%, 16.7% or 25% of base salary, respectively). As defined herein,
and referred to in the Company’s Change of Control Agreement and Executive Officer Severance Plan,
CEO’s “target bonus” based on Corporate Performance Goals is 16.7% of CEO’s base salary.
For the period from the Employment Commencement Date to December 31, 2006, you will be eligible to
earn a prorated bonus in accordance with the foregoing, but you will not otherwise be provided any
partial or prorated bonuses. The Board will determine whether you have earned a bonus and the
amount of any such bonus. You must be an employee in good standing on the bonus calculation date
to earn and be eligible to receive a bonus. Your compensation terms (including base salary and
bonus eligibility) are subject to review and change in the discretion of the Board (or any
authorized committee thereof).
Equity Incentives
Subject to Board approval, the Company will issue you an option (the “Option”) to purchase 500,000
shares of the Company’s common stock under the Company’s 2005 Equity Incentive Plan (the “Plan”) at
an exercise price equal to the fair market value of the stock as of the date of grant as determined
by the Board. The Option will be subject to a four-year vesting period subject to your continued
service to the Company (as defined in the Plan), with twenty-five percent (25%) of the shares
subject to the Option vesting on the one year anniversary of your vesting commencement date, and
one-forty-eighth (1/48
th
) of the shares subject to the Option vesting for each month of
your continued service thereafter. The Option will be governed in full by the terms and conditions
of the Plan and your individual Option agreement.
In addition, you will be eligible to earn a one-time stock bonus of 100,000 shares under the Plan
based on the achievement of performance objectives to be determined by the Board that will be
designed, to provide you with a reasonable opportunity to earn this bonus by the end of 2008.
However, the value of this stock bonus shall be limited to $1,000,000 and, therefore, if the per
share value of the Company’s common stock exceeds $10.00 when the bonus is earned (as
determined by the Board at that time), the number of shares subject to your stock bonus shall be
reduced accordingly.
Employee Benefits
You will be eligible to participate in the Company’s standard employee benefit plans in accordance
with the terms and conditions of the plans and applicable policies which may be in effect from time
to time, and provided by the Company to its executive employees generally
,
including the Executive
Officer Severance Benefit Plan and a Change of Control Agreement, as well as group medical and
dental insurance coverage, disability insurance coverage, life insurance coverage, 401(k) Plan,
paid vacation, and Company holidays. You will receive additional information concerning the
Company’s benefit plans after you commence employment. The Company may modify its benefits
programs from time to time in its discretion.
Relocation Assistance
In order to assist you and your spouse with the move from Australia to the Bay Area, we will
reimburse you for reasonably documented moving and temporary housing expenses up to $75,000. Any
taxes that may be due in respect of such reimbursement will be your responsibility.
Proprietary Information and Inventions Agreement
As a condition of employment, you are required to sign and abide by the Company’s Proprietary
Information and Inventions Agreement (the “Proprietary Information Agreement”), a form of which is
attached hereto as
Attachment A
.
Indemnity Agreement
The Company will enter into its standard form of Indemnity Agreement with you, a copy of which is
attached as
Attachment B
.
Protection Of Third Party Information
In your work for the Company, you will be expected not to make unauthorized use or disclosure of
any confidential information or materials, including trade secrets, of any former employer or other
third party to whom you have an obligation of confidentiality. Rather, you will be expected to use
only that information generally known and used by persons with training and experience comparable
to your own, which is common knowledge in the industry or otherwise legally in the public domain,
or which is otherwise provided or developed by the Company. By accepting employment with the
Company, you are representing to us that you will be able to perform your duties within the
guidelines described in this paragraph. You represent further that you have disclosed to the
Company any contract you have signed that may restrict your activities on behalf of the Company in
any manner.
Outside Activities
Throughout your employment with the Company, you may engage in civic and not-for-profit activities
so long as such activities do not interfere with the performance of your duties hereunder or
present a conflict of interest with the Company. Subject to the restrictions set forth herein and
with the prior written consent of the Board, you may serve as a director of other corporations and
may devote a reasonable amount of your time to other types of business or public activities not
expressly mentioned in this paragraph. The Board may rescind consent, in its sole discretion, to
your service as a director of all other corporations or participation in other business or public
activities, if it determines that such activities compromise or threaten to compromise the
Company’s business interests or conflict with your duties to the Company.
During your employment by the Company, except on behalf of the Company, you will not directly or
indirectly serve as an officer, director, stockholder, employee, partner, proprietor, investor,
joint venturer, associate, representative or consultant of any other person, corporation, firm,
partnership or other entity whatsoever known by you to compete with the Company (or is planning or
preparing to compete with the Company), anywhere in the world, in any line of business engaged in
(or planned to be engaged in) by the Company; provided, however, that you may purchase or otherwise
acquire up to (but not more than) one percent (1%) of any class of securities of any enterprise
(but without participating in the activities of such enterprise) if such securities are listed on
any national or regional securities exchange.
At-Will Employment Relationship
Your employment relationship with the Company is at-will. Accordingly, subject to the Company’s
obligations, if any, under the Executive Officer Severance Plan or your Change of Control
Agreement, both you and the Company may terminate the employment relationship at any time, with or
without cause, and with or without advance notice.
Miscellaneous
This letter, including the attached Proprietary Information Agreement, the Indemnity Agreement and
your Change of Control Agreement, constitutes the complete, final and exclusive embodiment of the
entire agreement between you and the Company with regard to the subject matter hereof. It is
entered into without reliance on any promise or representation, written or oral, other than those
expressly contained herein, and it supersedes any other agreements, promises, warranties or
representations concerning its subject matter. Changes in your employment terms, other than those
changes expressly reserved herein to the Company’s or the Board’s discretion, can only be pursuant
to a written agreement approved by the Board and signed by you and a duly-authorized representative
of the Board. This letter agreement will bind the heirs, personal representatives, successors and
assigns of both you and the Company, and inure to the benefit of both you and the Company, their
heirs, successors and assigns. If any provision of this letter agreement is determined to be
invalid or unenforceable, in whole or in part, this determination shall not affect any other
provision of this letter agreement and the provision in question shall be modified so as to be
rendered enforceable in a manner consistent with the intent of the parties insofar as possible
under applicable law. This letter agreement shall be construed and enforced in accordance with the
laws of the State of California without regard
to conflicts of law principles. Any waiver of a breach of this letter agreement, or rights
hereunder, shall be in writing and shall not be deemed to be a waiver of any successive breach or
rights hereunder. This letter agreement may be executed in counterparts which shall be deemed to
be part of one original, and facsimile signatures shall be equivalent to original signatures.
As required by law, this offer is subject to satisfactory proof of your identity and right to work
in the United States.
If the terms of this offer are agreeable to you, please sign and return this letter by July 14,
2006 to indicate your acceptance of employment with the Company on the terms set forth herein.
Sincerely,
Aradigm Corporation
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/s/ Virgil Thompson
Virgil Thompson
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Board of Directors
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Understood, Accepted and Agreed:
Attachment A
ARADIGM CORPORATION
EMPLOYEE PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
In consideration of my employment or continued employment by
Aradigm Corporation
(the
"
Company
”), and the compensation now and hereafter paid to me, I hereby agree as follows:
1. NONDISCLOSURE.
1.1 Recognition of Company’s Rights; Nondisclosure.
At all times during my employment and
thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish
any of the Company’s Proprietary Information (defined below), except as such disclosure, use or
publication may be required in connection with my work for the Company, or unless an officer of the
Company expressly authorizes such in writing. I will obtain Company’s written approval before
publishing or submitting for publication any material (written, verbal, or otherwise) that relates
to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the
Company any rights I may have or acquire in such Proprietary Information and recognize that all
Proprietary Information shall be the sole property of the Company and its assigns.
1.2 Proprietary Information.
The term “
Proprietary Information
” shall mean any and all
confidential and/or proprietary knowledge, data or information of the Company. By way of
illustration but not limitation, “
Proprietary Information
” includes (a) information relating to
products, know-how, drawings, clinical data, test data, formulas, methods, samples, developmental
or experimental work, (hereinafter collectively referred to as “
Inventions
”); and (b) information
regarding plans for research, development, manufacturing, new products, marketing and selling,
business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers
and customers; and (c) information regarding the skills and compensation of other employees of the
Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use
information which is generally known in the trade or industry, which is not gained as result of a
breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent
and in whichever way I wish.
1.3 Third Party Information.
I understand, in addition, that the Company has received and in
the future will receive from third parties confidential or proprietary information (“
Third Party
Information
”) subject to a duty on the Company’s part to maintain the confidentiality of such
information and to use it only for certain limited purposes. During the term of my employment and
thereafter, I will hold Third Party Information in the strictest confidence and will not disclose
to anyone (other than Company personnel who need to know such information in connection with their
work for the Company) or use, except in connection with my work for the Company, Third Party
Information unless expressly authorized by an officer of the Company in writing.
1.4 No Improper Use of Information of Prior Employers and Others.
During my employment by the
Company I will not improperly use or disclose any confidential information or trade secrets, if
any, of any former employer or any other person to whom I have an obligation of confidentiality,
and I will not bring onto the premises of the Company any unpublished documents or any property
belonging to any former employer or any other person to whom I have an obligation of
confidentiality unless consented to in writing by that former employer or person. I will use in
the performance of my duties only information which is generally known and used by persons with
training and experience comparable to my own, which is common knowledge in the industry or
otherwise legally in the public domain, or which is otherwise provided or developed by the Company.
2. ASSIGNMENT OF INVENTIONS.
2.1 Proprietary Rights.
The term “
Proprietary Rights
” shall mean all trade secret, patent,
copyright, mask work and other intellectual property rights throughout the world.
2.2 Prior Inventions.
Inventions, if any, patented or unpatented, which I made prior to the
commencement of my employment with the Company are excluded from the scope of this Agreement. To
preclude any possible uncertainty, I have set forth on
Exhibit B
(Previous Inventions) attached
hereto a complete list of all Inventions that I have, alone or jointly with others, conceived,
developed or reduced to practice or caused to be conceived, developed or reduced to practice prior
to the commencement of my employment with the Company, that I consider to be my property or the
property of third parties and that I wish to have excluded from the scope of this Agreement
(collectively referred to as “
Prior Inventions
”). If disclosure of any such Prior Invention would
cause me to violate any prior confidentiality agreement, I understand that I am not to list such
Prior Inventions in
Exhibit B
but am only to disclose a cursory name for each such invention, a
listing of the party(ies) to whom it belongs and the fact that full disclosure as to such
inventions has not been made for that reason. A space is provided on
Exhibit B
for such purpose.
If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the
course of my employment with the Company, I incorporate a Prior Invention into a Company product,
process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free,
irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of
sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the
foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in
any Company Inventions without the Company’s prior written consent.
2.3 Assignment of Inventions.
Subject to Sections 2.4, and 2.6, I hereby assign and agree to
assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice
or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest
in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not
patentable or registrable under copyright or similar statutes, made or conceived or reduced to
practice or learned by me, either alone or jointly with others, during the period of my employment
with the Company. Inventions assigned to the Company, or to a third party as directed by the
Company pursuant to this Section 2, are hereinafter referred to as “
Company Inventions
.”
2.4 Nonassignable Inventions.
This Agreement does not apply to an Invention which qualifies
fully as a nonassignable Invention under Section 2870 of the California Labor Code (hereinafter
"
Section 2870
”). I have reviewed the notification on
Exhibit A
(Limited Exclusion Notification)
and agree that my signature acknowledges receipt of the notification.
2.5 Obligation to Keep Company Informed.
During the period of my employment and for six (6)
months after termination of my employment with the Company, I will promptly disclose to the Company
fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone
or jointly with others. In addition, I will promptly disclose to the Company all patent
applications filed by me or on my behalf within a year after termination of employment. At the
time of each such disclosure, I will advise the Company in writing of any Inventions that I believe
fully qualify for protection under Section 2870; and I will at that time provide to the Company in
writing all evidence necessary to substantiate that belief. The Company will keep in confidence
and will not use for any purpose or disclose to third parties without my consent any confidential
information disclosed in writing to the Company pursuant to this Agreement relating to Inventions
that qualify fully for protection under the provisions of Section 2870. I will preserve the
confidentiality of any Invention that does not fully qualify for protection under Section 2870.
2.6 Government or Third Party.
I also agree to assign all my right, title and interest in and
to any particular Invention to a third party, including without limitation the United States, as
directed by the Company.
2.7 Works for Hire.
I acknowledge that all original works of authorship which are made by me
(solely or jointly with others) within the scope of my employment and which are protectable by
copyright are “works made for hire,” pursuant to United States Copyright Act (17 U.S.C., Section
101).
2.8 Enforcement of Proprietary Rights.
I will assist the Company in every proper way to
obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to
Company Inventions in any and all countries. To that end I will execute, verify and deliver such
documents and perform such other acts (including appearances as a witness) as the Company may
reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and
enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify
and deliver assignments of such Proprietary Rights to the Company or its designee. My obligation
to assist the Company with respect to Proprietary
Rights relating to such Company Inventions in any
and all countries shall continue beyond the termination of my employment, but the Company shall
compensate me at a reasonable rate after my termination for the time actually spent by me at the
Company’s request on such assistance.
In the event the Company is unable for any reason, after reasonable effort, to secure my
signature on any document needed in connection with the actions specified in the preceding
paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers
and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act
for and in my behalf to execute, verify and file any such documents and to do all other lawfully
permitted acts to further the purposes of the preceding paragraph with the same legal force and
effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of
any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights
assigned hereunder to the Company.
3. RECORDS.
I agree to keep and maintain adequate and current records (in the form of notes,
sketches, drawings and in any other form that may be required by the Company) of all Proprietary
Information developed by me and all Inventions made by me during the period of my employment at the
Company, which records shall be available to and remain the sole property of the Company at all
times.
4. ADDITIONAL ACTIVITIES.
I agree that during the period of my employment by the Company I will
not, without the Company’s express written consent, engage in any employment or business activity
which is competitive with, or would otherwise conflict with, my employment by the Company. I agree
further that for the period of my employment by the Company and for one (l) year after the date of
termination of my employment by the Company I will not induce any employee of the Company to leave
the employ of the Company.
5. NO CONFLICTING OBLIGATION.
I represent that my performance of all the terms of this Agreement
and as an employee of the Company does not and will not breach any agreement to keep in confidence
information acquired by me in confidence or in trust prior to my employment by the Company. I have
not entered into, and I agree I will not enter into, any agreement either written or oral in
conflict herewith.
6. RETURN OF COMPANY DOCUMENTS.
When I leave the employ of the Company, I will deliver to the
Company any and all drawings, notes, memoranda, specifications, devices, formulas, and documents,
together with all copies thereof, and any other material containing or disclosing any Company
Inventions, Third Party Information or Proprietary Information of the Company. I further agree
that any property situated on the Company’s premises and owned by the Company, including disks and
other storage media, filing cabinets or other work areas, is subject to inspection by Company
personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company
in completing and signing the Company’s termination statement.
7. LEGAL AND EQUITABLE REMEDIES.
Because my services are personal and unique and because I may
have access to and become acquainted with the Proprietary Information of the Company, the Company
shall have the right to enforce this Agreement and any of its provisions by injunction, specific
performance or other equitable relief, without bond and without prejudice to any other rights and
remedies that the Company may have for a breach of this Agreement.
8. NOTICES.
Any notices required or permitted hereunder shall be given to the appropriate party at
the address specified below or at such other address as the party shall specify in writing. Such
notice shall be deemed given upon personal delivery to the appropriate address or if sent by
certified or registered mail, three (3) days after the date of mailing.
9. NOTIFICATION OF NEW EMPLOYER.
In the event that I leave the employ of the Company, I hereby
consent to the notification of my new employer of my rights and obligations under this Agreement.
10. GENERAL PROVISIONS.
10.1 Governing Law; Consent to Personal Jurisdiction.
This Agreement will be governed by and
construed according to the laws of the State of California, as such laws are applied to agreements
entered into and to be performed entirely within California between California residents. I hereby
expressly consent to the personal jurisdiction of the state and federal courts located in Alameda
County, California for any lawsuit filed there against me by Company arising from or related to
this Agreement.
10.2 Severability.
In case any one or more of the provisions contained in this Agreement
shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement,
and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein. If moreover, any one or more of the provisions contained in this
Agreement shall for any reason be held to be excessively broad as to duration, geographical scope,
activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to
the extent compatible with the applicable law as it shall then appear.
10.3 Successors and Assigns.
This Agreement will be binding upon my heirs, executors,
administrators and other legal representatives and will be for the benefit of the Company, its
successors, and its assigns.
10.4 Survival.
The provisions of this Agreement shall survive the termination of my
employment and the assignment of this Agreement by the Company to any successor in interest or
other assignee.
10.5 Employment.
I agree and understand that nothing in this Agreement shall confer any right
with respect to continuation of employment by the Company, nor shall it interfere in any way with
my right or the Company’s right to terminate my employment at any time, with or without cause.
10.6 Waiver.
No waiver by the Company of any breach of this Agreement shall be a waiver of
any preceding or succeeding breach. No waiver by the Company of any right under this Agreement
shall be construed as a waiver of any other right. The Company shall not be required to give
notice to enforce strict adherence to all terms of this Agreement.
10.7 Entire Agreement.
The obligations pursuant to Sections 1 and 2 of this Agreement shall
apply to any time during which I was previously employed, or am in the future employed, by the
Company as a consultant if no other agreement governs nondisclosure and assignment of inventions
during such period. This Agreement is the final, complete and exclusive agreement of the parties
with respect to the subject matter hereof and supersedes and merges all prior discussions between
us. No modification of or amendment to this Agreement, nor any waiver of any rights under this
Agreement, will be effective unless in writing and signed by the party to be charged. Any
subsequent change or changes in my duties, salary or compensation will not affect the validity or
scope of this Agreement.
This Agreement shall be effective as of the first day of my employment with the Company,
namely:
,
2006
.
I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND AND AGREE TO ITS TERMS. I HAVE ALSO
COMPLETELY FILLED OUT EXHIBIT B TO THIS AGREEMENT.
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ACCEPTED AND AGREED TO:
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ACCEPTED AND AGREED TO:
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Dated:
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ARADIGM CORPORATION
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3929 Point Eden Way
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Hayward, CA 94545
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By:
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(Aradigm Officer)
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Title:
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EXHIBIT A
LIMITED EXCLUSION NOTIFICATION
THIS IS TO NOTIFY
you in accordance with Section 2872 of the California Labor Code that
the foregoing Agreement between you and the Company does not require you to assign or offer to
assign to the Company any invention that you developed entirely on your own time without using the
Company’s equipment, supplies, facilities or trade secret information except for those inventions
that either:
(1) Relate at the time of conception or reduction to practice of the invention to the
Company’s business, or actual or demonstrably anticipated research or development of the Company;
(2) Result from any work performed by you for the Company.
To the extent a provision in the foregoing Agreement purports to require you to assign an
invention otherwise excluded from the preceding paragraph, the provision is against the public
policy of this state and is unenforceable.
This limited exclusion does not apply to any patent or invention covered by a contract between
the Company and the United States or any of its agencies requiring full title to such patent or
invention to be in the United States.
I ACKNOWLEDGE RECEIPT
of a copy of this notification.
WITNESSED BY:
EXHIBIT B
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TO:
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ARADIGM CORPORATION
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FROM:
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DATE:
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SUBJECT:
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Previous Inventions
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1.
Except as listed in Section 2 below, the following is a complete list of all inventions or
improvements relevant to the subject matter of my employment by
Aradigm Corporation
(the “
Company
”)
that have been made or conceived or first reduced to practice by me alone or jointly with others
prior to my engagement by the Company:
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No inventions or improvements.
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See below:
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Additional sheets attached.
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2.
Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1
above with respect to inventions or improvements generally listed below, the proprietary rights and
duty of confidentiality with respect to which I owe to the following party(ies):
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Invention or Improvement
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Party(ies)
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Relationship
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1.
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2.
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3.
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Additional sheets attached.
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1
Attachment B
ARADIGM CORPORATION
INDEMNITY AGREEMENT
THIS
AGREEMENT is made and entered into as of the ___ day of
___ 20___ by and between
Aradigm Corporation, a California corporation (the “Corporation”), and
(the
“Indemnified Person”).
RECITALS
WHEREAS, the Indemnified Person performs a valuable service to the Corporation in such
person’s capacity as
of the Corporation;
WHEREAS, the shareholders of the Corporation have adopted provisions in the Articles of
Incorporation (the “Articles”) and the bylaws (the “Bylaws”) providing for the indemnification of
the directors, officers, employees and other agents of the Corporation, including persons serving
at the request of the Corporation in such capacities with other corporations or enterprises, as
authorized by the California General Corporation Law (the “Code”);
WHEREAS, the Articles, the Bylaws and the Code, by their nonexclusive nature, permit contracts
between the Corporation and its directors, officers, employees and other agents with respect to
indemnification of such persons; and
WHEREAS, in order to induce the Indemnified Person to continue to serve as
of the
Corporation, the Corporation has determined and agreed to enter into this Agreement with the
Indemnified Person;
NOW, THEREFORE, in consideration of the Indemnified Person’s continued service as
after the date hereof, the parties hereto agree as follows:
AGREEMENT
1.
Services to the Corporation
. The Indemnified Person will serve, at the will of
the Corporation or under separate contract, if any such contract exists, as
of the
Corporation or as a director, officer or other fiduciary of an affiliate of the Corporation
(including any employee benefit plan of the Corporation) faithfully and to the best of the
Indemnified Person’s ability so long as the Indemnified Person is duly elected and qualified in
accordance with the provisions of the Bylaws or other applicable charter documents of the
Corporation or such affiliate; provided, however, that the Indemnified Person may at any time and
for any reason resign from such position (subject to any contractual obligation that the
Indemnified Person may have assumed apart from this Agreement) and that the Corporation or any
affiliate shall have no obligation under this Agreement to continue the Indemnified Person in any
such position.
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2.
Indemnity
. The Corporation hereby agrees to hold harmless and indemnify the
Indemnified Person to the fullest extent authorized or permitted by the provisions of the Bylaws
and the Code, as the same may be amended from time to time, (but only to the extent that any such
amendment permits the Corporation to provide broader indemnification rights than the Bylaws or the
Code permitted prior to adoption of any such amendment).
3.
Additional Indemnity
. Subject to a determination pursuant to Section 9 hereof,
the Corporation hereby agrees to hold harmless and indemnify the Indemnified Person:
(a) against any and all expenses (including attorneys’ fees), witness fees, damages,
judgments, fines and amounts paid in settlement and any other amounts that the Indemnified Person
becomes legally obligated to pay because of any claim or claims made against or by such person in
connection with any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, arbitral, administrative or investigative (including an action by or in the right of the
Corporation) to which the Indemnified Person is, was or at any time becomes a party, or is
threatened to be made a party, by reason of the fact that the Indemnified Person is, was or at any
time becomes a director, officer, employee or other agent of Corporation, or is or was serving or
at any time serves at the request of the Corporation as a director, officer, employee or other
agent of another corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise; and
(b) otherwise to the fullest extent not prohibited by the Articles, the Bylaws or the Code.
4.
Limitations on Indemnity
. To the extent that any of the matters set forth in
subsections (a) through (l) of this Section 4 are successfully established by the Corporation as
defenses in accordance with the provisions of Section 9 hereof, no indemnity pursuant to Sections 2
or 3 hereof will be payable by the Corporation:
(a) on account of any claim against the Indemnified Person for an accounting of profits made
from the purchase or sale by the Indemnified Person of securities of the Corporation pursuant to
the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provisions of any federal, state or local statutory law;
(b) on account of the Indemnified Person’s conduct from which the Indemnified Person derived
an improper personal benefit;
(c) on account of the Indemnified Person’s conduct that he or she believed to be contrary to
the best interests of the Corporation or its shareholders or that involved the absence of good
faith on the part of the Indemnified Person;
(d) on account of the Indemnified Person’s conduct that constituted intentional misconduct or
a knowing and culpable violation of law;
(e) on account of the Indemnified Person’s conduct that showed a reckless disregard for the
Indemnified Person’s duty to the Corporation or its shareholders in circumstances in which the
Indemnified Person was aware, or should have been aware, in the ordinary course of performing his
or her duties, of a risk of serious injury to the Corporation or its shareholders;
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(f) on account of the Indemnified Person’s conduct that constituted an unexcused pattern of
inattention that amounted to an abdication of the Indemnified Person’s duty to the Corporation or
its shareholders;
(g) on account of the Indemnified Person’s conduct which constituted a violation of the
Indemnified Person’s duties under Section 310 (interested party transactions) or Section 316
(distributions, loans or guarantees) of the Code;
(h) for which payment is actually made to the Indemnified Person under a valid and
collectible insurance policy or under a valid and enforceable indemnity clause, bylaw or agreement,
except in respect of any excess beyond payment under such insurance, clause, bylaw or agreement;
(i) if indemnification is not lawful (and, in this respect, both the Corporation and the
Indemnified Person have been advised that the Securities and Exchange Commission believes that
indemnification for liabilities arising under the federal securities laws is against public policy
and is, therefore, unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication);
(j) in connection with any proceeding (or part thereof) initiated by the Indemnified Person,
or any proceeding by the Indemnified Person against the Corporation or its directors, officers,
employees or other agents, unless (i) such indemnification is expressly required to be made by law,
(ii) the proceeding was authorized by the Board of Directors of the Corporation, (iii) such
indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers
vested in the Corporation under the Code, or (iv) the proceeding is initiated pursuant to Section 9
hereof;
(k) with respect to any action by or in the right of the Corporation:
(i) if the Indemnified Person is adjudged to be liable to the Corporation in performance of
the Indemnified Person’s duty to the Corporation and its shareholders, unless and only to the
extent that the court in which such action is or was pending shall determine upon application that,
in view of all of the circumstances of the case, the Indemnified Person is fairly and reasonably
entitled to indemnity for expenses, and then only to the extent that the court shall determine;
(ii) for expenses incurred in defending a pending action which is settled or otherwise
disposed of without court approval; or
(iii) for amounts paid in settling or otherwise disposing of a pending action without court
approval; and
(l) to the extent, and only to the extent, that indemnification with respect to such action
(i) would be inconsistent with the Articles of Incorporation or Bylaws, or a resolution of the
shareholders or agreement of the Corporation prohibiting or otherwise limiting such indemnification
and in effect at the time of the accrual of the action or (ii) would be inconsistent with any
condition expressly imposed by a court in approving a settlement, unless the Indemnified Person has
been successful on the merits or unless the indemnification has been
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approved by the shareholders of the corporation in accordance with Section 153 of the Code (with
the shares of the Indemnified Person not being entitled to vote thereon).
5.
Continuation of Indemnity
. All agreements and obligations of the Corporation
contained herein shall continue during the period the Indemnified Person is a director, officer,
employee or other agent of the Corporation (or is serving or has served at the request of the
Corporation as a director, officer, employee or other agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so
long as the Indemnified Person shall be subject to any possible claim or threatened, pending or
completed action, suit or proceeding, whether civil, criminal, arbitral, administrative or
investigative, by reason of the fact that the Indemnified Person had served in the capacity
referred to herein.
6.
Partial Indemnification
. The Indemnified Person shall be entitled under this
Agreement to indemnification by the Corporation for a portion of the expenses (including attorneys’
fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts
that the Indemnified Person becomes legally obligated to pay in connection with any action, suit or
proceeding referred to in Section 3 hereof even if not entitled hereunder to indemnification for
the total amount thereof, and the Corporation shall indemnify the Indemnified Person for the
portion thereof to which the Indemnified Person is entitled.
7.
Notification and Defense of Claim
. Not later than thirty (30) days after receipt
by the Indemnified Person of notice of the commencement of any action, suit or proceeding, the
Indemnified Person will, if a claim in respect thereof is to be made against the Corporation under
this Agreement, notify the Corporation of the commencement thereof; but the omission so to notify
the Corporation will not relieve it from any liability which it may have to the Indemnified Person
otherwise than under this Agreement. With respect to any such action, suit or proceeding as to
which Agent notifies the Corporation of the commencement thereof:
(a) the Corporation will be entitled to participate therein at its own expense;
(b) except as otherwise provided below, the Corporation may, at its option and jointly with
any other indemnifying party similarly notified and electing to assume such defense, assume the
defense thereof, with counsel reasonably satisfactory to the Indemnified Person. After notice from
the Corporation to the Indemnified Person of its election to assume the defense thereof, the
Corporation will not be liable to the Indemnified Person under this Agreement for any legal or
other expenses subsequently incurred by the Indemnified Person in connection with the defense
thereof except for reasonable costs of investigation or otherwise as provided below. The
Indemnified Person shall have the right to employ separate counsel in such action, suit or
proceeding but the fees and expenses of such counsel incurred after notice from the Corporation of
its assumption of the defense thereof shall be at the expense of the Indemnified Person unless (i)
the employment of counsel by the Indemnified Person has been authorized by the Corporation, (ii)
the Indemnified Person shall have reasonably concluded that there may be a conflict of interest
between the Corporation and the Indemnified Person in the conduct of the defense of such action or
(iii) the Corporation shall not in fact have employed counsel to assume the defense of such action,
in each of which cases the fees and expenses of the Indemnified Person’s separate counsel shall be
at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of
any action, suit or proceeding brought by or on behalf of the
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Corporation or as to which the Indemnified Person shall have made the conclusion provided for in
clause (ii) above; and
(c) the Corporation shall not be liable to indemnify the Indemnified Person under this
Agreement for any amounts paid in settlement of any action or claim effected without its written
consent, which shall not be unreasonably withheld. The Corporation shall be permitted to settle
any action except that it shall not settle any action or claim in any manner which would impose any
penalty or limitation on the Indemnified Person without the Indemnified Person’s written consent,
which may be given or withheld in the Indemnified Person’s sole discretion.
8.
Expenses
. The Corporation shall advance, prior to the final disposition of any
proceeding, within 20 days after request therefor, all expenses incurred by the Indemnified Person
in connection with such proceeding upon receipt of an undertaking by or on behalf of the
Indemnified Person to repay said amounts if it shall be determined ultimately that the Indemnified
Person is not entitled to be indemnified under the provisions of this Agreement, the Bylaws, the
Articles, the Code or otherwise. Notwithstanding the foregoing, unless otherwise determined
pursuant to Section 9, no advance shall be made by the corporation if within 20 days after a
request for such advance a reasonable determination is made by the Board of Directors by a majority
vote of a quorum consisting of directors who are not parties to the proceeding (or, if no such
quorum exists, by independent legal counsel in a written opinion) that the facts known to the
decision making party at the time such determination is made clearly and convincingly demonstrate
that such person acted in bad faith or in a manner that such person did not believe to be in the
best interests of the Corporation and its shareholders.
9.
Determination by the Corporation
. To the extent required by the Code, promptly
after receipt of a request for indemnification hereunder made by the Indemnified Person (and in any
event within 90 days), the Corporation shall make a reasonable, good faith determination as to
whether indemnification of the Indemnified Person is proper under the Code by means of:
(a) A majority vote of a quorum consisting of directors who are not parties to such
proceeding;
(b) If such quorum is not obtainable, by independent legal counsel in a written opinion; or
(c) Approval or ratification by the affirmative vote of a majority of the shares of the
Corporation represented and voting at a duly held meeting in which a quorum is present (which
shares voting affirmatively also constitute at least a majority of the required quorum) or by
written consent of a majority of the outstanding shares entitled to vote, where in each case the
shares owned by the person to be indemnified shall not be considered entitled to vote thereon.
Such determination shall be reasonably made in good faith by the decision making party based
upon the facts known to the decision making party at the time such determination is made.
10.
Enforcement
. Any right to indemnification or advances granted by this Agreement
to the Indemnified Person shall be enforceable by or on behalf of the Indemnified Person in the
forum in which the proceeding is or was pending, or, if such forum is not available or a
determination is made that such forum is not convenient, in any court of competent jurisdiction if
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(i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no
disposition of such claim is made within ninety (90) days of request therefor. The Indemnified
Person, in such enforcement action, if successful in whole or in part, shall be entitled to be paid
also the expense of prosecuting his or her claim. The Corporation shall be entitled to raise by
pleading as an affirmative defense to any action for which a claim for indemnification is made
under Sections 2 or 3 hereof that the Indemnified Person is not entitled to indemnification because
of the limitations set forth in Section 4 hereof. Neither the failure of the Corporation
(including its Board of Directors, its shareholders or independent legal counsel) to have made a
determination prior to the commencement of such enforcement action that indemnification of the
Indemnified Person is proper in the circumstances, nor an actual determination by the Corporation
(including its Board of Directors, its shareholders or independent legal counsel) that such
indemnification is improper shall be a defense to the action or create a presumption that the
Indemnified Person is not entitled to indemnification under this Agreement or otherwise.
11.
Subrogation
. In the event of payment under this Agreement, the Corporation shall
be subrogated to the extent of such payment to all of the rights of recovery of the Indemnified
Person, who shall execute all documents required and shall do all acts that may be necessary to
secure such rights and to enable the Corporation effectively to bring suit to enforce such rights.
12.
Nonexclusivity of Rights
. The rights conferred on the Indemnified Person by this
Agreement shall not be exclusive of any other right which the Indemnified Person may have or
hereafter acquire under any statute, provision of the Articles or Bylaws, agreement, vote of
shareholders or directors, or otherwise, both as to action in such person’s official capacity and
as to action in another capacity while holding office.
13.
Survival of Rights
.
(a) The rights conferred on the Indemnified Person by this Agreement shall continue after the
Indemnified Person has ceased to be a director, officer, employee or other agent of the Corporation
or to serve at the request of the Corporation as a director, officer, employee or other agent of
another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise
and shall inure to the benefit of the Indemnified Person’s heirs, executors and administrators.
(b) The Corporation shall require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business or assets of the
Corporation, expressly to assume and agree to perform this Agreement in the same manner and to the
same extent that the Corporation would be required to perform if no such succession had taken
place.
14.
Separability
. Each of the provisions of this Agreement is a separate and
distinct agreement and independent of the others, so that if any provision hereof shall be held to
be invalid for any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof. Furthermore, if this Agreement shall be invalidated
in its entirety on any ground, then the Corporation shall nevertheless indemnify the Indemnified
Person to the fullest extent provided by the Articles, the Bylaws, the Code or any other applicable
law.
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15.
Governing Law
. This Agreement shall be interpreted and enforced in accordance
with the laws of the State of California, without giving effect to principles of conflict of laws.
16.
Amendment and Termination
. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless in writing signed by both parties hereto.
17.
Identical Counterparts
. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original but all of which
together shall constitute but one and the same Agreement. Only one such counterpart need be
produced to evidence the existence of this Agreement.
18.
Headings
. The headings of the sections of this Agreement are inserted for
convenience only and shall not be deemed to constitute part of this Agreement or to affect the
construction hereof.
19.
Notices
. All notices, requests, demands and other communications hereunder shall
be in writing and shall be deemed to have been duly given (i) upon delivery if delivered by hand to
the party to whom such communication was directed or (ii) upon the third business day after the
date on which such communication was mailed if mailed by certified or registered mail with postage
prepaid:
(a) If to the Indemnified Person, at the address indicated below such person’s
signature hereunder.
(b) If to the Corporation, to
Aradigm Corporation
3929 Point Eden Way
Hayward, CA 94545
or to such other address as may have been furnished to the Indemnified Person by the Corporation.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and
year first above written.
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CORPORATION:
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ARADIGM CORPORATION
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By:
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Title:
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INDEMNIFIED PERSON:
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Name:
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Address:
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8
