ARADIGM CORP (Form: 10-K, Received: 03/30/2016 14:33:15)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to ,

Commission File Number: 001-36480

Aradigm Corporation

(Exact Name of Registrant as Specified in Its Charter)

California

94-3133088

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

3929 Point Eden Way, Hayward, CA 94545

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code:

(510) 265-9000

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, no par value		The NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock on June 30, 2015 was: $38,322,138.

The number of shares of the registrant’s common stock outstanding as of March 7, 2016 was: 14,761,351.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders to be held on June 9, 2016 are incorporated by reference into Part III of this Annual Report on Form 10-K. Except as expressly incorporated by reference, the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders shall not be deemed to be a part of this Annual Report on Form 10-K.

TABLE OF CONTENTS


		Page
Cautionary Note Regarding Forward-Looking Statements			3

PART I

Item 1.	Business		4
Item 1A.	Risk Factors		20
Item 1B.	Unresolved Staff Comments		31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 3.	Defaults Upon Senior Securities		31
Item 4.	Mine Safety Disclosures		31

PART II

Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		32
Item 6.	Selected Financial Data		32
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		41
Item 8.	Financial Statements and Supplementary Data		41
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		66
Item 9A.	Controls and Procedures		66
Item 9B.	Other Information		67

PART III

Item 10.	Directors, Executive Officers and Corporate Governance		68
Item 11.	Executive Compensation		68
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		68
Item 13.	Certain Relationships and Related Transactions and Director Independence		68
Item 14.	Principal Accounting Fees and Services		68

PART IV

Item 15.	Exhibits and Financial Statement Schedules		69
SIGNATURES			73

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements that are based on the current beliefs of management, as well as current assumptions made by, and information currently available to, management. All statements contained in this Annual Report on Form 10-K, other than statements that are purely historical, are forward-looking statements. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “may,” “will,” “could,” “continue,” “seek,” “estimate,” or the negative thereof and similar expressions also identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause our future actual results, performance or achievements to differ materially from those expressed in, or implied by, any such forward-looking statements as a result of certain factors, including, but not limited to, those risks and uncertainties discussed in this section, as well as in the section entitled “Risk Factors”, and elsewhere in this Annual Report on Form 10-K and our other filings with the United States Securities and Exchange Commission (the “SEC”). Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements regarding: (i) our belief that our cash and cash equivalents as of December 31, 2015 will be sufficient to fund our operations through at least 2016; (ii) our business strategies, including our intent to pursue selected opportunities for prevention and treatment of severe respiratory diseases by seeking collaborations, government grants and other non-dilutive types of financing that will fund development and commercialization; (iii) our strategy to commercialize certain of our unlicensed respiratory product candidates with our own focused sales and marketing force addressing pulmonary specialty doctors in the United States or in the European Union; (iv) our plans to work with the US and other allied governments to supply them with our inhaled antibiotic for biodefense supplies; (v) our intent to use our pulmonary delivery methods and formulations of drugs and biologics to improve their safety, efficacy and convenience of administration to patients; (vi) our expectations regarding future clinical trials; and (vii) our expectation that we will incur additional operating losses.

These forward-looking statements and our business are subject to significant risks such as the risks and uncertainties discussed in the section entitled “Risk Factors”, including, but not limited to, our ability to maintain and/or enter into partnering agreements. Even if product candidates appear promising at various stages of development, they may not reach the market or may not be commercially successful for a number of reasons. Such reasons include, but are not limited to, the possibilities that the potential products may be found to be unsafe in animal or human trials, ineffective during clinical trials, may fail to receive necessary regulatory approvals, may be difficult to manufacture on a large scale, are uneconomical to market, may be precluded from commercialization by proprietary rights of third parties, may not be purchased by government organizations for biodefense, or may not gain acceptance from health care professionals and patients.

You are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date of the filing of this Annual Report on Form 10-K. We undertake no obligation to update these forward-looking statements in light of events or circumstances occurring after the date of the filing of this Annual Report on Form 10-K or to reflect the occurrence of unanticipated events.

PART I

Item 1. Business

Overview

We are an emerging specialty pharmaceutical company focused on the development and commercialization of products for the treatment and prevention of severe respiratory diseases. Over the last decade, we invested a large amount of capital to develop drug delivery technologies, particularly the development of a significant amount of expertise in respiratory (pulmonary) drug delivery as incorporated in our lead product candidate currently in Phase 3 clinical trials, Pulmaquin ^® inhaled ciprofloxacin. We 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 and other proprietary technologies. The key asset we have focused our efforts on in recent years is our inhaled ciprofloxacin formulations. We have not been profitable since inception and expect to incur additional operating losses over at least the foreseeable future as we continue product development efforts, clinical trial activities, animal toxicology and safety testing and contract manufacturing efforts. To date, we have not had any significant product sales and do not anticipate receiving revenues from the sale of any of our products in the near term. As of December 31, 2015, we had an accumulated deficit of $405.5 million. Historically, we have funded our operations primarily through public offerings and private placements of our capital stock, license fees, development expense reimbursements, borrowings, milestone payments from collaborators, the milestone and royalty payments associated with the sale of assets to Zogenix, proceeds from our June 2011 royalty financing transaction and interest earned on cash equivalents and short-term investments.

Our business has focused on opportunities in the development of drugs for the treatment of severe respiratory disease that could be developed by us and commercialized in the United States and/or another significant territory such as the European Union (EU). With the exception of our inhaled ciprofloxacin program which is partnered for non-biodefense indications with Grifols, S.A. (“Grifols”), our longer term strategy is to commercialize our respiratory product candidates with our own focused marketing and sales force addressing pulmonary specialty doctors in the United States and/or in the EU, where we believe that a proprietary sales force will enhance the return to our shareholders. Where our products can benefit a different population of patients in the United States or in other countries, such as with our biodefense products, 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. In selecting our proprietary development programs, we primarily seek drugs approved by the United States Food and Drug Administration (“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 of administration 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.

Our lead development candidates are proprietary formulations of the potent antibiotic ciprofloxacin (Pulmaquin (ARD-3150) and Lipoquin ^® (ARD-3100)) that are delivered by inhalation for the management of infections associated with severe respiratory diseases such as non-cystic fibrosis bronchiectasis (“BE”) and cystic fibrosis (“CF”); these product candidates are also tested in potential bioterrorism infections. The formulations differ in the proportion of rapidly available and slow release ciprofloxacin. Pulmaquin is a combination of the slow release liposomal formulation, Lipoquin, mixed with a small amount of unencapsulated ciprofloxacin dissolved in an aqueous medium. We received orphan drug designations for Lipoquin for both of these indications in the United States and for CF in the EU. We requested orphan drug designation from the FDA for Pulmaquin for the management of BE and we were granted orphan drug designation for ciprofloxacin for inhalation for this indication. We may seek orphan drug designation for other eligible product candidates we develop. FDA designated Pulmaquin as a Qualified Infectious Disease Product (QIDP) for treatment of non-cystic fibrosis bronchiectasis patients with chronic lung infections with Pseudomonas aeruginosa . We are currently conducting Phase 3 clinical trials with Pulmaquin in BE. We have reported the results of one successful Phase 2b trial with Lipoquin and one successful Phase 2b trial with Pulmaquin in BE. We previously conducted one successful Phase 2a trial with Lipoquin in CF and one successful Phase 2a trial with Lipoquin in BE.

In August 2013, we closed the transaction announced in May 2013 in which we entered into a License and Collaboration Agreement (the “License Agreement”) with Grifols under which we licensed to Grifols on an exclusive, world-wide basis, our inhaled liposomal ciprofloxacin product candidates for the indication of non-cystic fibrosis BE and other indications as more fully described in Note 6 to the consolidated financial statements included in this Annual Report on Form 10-K. In connection with our August 2013 private placement we also entered into a Governance Agreement (the “Governance Agreement”), which sets forth certain rights and obligations of us and Grifols concerning, among other things, certain corporate governance matters, certain limitations on future acquisitions of shares of common stock by Grifols, and certain rights by Grifols to maintain a target level of ownership in us, as more fully described in Note 6 to the consolidated financial statements included in this Annual Report on Form 10-K.

Pulmonary delivery by inhalation is an effective, widely used and well accepted method of administration of a variety of drugs for the treatment of respiratory and other diseases. Compared to other routes of administration, inhalation provides local delivery of the drug to the respiratory tract which offers 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 demonstrate reduced efficacy or increased side effects over prolonged use in patients, as well as to provide novel treatments to patient populations and for disease conditions that are inadequately treated.

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 and fast absorption as a result of pulmonary delivery than could otherwise only be obtained by injection. We believe particular opportunities exist for the use of our pulmonary 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. While we are currently focused on our Phase 3 Pulmaquin clinical trial program, we intend to pursue selected opportunities for systemic delivery via inhalation by seeking collaborations, government grants and other types of non-dilutive financing 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 opportunities in the respiratory disease market as well as other disease markets that would benefit from the efficient, non-invasive inhalation delivery of drugs.

Our Strategy

We are a specialty pharmaceutical company, and our strategy is to develop and commercialize products for the treatment and prevention of severe respiratory diseases. We have chosen severe respiratory diseases based on the expertise of our management team and the history of our company. We have significant experience in the treatment of severe 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 unique or significantly improved products in the global respiratory market. There are three key elements of our strategy:

•

Develop proprietary products for the treatment of respiratory diseases. We believe our expertise in the development and delivery of pulmonary pharmaceutical products should enable us to advance and commercialize respiratory products for a variety of indications. We select for development those product candidates 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.

•

Accelerate the regulatory approval process. We believe that our management team’s 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 our current product candidates incorporate FDA-approved drugs, we believe that the most expedient review and approval pathway for these product candidates in the United States will be under Section 505(b)(2) of the Food, Drug and Cosmetic Act (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 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. We have already been granted or 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 7 years as well as regulatory assistance, reduced filing fees and possible tax credits. Similar legislation exists in the EU with a market exclusivity of 10 years. We also seek other special designations by FDA such as Qualified Infectious Disease Product (QIDP). Under the Generating Antibiotic Incentives Now Act (GAIN Act), QIDP provides incentives including priority review and eligibility for fast-track status. Further, if ultimately approved by the FDA, the product is eligible for an additional five-year extension of Hatch-Waxman exclusivity.

•

Outsource manufacturing activities. We outsource the late stage clinical and commercial scale manufacturing of our products to conserve our capital for product development. We believe that the required late stage clinical and commercial manufacturing capacity can be obtained from contract manufacturers. With this approach, we seek manufacturers whose expertise should allow us to reduce risk and the costs normally incurred if we were to build, operate and maintain large-scale production facilities ourselves.

Partnered Programs Under Development

Inhaled Ciprofloxacin

See Part 1, Item 1 of the 2014 Annual Report on Form 10-K for additional information and discussion regarding earlier development efforts on Inhaled Ciprofloxacin.

We have been developing several disease indications for our inhaled ciprofloxacin that share much of the laboratory and product development efforts, as well as a common safety data base.

Pulmaquin and Lipoquin (ARD-3150 and ARD-3100)—Inhaled Ciprofloxacin for the Management of Infections in Non-Cystic Fibrosis Bronchiectasis (BE) Patients

BE is a chronic condition characterized by abnormal dilatation of the bronchi and bronchioles associated with chronic infection. The patient’s lung function is often irreversibly reduced compared to that found in healthy individuals. BE is frequently observed in patients with cystic fibrosis (CF). However, it is a condition that affects over 110,000 people without CF in the United States and many more in other countries, and results from a cycle of inflammation, recurrent infection, and bronchial wall damage. There is currently no drug specifically approved for the treatment of BE in the U.S. We were granted orphan drug designation in the U.S. for Lipoquin for the management of this condition. We requested orphan drug designation from the FDA for Pulmaquin for the management of BE and in June 2011 we were granted orphan drug designation for ciprofloxacin for inhalation for this indication.

In May 2015, we announced that the FDA designated Pulmaquin as a Qualified Infectious Disease Product (QIDP). The QIDP designation, granted for treatment of non-cystic fibrosis bronchiectasis patients with chronic

lung infections with Pseudomonas aeruginosa , will make Pulmaquin eligible to benefit from certain incentives for the development of new antibiotics provided under the Generating Antibiotic Incentives Now Act (GAIN Act). These incentives include priority review and eligibility for fast-track status. Further, if ultimately approved by the FDA, Pulmaquin is eligible for an additional five-year extension of Hatch-Waxman exclusivity.

In September 2015, we announced that the FDA granted Fast Track designation to Pulmaquin. The FDA gives Fast Track status to facilitate the development of new drugs intended to treat serious or life-threatening conditions and which demonstrate the potential to address unmet medical needs, with the goal of getting important new drugs to patients earlier. According to the FDA, determining whether a condition is serious is a matter of judgment, but generally is based on whether the drug will have an impact on such factors as survival, day-to-day functioning, or the likelihood that the condition, if left untreated, will progress from a less severe condition to a more serious one.

A drug that receives Fast Track designation is eligible for some or all of the following:

•

More frequent meetings with FDA to discuss the drug’s development plan and ensure collection of appropriate data needed to support drug approval

•

Eligibility for Priority Review, if relevant criteria are met

•

Rolling Review, which means that a drug company can submit completed sections of its New Drug Application (NDA) for review by FDA, rather than waiting until every section of the application is completed before the entire application can be reviewed. NDA review usually does not begin until the drug company has submitted the entire application to the FDA

According to the FDA, once a drug receives Fast Track designation, early and frequent communication between the FDA and a drug company is encouraged throughout the entire drug development and review process. The frequency of communication assures that questions and issues are resolved quickly, often leading to earlier drug approval and access by patients.

We believe we have the preclinical development, clinical and regulatory expertise to advance this product through development. In August 2013, we licensed to Grifols on an exclusive, world-wide basis, our inhaled liposomal ciprofloxacin product candidates for the indication of non-cystic fibrosis bronchiectasis and other indications. We obtained a royalty-bearing license for biodefense applications from Grifols.

Development of Inhaled Ciprofloxacin for BE

See Part 1, Item 1 of the 2014 Annual Report on Form 10-K for additional information and discussion regarding earlier efforts on the Development of Inhaled Ciprofloxacin for BE.

We had been testing two formulations of inhaled ciprofloxacin (Pulmaquin and Lipoquin) that differ in the proportion of rapidly available and slow release ciprofloxacin. Pulmaquin (also called Dual Release Ciprofloxacin for Inhalation—DRCFI) uses the slow release liposomal formulation (Lipoquin, also called Ciprofloxacin for Inhalation—CFI) mixed with a small amount of ciprofloxacin dissolved in an aqueous medium. The clinical activities described below for Lipoquin also support the Pulmaquin program.

In November 2009, the first patient was dosed in the ORBIT-2 (Once-daily Respiratory Bronchiectasis Inhalation Treatment) trial, a 168 day, multicenter, international Phase 2b clinical trial of inhaled ciprofloxacin with the Pulmaquin (ARD-3150) formulation in 42 adult patients with non-cystic fibrosis bronchiectasis. The randomized, double-blind, placebo-controlled trial was conducted in Australia and New Zealand. Following a 14 day screening period, the patients were treated once-a-day for 28 days with either the active drug, or placebo, followed by a 28 day off-treatment period. This on-off sequence was repeated three times. The primary endpoint

was defined as the mean change in Pseudomonas aeruginosa density in sputum (colony forming units—CFU - per gram) from baseline to day 28 of the active treatment group versus placebo. Safety and tolerability assessments of the treatment versus placebo group were performed. Secondary efficacy endpoints assessed included long term microbiological responses, time to an exacerbation, severity of exacerbations, length of time to resolve exacerbations and changes in lung function and in quality of life measurements. ORBIT-2 explored whether the novel formulation Pulmaquin, which has a different drug release profile than Lipoquin, may have additional therapeutic benefits.

In October 2010, we announced positive top line data from the ORBIT-2 study. Statistical significance was achieved in the primary endpoint—the mean change in Pseudomonas aeruginosa density in sputum from baseline to day 28. In the full analysis population (full analysis set includes all patients who were randomized, received at least one dose and provided samples for at least two time points), there was a significant mean reduction of 4.2 log ₁₀ units in the Pulmaquin group, reflecting an almost sixteen-thousand fold decrease in bacterial load, versus a very small mean decrease of 0.1 log ₁₀ units in the placebo group (p=0.004). Secondary endpoint analysis showed that 17 subjects in the placebo group required supplemental antibiotics for respiratory-related infections versus 8 subjects in the Pulmaquin group (p=0.05). As announced in January 2011, the Kaplan-Meier analysis showed that the median time to first pulmonary exacerbation in the per protocol population evaluation increased from 58 days in the placebo group to 134 days in the active treatment group and was statistically significant (p<0.05, log rank test). Pulmaquin was well tolerated and there were no significant decreases in lung function, as measured by FEV1 (forced expiratory volume in one second), at 28 days in either group. Overall, the incidence and severity of adverse events were similar in both the placebo and treatment groups; however, Pulmaquin had a superior pulmonary safety profile reflected in the number and severity of pulmonary adverse events. As announced in May 2011, further statistical analysis concluded that the reduction from baseline in Pseudomonas aeruginosa CFUs with Pulmaquin was rapid and persistent throughout the treatment cycles as exemplified by the statistically significant reductions of the mean log CFU values in the Pulmaquin group versus the placebo at day 14 and day 28 during the first treatment cycle, as well as at the end of the second and third cycles of treatment (days 84 and 140, respectively).

In December 2011, we completed the analysis of all preclinical and clinical data from the two different formulations of inhaled ciprofloxacin (Lipoquin and Pulmaquin) and determined that Pulmaquin showed superior performance; therefore, we have taken Pulmaquin forward into Phase 3 clinical trials. In order to expedite anticipated time to market and increase market acceptance, we have elected to deliver our formulations via an approved, widely-accepted nebulizer system in many countries including US and EU, for each of our clinical trials and we intend to continue using this approach and also obtain the initial marketing approval with a currently FDA-approved nebulizer system. In March 2012, we announced the FDA clearance of the Phase 3 IND for Pulmaquin in BE patients; the first human studies under this IND are the two identical Phase 3 studies in BE patients with Pulmaquin currently being conducted. These trials are fully enrolled and we anticipate that the top line data from both trials will be released in the fourth quarter of 2016.

Lipoquin (ARD-3100)—Inhaled Ciprofloxacin for the Management of Infections in Cystic Fibrosis (CF) Patients

See Part 1, Item 1 of the 2014 Annual Report on Form 10-K for additional information and discussion regarding earlier efforts on Development of Inhaled Ciprofloxacin for CF.

This program uses our proprietary inhaled formulation of ciprofloxacin for the management of respiratory infections caused by a microorganism, Pseudomonas aeruginosa, common in patients with 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. Recent reports suggest that there may be over 100,000 largely undiagnosed CF patients in India. According to the American Lung Association, the direct medical care costs for an individual with CF in the U.S. are estimated to be in excess of $40,000 per year.

The CF and BE programs incorporate formulation and manufacturing processes and the early preclinical safety data developed for our biodefense program discussed below. We believe our inhaled ciprofloxacin could also be explored for the treatment of other serious respiratory infections, such as those occurring in severe COPD, pulmonary non-tuberculous mycobacteria (PNTM) and asthma patients.

In August 2013, we licensed to Grifols on an exclusive, world-wide basis, our inhaled liposomal ciprofloxacin product candidates for all indication with a back-license to Aradigm for biodefense applications.

Liposomal Ciprofloxacin for Non-Tuberculous Mycobacteria

In August 2013, the National Institutes of Health (NIH) awarded us a Small Business Initiative Research (SBIR) grant in the amount of approximately $278,000 to investigate the treatment of pulmonary non-tuberculous mycobacteria (PNTM) infections with our inhaled liposomal ciprofloxacin product candidates, Pulmaquin and Lipoquin. The research program was conducted in collaboration with Oregon State University, Corvalis (OSU).

According to a recent report from the National Institutes of Health based on an epidemiological study in U.S. adults aged 65 years or older, PNTM infections are an important cause of morbidity among older adults in the United States. From 1997 to 2007, the annual prevalence significantly increased from 20 to 47 cases/100,000 persons or 8.2% per year. Forty-four percent of PNTM-affected people in the study had bronchiectasis compared to 1% in the non-PNTM cases pointing to an important co-morbidity. PNTM infections are also common in patients with other chronic lung conditions, such as cystic fibrosis and emphysema. In patients with AIDS, the infection is disseminated. These infections are particularly difficult to treat as the mycobacteria can form biofilms in the airways and they are able to cause intracellular infections, e.g. by invasion of pulmonary macrophages. The current clinical paradigm is to treat patients with lung or disseminated disease with combination therapy given orally or by IV. Unfortunately, these therapies often fail, and may have significant side effects.

On April 15, 2015, we announced the first results from the collaboration between scientists from OSU and Aradigm funded by NIH. The research demonstrated that after 4 days of in vitro treatment of human macrophages infected with Mycobacterium avium and Mycobacterium abscessus , Aradigm’s liposomal ciprofloxacin was associated with a decrease of greater than 99% of these infections at ciprofloxacin concentrations of 200 mcg/ml, which approximate the peak sputum levels observed in humans in prior Aradigm clinical studies. At a lower concentration of 20 mcg/ml, the liposomal concentrations still showed statistically significant decreases greater than 70% for M. avium and greater than 90% for M. abscessus . Unencapsulated ciprofloxacin showed smaller decreases which were only statistically significant at 200 mcg/ml. Liposomal ciprofloxacin at a concentration of 100 mcg/ml significantly reduced the population of these mycobacteria in a biofilm assay by more than 50% whereas unencapsulated ciprofloxacin did not show statistically significant decreases.

In May 2015, we announced that scientists from OSU and Aradigm demonstrated that Aradigm’s investigational drugs Lipoquin and Pulmaquin significantly reduced the growth of PNTM after 3 weeks of once daily respiratory tract dosing in mice. The number of colony forming units (CFUs) of Mycobacterium avium subsp hominissuis was reduced by 79% and 77% by Lipoquin and Pulmaquin, respectively (p<0.05) compared to saline controls. In contrast, unencapsulated ciprofloxacin had no effect.

In September 2015, we announced that scientists from OSU and Aradigm demonstrated that Aradigm’s investigational drugs Lipoquin and Pulmaquin significantly reduced PNTM with Mycobacterium abscessus using once daily respiratory tract dosing in mice that had established colonization with this microorganism. After 3 weeks of treatment, the number of CFUs in the lungs was significantly reduced (p<0.05) by 95.2% and 96.1% by Lipoquin and Pulmaquin, respectively; after 6 weeks of treatment, the CFUs were further reduced (p<0.05) by 99.7% and 99.4% for Lipoquin and Pulmaquin, respectively. In contrast, unencapsulated ciprofloxacin had no effect.

Liposomal Ciprofloxacin for Biodefense Purposes: Treatment of Q Fever, Tularemia, Pneumonic Plague, Inhalation Anthrax and other biodefense purposes

In addition to our programs addressing bronchiectasis, cystic fibrosis and PTNM our inhaled ciprofloxacin has also been tested for the prevention and treatment of inhaled “bioterrorism” infections, such as Q fever, inhalation anthrax, tularemia, melioidosis and pneumonic plague.

In September 2012, UK scientists from the Health Protection Agency (HPA) and Defence Science and Technology Laboratory (Dstl) reported the successful testing of our inhaled liposomal ciprofloxacin against Coxiella burnetii (Q fever) in a mouse model of this virulent infection. This work was conducted as part of the collaborative consortium that we formed with HPA and Dstl to evaluate the efficacy of our inhaled liposomal ciprofloxacin against high threat microbial agents.

Coxiella burnetii is a Gram-negative intracellular bacterium and the causative agent of the disease Q fever. C. burnetii is endemic worldwide, infects a wide variety of animals and humans and has a low infectious dose by the inhalational route. Clinical presentation in humans may lead to an acute infection with flu-like symptoms, or a chronic life-threatening disease. A recent epidemic of Q fever in humans took place in the Netherlands in 2009, with 2,357 reported cases and 6 deaths. Current oral antibiotic treatment of Q fever can be lengthy and complex.

In the experiments reported by the UK scientists, mice that were infected with C. burnetii via inhalation and treated 24 hours later with twice-daily oral ciprofloxacin continuing for 6 additional days, or infected drug-free control-treated animals that had the same treatment schedule, lost almost 20% of body weight by day 7 and exhibited clinical signs of the disease. In contrast, infected mice treated 24 hours later with once-daily lung-delivered liposomal ciprofloxacin continuing for 6 additional days, were significantly protected against weight loss and showed no clinical signs of disease throughout the 14-day duration of the study.

In November 2012, scientists from the UK Defence Science and Technology Laboratory (Dstl) reported in a preliminary study that they demonstrated that a single dose of Aradigm’s liposomal ciprofloxacin formulation Lipoquin administered 24 hours after exposure to a lethal dose of the bacterium Yersinia pestis provided full protection in a murine model of pneumonic plague. In comparison, a single dose of oral ciprofloxacin administered 24 hours post-exposure provided no protection.

The Gram-negative bacterium Yersinia pestis is the causative agent of plague, a disease thought to be responsible for the death of 200 million people through devastating pandemics such as the Black Death. Inhalation of Y. pestis can result in the most severe form of the disease, pneumonic plague, which if untreated may have a mortality rate of 100%. Currently, there is no licensed vaccine for use in humans.

In the study, exposure to aerosolized Y. pestis was lethal. Animals were followed for up to 28 days post-exposure. All untreated mice succumbing to a systemic infection by day 3 post-exposure. A single dose of oral ciprofloxacin administered at 24 hours post-exposure did not prevent mortality and only increased the mean time to death to 5 days compared to 3 days for untreated mice. In comparison, a single dose of Lipoquin delivered via the nose into the lungs of the animals provided 100% protection and significantly improved survival compared to a single dose of oral ciprofloxacin (P<0.0001); a single dose of aerosolized Lipoquin administered at 24 hours post-exposure provided approximately 70% protection and significantly improved survival when compared to a single dose of oral ciprofloxacin (P<0.001).

In their report, the scientists state that the study demonstrated the superior efficacy of Lipoquin compared to oral ciprofloxacin as post-exposure prophylaxis against Y. pestis .

The Dstl team also demonstrated in another series of experiments that a single dose of our inhaled liposomal ciprofloxacin protects animals against lethal doses of inhaled Francisella tularensis (tularemia) infection—another microbial threat. These results confirmed and extended the research that we began originally under a

technology demonstration program funded by the Defence Research and Development Canada (DRDC) as part of their interest in developing products to counter bioterrorism, such as inhaled anthrax and tularemia infections. DRDC had already demonstrated the feasibility of inhaled liposomal ciprofloxacin for post-exposure prophylaxis of Francisella tularensis. Mice were exposed to a lethal dose of Francisella tularensis and then 24 hours later were exposed via inhalation to a single dose of free ciprofloxacin, liposomal ciprofloxacin or 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.

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 then germinate. Anthrax has been identified by the Centers for Disease Control as a likely potential agent of bioterrorism.

Ciprofloxacin has been approved by the FDA for use orally and via injection for the treatment of inhalation anthrax (post-exposure) since 2000. We believe that our product candidate may be able to deliver a long-acting formulation of ciprofloxacin directly into the lungs and be more effective and could potentially have fewer side effects, which is important for patient compliance, to prevent and treat inhalation tularemia and anthrax, Q fever, pneumonic plague and other inhaled bacterial bioterrorism agents than currently available therapies.

If we can obtain sufficient additional funding, including government grants or collaborative funding from organizations such as the Canadian DRDC and the UK Dstl, we may be able to complete the development of our liposomal ciprofloxacin for approval under FDA regulations relating to 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 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. We plan to use our preclinical and clinical safety data from our BE and CF programs to supplement the data needed to have this product candidate considered for approval for use in prevention and treatment of a number of potential bioterrorism infections including anthrax, tularemia, Q fever, melioidosis and pneumonic plague.

Proprietary Programs Under Development

Smoking Cessation Therapy

ARD-1600 Inhaled Nicotine

According to the National Center for Health Statistics (NCHS), 21% of the U.S. population age 18 and above currently smoke cigarettes. The World Health Organization’s (WHO) recent report states that tobacco smoking is the single most preventable cause of death in the world today. Already tobacco kills more than five million people per year—more than tuberculosis, HIV/AIDS and malaria combined. WHO warns that by 2030, the death toll could exceed eight million a year. Unless urgent action is taken, tobacco could kill one billion people during this century. According to the National Institute on Drug Abuse, more than $75 billion of total U.S. healthcare costs each year is attributable directly to smoking. However, this cost is well below the total cost to society because it does not include burn care from smoking-related fires, perinatal care for low birth-weight infants of mothers who smoke, and medical care costs associated with disease caused by secondhand smoke. In addition to healthcare costs, the costs of lost productivity due to smoking effects are estimated at $82 billion per year, bringing a conservative estimate of the economic burden of smoking to more than $150 billion per year.

we had two issued U.S. patents covering systems for effecting smoking cessation, which provided exclusivity until 2019. The first two patents are method of treatment patents, covering systems, devices and containers for delivering aerosolized nicotine formulations in specific ways which we believe to be important for cigarette smokers who want to quit smoking. The third patent extends the coverage to containers with novel features anticipated to provide additional smoking cessation benefits.

We are seeking collaborations and non-dilutive financing to further develop this product for either the pharmaceutical market or the direct-to-consumer market or both.

Other Programs

In August 2013, the NIH awarded us an SBIR grant in the amount of approximately $340,000 to investigate the development and validation of tests for gastro-esophageal reflux with aspirations into the respiratory tract. The Principal Investigators and co-inventors of the new diagnostic tests are Professor Homer Boushey, University of California, San Francisco (UCSF) and Dr. Igor Gonda, Aradigm Corporation. The grant is funding laboratory work and a human clinical trial being conducted at UCSF.

Aspiration of gastric contents into the respiratory tract causes significant morbidity and mortality and is accepted as the key initiating event for aspiration pneumonitis—a form of acute lung injury caused by the acidity of the gastric contents, and aspiration pneumonia—the consequence of the growth of pathogenic bacteria contained in the oropharynx aspirated into the tracheobronchial tree. When subclinical events of gastric aspiration occur, it is described as “silent aspiration” or “microaspiration.” Chronic, recurrent microaspirations have been implicated in the pathogenesis and worsening of many severe chronic pulmonary diseases of unknown origin, such idiopathic pulmonary fibrosis, bronchiolitis obliterans after lung transplantation, pulmonary disease in conditions associated with esophageal dysfunction and delayed gastric emptying such as cystic fibrosis and scleroderma, and the very common conditions of community acquired pneumonia in the elderly, asthma and COPD.

Research into the role of microaspirations has been severely hampered by the insensitivity, expense, inconvenience, invasiveness, and discomfort of current diagnostic methods for this condition. Development of a simple, patient-convenient, diagnostic test that is safe and can be used repeatedly over time could significantly impact the diagnosis and management of several pulmonary diseases that may be affected by recurrent microaspirations of gastro-intestinal contents into the respiratory tract

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. Our most recent patents issued in the United States were an important composition of matter patent and a method of treatment patent for Pulmaquin. As of February 28, 2016, we had 39 issued United States patents, with 8 additional United States patent applications pending. In addition, we had 42 issued foreign patents and an additional 19 foreign patent applications pending. The bulk of our patents and patent applications contain claims directed toward our Pulmaquin and Lipoquin compositions and methods of treatment, 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 The bulk of our patents directed toward our proprietary delivery technologies and methods of use expire between 2016 and 2031. 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.

We continue to 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 officers, employees, 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, 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.

Pulmaquin and Lipoquin are trademarks of Aradigm and are registered or pending in several countries around the world.

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 compete 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 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.

There is no product currently approved in the United States specifically for the treatment of bronchiectasis (BE). Bayer is testing a ciprofloxacin dry powder inhaler for the management of BE in two Phase 3 studies and an experimental oral drug, BAY85-8501 that completed a Phase 2 study in BE patients. Currently marketed inhaled antibiotics for the management of infections associated with cystic fibrosis (CF) are several products containing tobramycin (nebulizer and dry powder formulations) marketed by multiple companies, and nebulized Cayston* marketed by Gilead Sciences. Inhaled products under development to treat respiratory infections in CF include dry powder ciprofloxacin by Bayer, nebulized liposomal amikacin by Insmed, and nebulized levofloxacin by Raptor. Bayer has obtained orphan drug status for their inhaled powder formulation of ciprofloxacin in the United States for the treatment of BE and in the United States and European Union for the treatment of CF.

Several 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, could 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, MAP (acquired by Allergan), Mannkind, Insmed 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 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 Food, Drug and Cosmetic Act (FDCA) and implementing regulations thereunder.

If we fail to comply with the FDCA or FDA regulations, we 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.

Before any of our drugs may be marketed in the United States, it must be approved by the FDA. None of our current product candidates has received such approval. We believe that our products currently in development will be regulated by the 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 (IND) application 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 (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 (GMP); and

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FDA review and approval of the NDA.

Preclinical Testing

The testing and approval process requires 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.

In July 2009, we received clearance from the FDA for our IND for inhaled liposomal ciprofloxacin (ARD-3100, Lipoquin) for the treatment of non-cystic fibrosis bronchiectasis. In May 2010, we received clearance from the FDA for our IND for inhaled liposomal ciprofloxacin for the treatment of cystic fibrosis. However, an additional three month toxicity study in animals with Lipoquin (ARD-3100) and Pulmaquin (ARD-3150) was requested by the FDA to support longer term human clinical trials. This study was completed and the results were submitted to the FDA as part of our IND filing for the Phase 3 program for Pulmaquin in BE patients.

In March 2012, we received clearance from the FDA for our IND to start the first of two Phase 3 studies of Pulmaquin (ARD-3150) in BE patients. The FDA has requested a 2 year carcinogenicity study in rats with inhaled Pulmaquin to support the NDA for BE. We have initiated that study. The FDA indicated a 9 month inhalation safety study in dogs may also be needed to support approval for marketing this product for BE in the U.S. and the EU. Neither of these studies were required prior to beginning the Phase 3 clinical trials; however, we have taken the initiative to conduct them in the interest of reducing time to approval of Pulmaquin. The 9 month inhalation safety study in dogs has been completed and the study report has been submitted to the FDA. The 2 year rat carcinogenicity study is being conducted in parallel with the Phase 3 program.

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 preclinical (animal), Phase 1 and Phase 2 human 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 geographically dispersed clinical trial sites. Phase 3 studies usually include several hundred to several thousand patients.

The Phase 3 clinical program for Pulmaquin in non-CF BE consists of two worldwide, double-blind, placebo-controlled pivotal trials (ORBIT-3 and ORBIT-4) that are identical in design except for a pharmacokinetics sub-study to be conducted in one of the trials. Each trial has completed enrollment of patients (278 in ORBIT-3 and 304 in ORBIT-4) into a 48-week double-blind period consisting of 6 cycles of 28 days on treatment with Pulmaquin or placebo plus 28 days off treatment, followed by a 28 day open label extension in which all participants will receive Pulmaquin (total treatment duration approximately one year). The superiority of Pulmaquin versus placebo during the double-blind period is being evaluated in terms of the time to first pulmonary exacerbation (primary endpoint), while key secondary endpoints include the reduction in the number of pulmonary exacerbations and improvements in quality of life measures. Lung function is being monitored as a safety indicator. The trial randomization has two patients on active drug for every patient on placebo. The last patient was enrolled in each of the trials in September 2015.

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 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.

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 the 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 use 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) may 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 a patent that the NDA holder has listed with the FDA, the Section 505(b)(2) applicant must submit a patent certification that: the patent information has not been filed; the patent has expired; the patent listing will expire on a given date; or that the patent is invalid, unenforceable, or not infringed by the product that is the subject of the Section 505(b)(2) application. FDA itself will determine the accuracy of the first three certification bases for purposes of application approval timing. For the fourth basis (a “Paragraph IV claim” of no validity, non-enforceability, or non-infringement), the patent holder must sue the 505(b)(2) applicant within 45 days of the patent certification notice to prevent FDA approval 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 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 orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the drug is entitled to orphan drug 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 or that it represents a major contribution to patient care. Orphan drug designation does not prevent competitors from developing or marketing different drugs for that indication, or the same drug for other indications.

We received orphan drug designations for Lipoquin for the management of cystic fibrosis and non-cystic fibrosis bronchiectasis in the U.S. We requested orphan drug designation from the FDA for Pulmaquin for the management of bronchiectasis and in June 2011 we were granted orphan drug designation for ciprofloxacin for inhalation for this indication. In June 2012, we received orphan drug designation in the U.S. for liposomal ciprofloxacin plus ciprofloxacin for cystic fibrosis.

We may seek orphan drug designation for other eligible product candidates we develop. However, our inhaled 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 inhaled ciprofloxacin for these indications for some time.

Foreign regulatory authorities may also provide for orphan drug designations in countries outside the United States. For example, under European guidelines, Orphan Medicinal Product Designation provides 10 years of potential market exclusivity if the product candidate is the first product candidate for the indication approved for marketing in the EU. Orphan drug designation also allows the candidate’s sponsor to seek assistance from the European Medicines Agency in optimizing the candidate’s clinical development through participation in designing the clinical protocol and preparing the marketing application. Additionally, a drug candidate designated by the Commission as an Orphan Medicinal Product may qualify for a reduction in regulatory fees as well as a EU-funded research grant.

In August 2009, the European Medicines Agency granted Orphan Drug Designation to our inhaled liposomal ciprofloxacin drug product candidate Lipoquin (ARD-3100) for the management of lung infections associated with cystic fibrosis.

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.

Principal Supplier

We currently contract exclusively with Sigma-Tau PharmaSource, Inc. to manufacture inhaled ciprofloxacin, however, we are exploring developing a second source to manufacture inhaled ciprofloxacin. For more information on the risks associated with this arrangement, please see Item 1A—Risk Factors—“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.”

Research and Development

Our research and development expenses were approximately $35.3 million for the year ended December 31, 2015 and $31.2 million for the year ended December 31, 2014. For more information regarding our research and development, please see Item 7—Management’s Discussion and Analysis—Research and Development.

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, 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 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:


Name	Affiliation	Area of Expertise
Peter R. Byron, Ph.D.	Medical College of Virginia, Virginia Commonwealth University	Aerosol Science/Pharmaceutics
Stephen J. Farr, Ph.D.	Zogenix, Inc.	Pulmonary Delivery/Pharmaceutics
Babatunde Otulana, M.D.	Mallinckrodt Pharmaceuticals	Pulmonary Diseases/Cystic Fibrosis/Regulatory
Adam Wanner, M.D.	University of Miami	Chronic Obstructive Pulmonary Diseases (COPD)

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 December 31, 2015, we had twenty-three employees. Sixteen employees are involved in research and development and product development and seven employees are involved in finance and administration. Eight employees have advanced scientific degrees.

Our employees are not represented by any collective bargaining agreement.

We also utilize an international network of consultants and contractors, such as clinical research organizations (CROs), clinical manufacturing organizations (CMOs) and various specialists in areas, such as regulatory affairs and business and corporate development.

Corporate History and Website Information

We were incorporated in California in 1991. Our principal executive offices are located at 3929 Point Eden Way, Hayward, California 94545, and our main telephone number is (510) 265-9000. Investors can obtain access to this Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and all amendments to these reports, free of charge, on our website at http://www.aradigm.com as soon as reasonably practicable after such filings are electronically filed with the Securities and Exchange Commission (SEC). Information contained on our website is not part of this Annual Report on Form 10-K or of our other filings with the SEC. The public may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.W., Washington, D.C., 20549. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site, http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

Item 1A. Risk Factors

Except for historical information contained herein, the discussion of this Annual Report on form 10-K contains forward-looking statements, including, without limitation, statements regarding timing and results of clinical trials, the maintenance and establishment of corporate partnering arrangements, the anticipated commercial introduction of our products and the timing of our cash requirements. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, any such forward-looking statements. Potential risks and uncertainties include, without limitation, those mentioned in this report and in particular the factors described below.

Risks Related to Our Business

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 are encouraging, the results of initial preclinical safety testing and clinical trials do not necessarily predict the results that we will get from subsequent or more extensive preclinical safety testing and clinical trials. Pre-clinical safety testing and clinical trials of our product candidates may not demonstrate that they are safe and effective to the extent necessary to obtain collaborative partnerships and/or 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 pre-clinical studies and 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. For example, while both of our Phase 2b clinical trials (ORBIT-1 and ORBIT-2) with inhaled ciprofloxacin showed promising initial efficacy and safety results in patients with non-cystic fibrosis bronchiectasis (BE) and our Phase 2a clinical trials showed promising results in patients with cystic fibrosis (CF) and BE, there is no guarantee that longer term studies, such as our Phase 3 studies (ORBIT-3 and ORBIT-4), in larger patient populations will confirm these results or that we will be able to conduct studies that will provide satisfactory evidence of all efficacy and safety endpoints required by the regulatory authorities.

We are a development-stage company and will require substantial capital to complete the development of our product candidates and commercialize them.

We will need to raise additional capital prior to approval and commercialization of our leading product candidate Pulmaquin. We cannot assure you that we will be able to raise additional capital when needed on terms acceptable to the Company or at all. All of our potential products are in research or development. Our potential drug products require extensive research and development, including pre-clinical and clinical testing. Our potential products also may involve lengthy regulatory reviews before they can be sold. Because none of our product candidates has yet received approval by the FDA, we cannot assure you that our research and development efforts will be successful, any of our potential products will be proven safe and effective, or regulatory clearance or approval to sell any of our potential products will be obtained. We cannot assure you that any of our potential products can be manufactured in commercial quantities with quality systems acceptable to the regulatory authorities at an acceptable cost or marketed successfully. 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 negatively impact our business. Running clinical trials and developing an investigational drug for commercialization involve significant expense, and any unexpected delays or other issues in the development process can result in significant additional expense.

Our dependence on collaborators and other third parties may delay or require that we terminate certain of our programs, and any such delay or termination would harm our business prospects and stock price.

Our commercialization strategy for certain of our product candidates depends on our ability to enter into or maintain agreements with collaborators (such as the Grifols collaboration transaction) and to obtain assistance and funding for the development and potential commercialization of our product candidates. Supporting diligence activities conducted by potential collaborators and negotiating the financial and other terms of a collaboration agreement are long and complex processes with uncertain results. Collaborations may involve greater uncertainty for us, as we have less control over certain aspects of our collaborative programs than we would over a proprietary development and commercialization program. We may determine that continuing a collaboration under the terms provided is not in our best interest and, if we are able to under the terms of the agreement, we may terminate the collaboration. Our collaborators could delay or terminate their agreements with us, and our products subject to collaborative arrangements may never be successfully commercialized. Under our existing collaboration agreement with Grifols, we have granted Grifols exclusive rights with respect to inhaled ciprofloxacin compounds for other indications besides the treatment of non-CF BE, and we have limited ability to terminate that agreement.

Further, our present 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, or they may be terminated altogether. 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 present or future collaborators, such as 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, or programs that Grifols has declined its exclusive right to fund and commercialize, 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 future collaborative arrangements may not be successful.

We are using contract research organizations in order to conduct our global Phase 3 clinical trials and for other testing activities. We may not be able to maintain satisfactory contract research arrangements. If we are not, there may be significant delays before we find an alternative contract research organization or we may not find an alternative contract research organization at all. If our contract research organizations are delayed in their activities or issues are uncovered regarding the quality of the data provided by the contract research organization it could result in significant delays in our Pulmaquin clinical program and adversely impact our ability to file for regulatory approval of our product candidate.

Because our inhaled ciprofloxacin programs may rely on the FDA’s and European Medicines Agency’s grant 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 in the US for up to seven years or European Union for up to ten years.

The FDA has granted orphan drug designation for our liposomal ciprofloxacin drug product candidate for the management of CF and BE and to our ciprofloxacin for inhalation for the management of bronchiectasis. FDA also granted orphan drug designation to our proprietary drug product of liposomal ciprofloxacin for the management of CF. 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, even in the absence of a granted patent or other intellectual property protection, for seven years from the date of the FDA’s approval of an 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 similar inhaled ciprofloxacin product were to be approved by the FDA for a CF or BE 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. For example, Bayer HealthCare is developing an inhaled dry powder formulation of ciprofloxacin for the treatment of respiratory infections in CF and BE. Bayer has obtained orphan drug status for their inhaled powder formulation of ciprofloxacin in the United States for the treatment of BE and in the United States and European Union for the treatment of CF.

In August 2009, the European Medicines Agency granted orphan drug designation to our inhaled liposomal ciprofloxacin drug product candidate Lipoquin (ARD-3100) for the treatment of lung infections associated with CF. Under European guidelines, Orphan Medicinal Product Designation provides 10 years of potential market exclusivity if the product candidate is the first product candidate for the indication approved for marketing in the EU. 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 or European Medicines Agency for a given orphan indication, we may not be able to access the target market in the United States and/or the EU, which would adversely affect our ability to earn revenues.

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. As of December 31, 2015, we have an accumulated deficit of approximately $405.5 million. We have not had any direct product sales and do not anticipate receiving revenues from the sale of any of our products for at least the next few years, if ever. While our agreement with Grifols, which includes reimbursement of the majority of development expenses associated with our Pulmaquin program, has resulted in reduced operating expenses and capital expenditures, we expect to continue to incur losses for the foreseeable future as we:

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continue drug product development efforts;

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conduct preclinical testing and clinical trials;

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pursue additional applications for our existing delivery technologies; and

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outsource the commercial-scale production of our products.

To achieve and sustain profitability, we must, alone or with others such as our partner Grifols, successfully develop, obtain regulatory approval for, manufacture, market and sell our products. We expect to 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.

For our lead product candidate, Pulmaquin, regulatory authorities have requested additional animal toxicology prior to product approval for bronchiectasis (BE). Our Phase 3 clinical trials in BE may be successful but the results of these animal toxicology studies may be unacceptable to the regulatory authorities and may delay or prevent the approval of Pulmaquin for BE.

Although we have already submitted a substantial amount of safety data to the regulatory authorities on Pulmaquin and we also have conducted a variety of preclinical studies to support our product development, regulatory authorities have requested that we conduct a 2 year carcinogenicity study in rats with inhaled Pulmaquin prior to product approval for BE. This study is currently underway. A 9 month inhalation safety study in dogs may also be needed to support approval for marketing this product for BE in the U.S. and the EU. We have taken the initiative to conduct this study. Although this study has been completed and the final audited study report has been submitted to the FDA we do not know if the FDA will require further toxicology studies. Longer term animal safety studies may produce toxicity findings that were not found in shorter, earlier studies, which could prevent commercialization of Pulmaquin or could necessitate the conduct of further animal safety studies, leading to delays and additional costs. Toxicology findings from animal studies may also be the reason for more extensive safety monitoring in humans.

If our present or future clinical trials are delayed for any reason, we would incur additional costs and delay the potential receipt of revenues.

Before we or any current or future 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 many factors. Delays in completing our present 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 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. In September 2014, we were granted Fast Track Designation for Pulmaquin for non-CF BE patients with chronic lung infections with Pseudomonas aeruginosa , The FDA gives Fast Track status to facilitate the development of new drugs intended to treat serious or life-threatening conditions and which demonstrate the potential to address unmet medical needs, with the goal of getting important new drugs to patients earlier. However, having Fast Track Designation is no guarantee that the approval process will actually result in a faster or more streamlined process and to date, we have not sought or received approval from the FDA or any corresponding foreign authority for any of our drug product candidates.

The approval process is 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 delay or 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/or efficacy endpoints in our clinical trials. Our pharmaceutical 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 that can be long and costly. 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 effect 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 present and future 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. 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 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 may involve expensive ongoing monitoring and testing requirements.

We will have to depend on contract manufacturers and collaborators: if they do not perform as expected, our revenues and customer relations will suffer.

We intend to use contract manufacturers to produce our products. We may not be able to maintain satisfactory contract manufacturing arrangements. If we are not, there may be a significant delay before we find an alternative contract manufacturer or we may not find an alternative contract manufacturer at all. 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 and 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.

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 patients that are cost-effective as compared to the benefits of alternative therapies. Our ability to demonstrate this depends on a variety of factors, including:

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the demonstration of efficacy and safety in clinical trials;

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the existence, prevalence and severity of any side effects;

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the potential or perceived advantages or disadvantages compared to alternative treatments;

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the timing of market entry relative to competitive treatments;

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the pricing relative to competitive products;

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the relative cost, convenience, product dependability and ease of administration;

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the strength of marketing and distribution support;

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the sufficiency of coverage and reimbursement of our product candidates by governmental and other third-party payors; and

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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 are in the early stages of development for our inhaled nicotine product and commercialization of this product cannot be assured.

While the preliminary development work and early testing of the commercial potential of this direct-to-consumer product have been favorable, there are many significant issues that are unresolved and could severely limit the commercial potential of this product. The regulatory environment for inhaled nicotine products is evolving and the resolution of any necessary regulatory approvals is uncertain at this time. Smokers’ acceptance of this product for use in smoking cessation or as a cigarette replacement is unknown. Competition for our product exists from currently marketed smoking cessation products, such as nicotine replacement products, as well as from electronic cigarettes. In order to commercialize this product, substantial amounts of capital will be required to establish and operate a high volume manufacturing facility. We have no experience with developing, manufacturing or selling commercial products.

We depend upon our proprietary technologies, and we may not be able to protect our potential competitive proprietary advantage.

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 present and future 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 and provide only a short period of protection, if any, following commercialization of products.

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 on 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’s 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. In addition, because patent applications in the United States are currently maintained in secrecy for a period of time prior to issuance, patent applications in certain other countries generally are not published until more than 18 months after they are first filed, and 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 compete 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, 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 present and future collaborators to enter markets as second or 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. We are aware that Bayer is currently conducting two Phase 3 clinical trials of their inhaled ciprofloxacin dry powder formulation in non-cystic fibrosis bronchiectasis patients in several countries. Bayer 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 present and future collaborators were able to, or if a competitor introduced at any time a product superior to 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 management, clinical, regulatory and development personnel. There is a shortage of skilled personnel in our industry, we face 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 President and Chief Executive Officer, Dr. Igor Gonda, and Dr. Juergen Froehlich, our Chief Medical Officer, could impair our product development efforts and otherwise harm our business. Any of our employees may terminate their employment with us at will.

If we market our products in other countries, we will be subject to different laws and regulations and we may not be able to adapt to those laws and regulations, 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 and regulations, 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 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 present and future 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 clinical trials and 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.

Our current facility lease is scheduled to expire and we may not be able to secure a new facility lease on terms commercially favorable for us.

We lease approximately 72,000 square feet of office and laboratory space in an office building at 3929 Point Eden Way, California, which is scheduled to expire in July 2016. While our current facility requirement is for significantly less than 72,000 square feet, due to the competitive commercial real estate market in Silicon Valley,

we may not be able to secure a new facility lease on terms commercially favorable for us. In addition, the relocation of our current corporate headquarters could be disruptive to our business operations, result in increased expenses, hinder our ability to attract and retain qualified personnel, and may also cause employee turnover if the commute time for our headquartered employees is significantly increased.

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 involves the 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 control 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 control over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K for that fiscal year. 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. 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 reduce our stock price.

Risks Related to Our Common Stock

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. These broad market fluctuations may adversely affect the trading price of our common stock. The market prices for our common stock may also be influenced by many factors, including:

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the limited trading volume for shares of our common stock and the fact that a large percentage of our outstanding shares are held by a small number of shareholder;

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announcements of clinical trial results, technological innovations or new commercial products by us or our competitors;

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investor perception of us;

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sales of our stock by certain large institutional shareholders;

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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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failure to maintain or establish collaborative relationships;

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publicity regarding actual or potential developments relating to products under development by us or our competitors;

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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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future sales or expected sales of substantial amounts of common stock by shareholders;

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our ability to raise capital; and

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economic and other external factors.

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.

In addition, although our shares are currently listed by NASDAQ, we cannot assure you that we will be successful in maintaining a NASDAQ listing continuously or that we will be able to meet NASDAQ listing standards going forward. The failure to maintain the NASDAQ listing for our common stock could adversely affect the price for , and liquidity of, our common stock.

We have implemented certain anti-takeover provisions, which may make an acquisition less likely or might result in costly litigation or proxy battles.

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 entered into change of control agreements with our executive officers, both of which may provide for the payment of benefits to our officers and other key employees in connection with an acquisition. The provisions of our articles of incorporation, 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.

One or more of our shareholders may choose to pursue a lawsuit or engage in a proxy battle with management to limit our use of one or more of these anti-takeover protections. Any such lawsuit or proxy battle would, regardless of its merit or outcome, result in substantial costs and a diversion of management’s attention and resources.

We have never paid dividends on our capital stock.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to fund the development and growth of our business. Therefore, our shareholders may not receive any funds absent a sale of their shares. We cannot assure shareholders of a positive return on their investment if they sell their shares, nor can we assure that shareholders will not lose the entire amount of their investment.

Conflicts of interest and other disputes may arise between Grifols and us that may be resolved in a manner unfavorable to us and our other shareholders.

In August 2013, we entered into several agreements with Grifols as part of the completion of a private sale of shares of common stock to Grifols, including in particular the License Agreement, the Governance Agreement, and a registration rights agreement with respect to shares of common stock owned by Grifols. As a result of the various obligations under these agreements, in addition to Grifol’s ownership of a significant amount of our outstanding common stock, conflicts of interest may arise between us and Grifols from time to time. Disagreements regarding the rights and obligation of Grifols under these agreements could create conflicts of interest for certain of our directors who have been appointed by Grifols. Any such disagreements could also lead to actual disputes or legal proceedings that may be resolved in a manner unfavorable to us and our other shareholders. In addition, Grifols has a number of consent rights under the Governance Agreement, including the right to consent to any termination of our Chief Executive Officer or our appointment of a successor Chief Executive Officer and certain preemptive rights to participate in any future issuances of common stock (or common stock equivalents) by us or to acquire shares in the open market to maintain ownership thresholds specified in the Governance Agreement. Grifols may exercise any of these rights, or any of its other rights contained in its agreements with us, in a manner which is not necessarily in the best interest of us or our other shareholders. The result of any of these conflicts could adversely affect our business, financial condition, results of operations or the price of our common stock.

A small number of shareholders own a large percentage of our common stock and can influence the outcome of matters submitted to our shareholders for approval.

A small number of our shareholders own a large percentage of our common stock and can, therefore, influence the outcome of matters submitted to our shareholders for approval. Based on information known to us as of February 16, 2016, our two largest shareholders, collectively, control in excess of a majority of our

outstanding common stock. As a result, these shareholders have the ability to influence the outcome of matters submitted to our shareholders for approval, including certain proposed amendments to our amended and restated articles of incorporation (for example, amendments to increase the number of our authorized shares) and any other material transactions we may undertake in the future, such a financing transaction or a merger, consolidation or sale of all or substantially all of our assets. These shareholders may support proposals and actions with which you may disagree. The concentration of ownership could delay or prevent a change in control of our company or otherwise discourage a potential acquirer from attempting to obtain control of our company, which in turn could reduce the price of our common stock.

Item 1B. Unresolved Staff Comments

None.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

Item 5. Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Since June 11, 2014, our common stock has been traded on the NASDAQ Capital Market under the symbol “ARDM”. From December 21, 2006 to June 10, 2014, our common stock was quoted on the OTC Bulletin Board, an electronic quotation service for securities traded over-the-counter.

The following table sets forth the high and low closing sale prices of our common stock for the periods indicated as reported on the NASDAQ Capital Market or the OTC Bulletin Board, as appropriate.


	High		Low
2014
First Quarter	$	15.20	$	7.20
Second Quarter		10.80		7.08
Third Quarter		10.56		8.13
Fourth Quarter		9.14		6.82

2015
First Quarter	$	7.95	$	6.26
Second Quarter		7.67		6.33
Third Quarter		7.67		6.78
Fourth Quarter		7.22		3.61

As of March 7, 2016, there were 60 holders of record of our common stock. A greater number of holders of common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.

Dividend Policy

We have never declared or paid any cash dividends on our capital stock. 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.

Recent Sales of Unregistered Securities

All information under this Item has been previously reported on our Current Reports on Form 8-K, filed with the SEC.

Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

We have derived the selected financial data for the years ended and as of December 31, 2015 and 2014 from our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

The selected financial data for the years ended and as of December 31, 2013, 2012, and 2011 has been derived from financial statements not included in this Annual Report on Form 10-K.


	Years Ended December 31,
	2015			2014			2013			2012			2011
	(In thousands, except per share data)
Statements of operations data:
Total revenues	$	23,429		$	33,561		$	9,717		$	1,007		$	791
Total operating expenses		40,581			37,417			29,629			7,711			9,320
Loss from operations		(17,152	)		(3,856	)		(19,912	)		(6,704	)		(8,529	)
Interest income (expense), net		29			(271	)		(1,643	)		(1,520	)		(784	)
Other income (expense), including extinguishment of debt		(86	)		8,779			(9	)		(2	)		4
Net income (loss)		(17,209	)		4,652			(21,564	)		(8,226	)		(9,309	)
Basic net income (loss) per share		(1.17	)		0.32			(2.36	)		(1.63	)		(2.03	)
Diluted net income (loss) per share		(1.17	)		0.32			(2.36	)		(1.63	)		(2.03	)

Shares used in computing basic net income (loss) per share		14,747			14,700			9,154			5,032			4,585
Shares used in computing diluted net income (loss) per share		14,747			14,726			9,154			5,032			4,585

	As of December 31,
	2015			2014			2013			2012			2011
	(In thousands)
Balance sheet data:
Cash, cash equivalents and short-term investments	$	31,462		$	47,990		$	48,131		$	7,617		$	8,664
Working capital		27,730			43,736			42,394			6,479			8,017
Total assets		35,626			53,963			50,424			8,966			10,556
Deferred revenue current		—			790			4,379			—			—
Deferred revenue non current		5,000			7,845			—			—			—
Note payable and accrued interest net of discount		—			—			9,035			8,513			8,207
Accumulated deficit		(405,481	)		(388,272	)		(392,924	)		(371,360	)		(363,134	)
Total shareholders’ equity (deficit)		23,110			39,115			33,683			(1,441	)		689

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

The discussion below contains forward-looking statements that are based on the current beliefs of our management, as well as current assumptions made by, and information currently available to, our management. All statements contained in the discussion below, other than statements that are purely historical, are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause our future actual results, performance or achievements to differ materially from those expressed in, or implied by, any such forward-looking statements as a result of certain factors, including, but not limited to, those risks and uncertainties discussed in this section, as well as in the section entitled “Risk Factors”, and elsewhere in our other filings with the SEC. See “Cautionary Note Regarding Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K.

Our business is subject to significant risks including, but not limited to, our ability to maintain our collaboration agreement with Grifols, our ability to implement our product development strategy, the success of product development efforts, obtaining and enforcing patents important to our business, clearing the lengthy and expensive regulatory approval process and possible competition from other products. Even if product candidates

appear promising at various stages of development, they may not reach the market or may not be commercially successful for a number of reasons. Such reasons include, but are not limited to, the possibilities that the potential products may be found to be ineffective during clinical trials, may fail to receive necessary regulatory approvals, may be difficult to manufacture on a large scale, are uneconomical to market, may be precluded from commercialization by proprietary rights of third parties or may not gain acceptance from health care professionals and patients.

Investors are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to update these forward-looking statements in light of events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

Overview

We are an emerging specialty pharmaceutical company focused on the development and commercialization of products for the treatment of severe respiratory diseases by pulmonologists. Over the last decade, we invested a large amount of capital to develop drug delivery technologies, particularly the development of a significant amount of expertise in respiratory (pulmonary) drug delivery as incorporated in our lead product candidate in Phase 3 clinical trials, Pulmaquin. We 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 and other proprietary technologies, including our inhaled ciprofloxacin formulations. We have incurred significant losses and negative cash flow from our operations since our inception and expect to incur additional operating losses over at least the foreseeable future as we continue product development efforts, clinical trial activities, animal toxicology and safety testing and contract manufacturing efforts. To date, we have not had any significant product sales and do not anticipate receiving revenues from the sale of any of our products in the near term.

Inhaled Ciprofloxacin Program

Our lead development candidates are proprietary formulations of the potent antibiotic ciprofloxacin (Pulmaquin (ARD-3150) and Lipoquin (ARD-3100)) that are delivered by inhalation for the management of infections associated with the severe respiratory diseases cystic fibrosis (CF) and non-cystic fibrosis bronchiectasis (BE). The formulations differ in the proportion of rapidly available and slow release ciprofloxacin. Pulmaquin uses the slow release liposomal formulation (Lipoquin) mixed with a small amount of ciprofloxacin dissolved in an aqueous medium. We received orphan drug designations for Lipoquin for both of these indications in the United States and for CF in the EU. We have been granted orphan drug designation from the FDA for ciprofloxacin for inhalation for the management of BE. We may seek orphan drug designation for other eligible product candidates we develop. In May 2014, the FDA designated Pulmaquin as a Qualified Infectious Disease Product (QIDP). The QIDP designation, granted for the treatment of non-cystic fibrosis bronchiectasis patients with chronic lung infections with Pseudomonas aeruginosa , makes Pulmaquin eligible to benefit from certain incentives for the development of new antibiotics provided under the Generating Antibiotic Incentives Now Act (GAIN Act). These incentives include priority review and eligibility for fast-track status. In September 2014, we announced that the FDA granted Fast Track Designation to Pulmaquin for non-CF BE patients with chronic lung infections with Pseudomonas aeruginosa . We have been issued seven U.S. patents covering composition of matter and method of treatment for our inhaled ciprofloxacin formulations with the longest patent

protection until 2031. We have also been granted key composition of matter patents for our inhaled ciprofloxacin formulations in Europe, Canada, Japan and Australia/New Zealand. We are currently fully enrolled and dosing patients in two Phase 3 clinical trials with Pulmaquin in BE.

In order to expedite anticipated time to market and increase our market acceptance, we have elected to deliver our formulations via an FDA-approved, widely-accepted nebulizer system for our clinical trials and we intend to continue using this approach and obtain initial marketing approval also with a currently FDA-approved nebulizer system.

The ongoing Phase 3 clinical program for Pulmaquin in BE consists of two worldwide, double-blind, placebo-controlled pivotal trials (ORBIT-3 and ORBIT-4) that are identical in design except for a pharmacokinetics sub-study to be conducted in one of the trials. Each trial has enrolled patients (278 in ORBIT-3 and 304 in ORBIT-4) into a 48 week double blind period consisting of 6 cycles of 28 days on treatment with Pulmaquin or placebo plus 28 days off treatment, followed by a 28 day open label extension in which all participants will receive Pulmaquin (total treatment duration approximately one year). The superiority of Pulmaquin versus placebo during the double blind period is being evaluated in terms of the time to first pulmonary exacerbation (primary endpoint), while key secondary endpoints include the reduction in the number of pulmonary exacerbations and improvements in quality of life measures. Lung function is being monitored as a safety indicator.

Liposomal Ciprofloxacin for Biodefense Purposes: Treatment of Q Fever, Tularemia, Pneumonic Plague, Inhalation Anthrax and other biodefense purposes

In addition to our programs addressing bronchiectasis and cystic fibrosis licensed to Grifols, our inhaled ciprofloxacin has also been tested for the prevention and treatment of inhaled “bioterrorism” infections, such as Q fever, inhalation anthrax, tularemia, melioidosis and pneumonic plague. We have obtained a royalty-bearing license for the biodefense applications from Grifols.

Liposomal Ciprofloxacin for Non-Tuberculous Mycobacteria

In August 2013, the National Institutes of Health (NIH) awarded us a Small Business Initiative Research (SBIR) grant in the amount of approximately $278,000 to investigate the treatment of pulmonary non-tuberculous mycobacteria (PNTM) infections with our inhaled liposomal ciprofloxacin products Pulmaquin and Lipoquin. The research program was conducted in collaboration with Oregon State University, Corvalis (OSU).

biofilms in the airways and they are able to cause intracellular infections, e.g. by invasion of pulmonary macrophages. The current clinical paradigm is to treat patients with lung or disseminated disease with combination therapy given orally or by IV. Unfortunately, these therapies often fail, and may have significant side effects.

ARD-1600 Inhaled Nicotine

An inhaled nicotine product utilizing our AERx delivery system that would effectively address the acute craving for cigarettes and, through gradual reduction of the peak nicotine levels, could wean-off patients from cigarette smoking and from the nicotine addiction. In September 2012, we were issued a new U.S. patent for our inhaled nicotine technology from a second patent family that provides protection until at least 2024. Previously, we had two issued U.S. patents covering systems for effecting smoking cessation, which provided exclusivity until 2019. The first two patents are method of treatment patents, covering systems, devices and containers for

delivering aerosolized nicotine formulations in specific ways which we believe to be important for cigarette smokers who want to quit smoking. This new patent extends the coverage to containers with novel features anticipated to provide additional smoking cessation benefits.

We are seeking collaborations and non-dilutive financing to further develop and commercialize this product for either the pharmaceutical market or the direct-to-consumer market or both.

Other Programs

Grifols Collaboration Transaction

See Note 6 to the accompanying consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for information on the Grifols Collaboration Transaction.

Critical Accounting Policies and Estimates

We consider certain accounting policies related to revenue recognition, impairment of long-lived assets, exit/disposal activities, research and development, income taxes and stock-based compensation 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 consolidated 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, 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 grants, collaboration agreements and feasibility studies. We recognize revenue under the provisions of the Securities and Exchange Commission issued Staff Accounting Bulletin 104, Topic 13, Revenue Recognition Revised and Updated (“SAB 104”) and Accounting Standards Codification (“ASC”) 605-25, Revenue Arrangements-Multiple Element Arrangements (“ASC 605-25”). Revenue for arrangements not having multiple deliverables, as outlined in ASC 605-25, is recognized once costs are incurred and collectability is reasonably assured.

Collaborative license and development agreements often require us to provide multiple deliverables, such as a license, research and development, product steering committee services and other performance obligations. These agreements are accounted for in accordance with ASC 605-25. Under this standard, delivered items are evaluated to determine whether such items 1) have value to our collaborators on a stand-alone basis and 2) if the item includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the vendor.

Deliverables that meet these criteria are considered a separate unit of accounting. Deliverables that do not meet these criteria are combined and accounted for as a single unit of accounting. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling

price method and the appropriate revenue recognition principles are applied to each unit. We allocate non-contingent consideration to each stand-alone deliverable based upon the relative selling price of each element. When applying the relative selling price method, we determine the selling price for each deliverable using vendor-specific objective evidence, or VSOE, of selling price, if it exists, or third-party evidence, or TPE, of selling price, if it exists. If neither VSOE nor TPE of selling price exist for a deliverable, we use best estimated selling price, or BESP, for that deliverable. Significant management judgment may be required to determine the relative selling price of each element.

When we determine that an arrangement should be accounted for as a single unit of accounting, we must determine the period over which the performance obligations will be performed and revenue will be recognized. We estimate our performance period used for revenue recognition based on the specific terms of each agreement, and adjust the performance periods, if appropriate, based on the applicable facts and circumstances. Significant management judgment may be required to determine the level of effort required under an arrangement and the period over which we are expected to complete our performance obligations under the arrangement. If we cannot reasonably estimate when our performance obligations either are completed or become inconsequential, then revenue recognition is deferred until we can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.

Royalty revenue has been earned under the terms of the asset sale agreement with Zogenix through March 31, 2014 and may be earned in the future under the Grifols License Agreement. We recognize royalty revenue when the amounts can be determined and when collectability is probable. We anticipate recognizing revenue from quarterly royalty payments one quarter in arrears since we believe that we will not be able to determine quarterly royalty earnings until we receive our royalty statements from collaboration partners.

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. 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, we write down the assets to their estimated fair values and recognize the loss in the consolidated statements of operations.

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 that are reimbursed under collaborative and government grants approximate the revenue recognized under such agreements. We expense research and development costs as incurred.

Income Taxes

We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. In addition, we evaluate our tax positions to ensure that a minimum recognition threshold is met before we recognize the tax position in the consolidated financial statements. The aforementioned differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets.

We assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including our historical levels of income and losses, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we do not consider it more likely than not that we will recover our deferred tax assets, we will record a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. At December 31, 2015 and 2014, we believed that the amount of our deferred income taxes would not be ultimately recovered. Accordingly, we recorded a full valuation allowance for deferred tax assets. However, should there be a change in our ability to recover our deferred tax assets, we would recognize a benefit to our tax provision in the period in which we determine that it is more likely than not that we will recover our deferred tax assets.

During the year ended December 31, 2014, the Company had pre-tax income of $4.7 million. The provision for Federal and state income taxes related to such pre-tax income has been offset by the utilization of available net operating loss carryovers.

Stock-Based Compensation

We recognize compensation expense, using a fair-value based method, for all costs related to stock-based payments including stock options, restricted stock awards and stock issued under the Employee Stock Purchase Plan (“ESPP”). ASC topics require companies to estimate the fair value of stock-based payment awards on the date of the grant using an option pricing model.

We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards as of the grant date. The Black-Scholes model is complex and dependent upon key data input estimates. The primary data inputs with the greatest degree of judgment are the expected terms of the stock options and the estimated volatility of our stock price. The Black-Scholes model is highly sensitive to changes in these two inputs. The expected term of the options represents the period of time that options granted are expected to be outstanding. We use the simplified method to estimate the expected term as an input into the Black-Scholes option pricing model. We determine expected volatility using the historical method, which is based on the historical daily trading data of our common stock over the expected term of the option. For more information about our accounting for stock-based compensation, see Note 9 to the consolidated financial statements included in this Annual Report on Form 10-K.

Recent Accounting Pronouncements

See Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K for information on recent accounting pronouncements.

Results of Operations

Years ended December 31, 2015 and 2014

Our net loss of $17.2 million for the year ended December 31, 2015 increased by approximately $21.9 million as compared to the net income of $4.7 million for the year ended December 31, 2014. The increase in the net loss resulted primarily from the decrease in contract revenue—related party of approximately $9.7 million for the reimbursement of Pulmaquin project-related expenses as we have utilized the full amount of the $65 million of the Grifols-funded budget provided under the License Agreement and a decrease in grant revenue from government grants of approximately $0.3 million, as well as an increase in operating expenses of $3.2 million primarily related to the ongoing Phase 3 trials. Net income of $4.7 million in 2014 resulted from the one-time non-cash gains of approximately $8.9 million from the assignment of royalty rights and extinguishment of debt recorded in 2014. Excluding such gains, the Company’s loss in 2014 was $4.2 million.

Total revenue was approximately $23.4 million for the year ended December 31, 2015 as compared to approximately $33.6 million for the year ended December 31, 2014. We recognized approximately $23.4 million

in revenue under the Grifols License Agreement, and approximately $0.1 million in government grant revenue for the year ended December 31, 2015 as compared to approximately $33.0 million under the Grifols License Agreement, approximately $0.3 million in government grant revenue and approximately $0.2 million in royalty revenue for the year ended December 31, 2014.

Operating expenses were approximately $40.6 million for the year ended December 31, 2015, which represented an approximately $3.2 million increase as compared to the year ended December 31, 2014. Research and development expenses increased approximately $4.1 million and general and administrative expenses decreased approximately $0.9 million. The increase in research and development expenses was due to higher contract manufacturing, contract testing and clinical trial costs related to the Pulmaquin program and higher employee-related expenses due to the addition of staff, offset by a decrease in consulting expenses in support of the Pulmaquin program. The decrease in general and administrative expenses was due to lower consulting expenses, lower officer bonuses, lower legal expenses and lower expenses for NASDAQ and public filings, offset by an increase in employee-related costs for the addition of staff.

Liquidity and Capital Resources

The Company believes that its cash and cash equivalents as of December 31, 2015 will fund its operations throughout 2016. However, the Company will need to raise additional capital in 2016 to maintain the Company’s current level of product development activity. Accordingly, the Company anticipates raising additional capital in 2016, through the issuance of debt or equity securities, strategic transactions or otherwise, to fund the Company’s operations and continue the development of the Company’s leading product candidate Pulmaquin. No assurance can be given that the Company will be successful in raising such additional capital on favorable terms or at all. If the Company is unable to obtain additional funds when required, it will delay or reduce the scope of all or a portion of its development programs or dispose of assets or technology.

Since inception, we have funded our operations primarily through public offerings and private placements of our capital stock, license fees and milestone payments from collaborators, borrowings, the milestone and royalty payments associated with the sale of assets to Zogenix and interest earned on investments. We have incurred significant losses and negative cash flows from operations since our inception. In 2015, we utilized the full $65 million of the Grifols-funded budget provided under the License Agreement.

Year ended December 31, 2015

As of December 31, 2015, we had cash and cash equivalents of approximately $31.5 million, down from approximately $48.0 million at December 31, 2014. The decrease primarily resulted from the use of cash to fund our ongoing operations offset by the receipt of approximately $23.4 million from Grifols for Pulmaquin program-related expenses. Receipts from Grifols for the Pulmaquin program were lower in 2015 compared to 2014 as in 2015 we utilized the full $65 million of the Grifols-funded budget provided under the License Agreement.

Net cash used by operating activities for the year ended December 31, 2015 was approximately $16.7 million as a result of operating activities after adjusting our $17.2 million net loss for non-cash expenses of approximately $1.2 million in stock based compensation and depreciation and adjusting for net changes in operating assets and liabilities of approximately $0.9 million. Net cash provided by financing activities for the year ended December 31, 2015 was approximately $0.2 million from the proceeds from the purchase of common stock primarily through the Employee Stock Purchase Plan (ESPP).

Year ended December 31, 2014

As of December 31, 2014, we had cash and cash equivalents of approximately $48.0 million, slightly down from approximately $48.1 million at December 31, 2013. The nominal use of cash primarily resulted from the Company’s use of cash to fund operations of approximately $36.1 million, offset by the receipt of approximately

$31.3 million from Grifols for incurred and future Pulmaquin program-related expenses and the receipt of the $5.0 million milestone payment from Grifols for the dosing of the first patient in our Phase 3 clinical program with Pulmaquin.

Net cash provided by operating activities for the year ended December 31, 2014 was approximately $0.1 million reflecting the result of operating activities after adjusting our approximately $4.7 million net income for non-cash gains, including approximately $8.9 million from the assignment of royalty rights for future Zogenix royalties and extinguishment of debt, offset by non-cash expenses of approximately $0.9 million in depreciation and stock based-compensation, and adjusting for net changes in operating assets and liabilities of approximately $3.4 million. Net cash used in investing activities was approximately $0.4 million as the company invested in equipment to support the Pulmaquin program. Net cash provided by financing activities for the year ended December 31, 2014 was approximately $0.2 million from the proceeds from the purchase of common stock primarily through the ESPP.

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 have one inactive, wholly-owned subsidiary incorporated in Delaware, Aradigm Royalty Financing LLC, one active wholly-owned subsidiary domiciled in Australia and one inactive, wholly-owned subsidiary domiciled in the UK.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

The disclosures in this section are not required since we qualify as a smaller reporting company.

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Aradigm Corporation

We have audited the accompanying consolidated balance sheets of Aradigm Corporation as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity and cash flows for the years then ended. 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. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. Our audits 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 as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aradigm Corporation at December 31, 2015 and 2014 and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ OUM & Co. LLP

San Francisco, California

March 30, 2016

ARADIGM CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	December 31,
	2015			2014
ASSETS
Current assets:
Cash and cash equivalents	$	31,462		$	47,990
Restricted cash		—			250
Receivables		150			1,058
Prepaid and other current assets		3,634			1,207

Total current assets		35,246			50,505
Property and equipment, net		299			502
Other assets		81			2,956

Total assets	$	35,626		$	53,963

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,789		$	2,706
Accrued clinical and cost of other studies		4,315			2,070
Accrued compensation		1,159			819
Deferred revenue—related party		—			790
Deferred rent		37			—
Facility lease exit obligation		104			193
Other accrued liabilities		112			191

Total current liabilities		7,516			6,769
Accrued clinical and cost of other studies, non-current		—			33
Deferred rent, non-current		—			97
Facility lease exit obligation, non-current		—			104
Deferred revenue- related party, non-current		5,000			7,845

Total liabilities		12,516			14,848

Commitments and contingencies (Note 8)

Shareholders’ equity:
Preferred stock, 5,000,000 shares authorized, none outstanding
Common stock, no par value; authorized shares: 25,045,765 at December 31, 2015 and December 31, 2014; issued and outstanding shares: 14,761,351 at December 31, 2015; 14,726,960 at December 31, 2014		428,591			427,387
Accumulated deficit		(405,481	)		(388,272	)

Total shareholders’ equity		23,110			39,115

Total liabilities and shareholders’ equity	$	35,626		$	53,963

See accompanying Notes to Consolidated Financial Statements.

ARADIGM CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)


	Years Ended December 31,
	2015			2014
Revenue:
Contract revenue—related party (Note 6)	$	23,372		$	33,038
Grant revenue		57			323
Royalty revenue		—			200

Total revenues		23,429			33,561

Operating expenses:
Research and development		35,276			31,172
General and administrative		5,294			6,226
Restructuring and asset impairment		11			19

Total operating expenses		40,581			37,417

Loss from operations		(17,152	)		(3,856	)
Interest income		29			17
Interest expense		—			(288	)
Other expense, net		(86	)		(85	)
Gain on assignment of royalty interests		—			5,823
Gain from extinguishment of debt		—			3,041

Net income (loss) and comprehensive income (loss)	$	(17,209	)	$	4,652

Basic net income (loss) per common share	$	(1.17	)	$	0.32

Diluted net income (loss) per common share	$	(1.17	)	$	0.32

Shares used in computing basic net income (loss) per common share		14,747			14,700

Shares used in computing diluted net income (loss) per common share		14,747			14,726

See accompanying Notes to Consolidated Financial Statements.

ARADIGM CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except share data)


	Common Stock				Accumulated Deficit			Total Shareholders’ Equity
	Shares		Amount		Accumulated Deficit			Total Shareholders’ Equity
Balances at December 31, 2013		14,681,274	$	426,607	$	(392,924	)		33,683
Issuance of common stock under the employee stock purchase plan		33,161		157		—			157
Issuance of restricted stock awards		11,250		—		—			—
Exercise of options		1,275		7		—			7
Non-cash stock-based compensation expense for stock options, restricted stock and restricted stock units		—		616		—			616
Net income		—		—		4,652			4,652

Balances at December 31, 2014		14,726,960		427,387		(388,272	)	$	39,115

Issuance of common stock under the employee stock purchase plan		30,891		154		—			154
Exercise of options		3,500		21		—			21
Non-cash stock-based compensation expense for stock options, restricted stock and restricted stock units		—		1,029		—			1,029
Net loss		—		—		(17,209	)		(17,209	)

Balances at December 31, 2015		14,761,351	$	428,591	$	(405,481	)	$	23,110

See accompanying Notes to Consolidated Financial Statements.

ARADIGM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Years Ended December 31,
	2015			2014
Cash flows from operating activities:
Net income (loss)	$	(17,209	)	$	4,652
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		203			310
Stock-based compensation expense		1,029			616
Gain on assignment of royalty interests		—			(5,823	)
Gain from extinguishment of debt		—			(3,041	)
Amortization of note discount		—			19

Changes in operating assets and liabilities:
Restricted cash		250			(250	)
Receivables		908			(966	)
Prepaid and other current assets		(2,427	)		241
Other assets		2,875			(2,840	)
Accounts payable		(917	)		2,087
Accrued compensation		340			621
Current deferred revenue—related party		(790	)		(3,589	)
Accrued liabilities		2,133			428
Deferred rent		(60	)		(35	)
Deferred revenue—related party, non-current		(2,845	)		7,845
Facility lease exit obligation		(193	)		(168	)

Net cash (used in) provided by operating activities		(16,703	)		107

Cash flows from investing activities:
Capital expenditures		—			(412	)

Net cash used in investing activities		—			(412	)

Cash flows from financing activities:
Proceeds from issuance of common stock		175			164

Net cash provided by financing activities		175			164

Net decrease in cash and cash equivalents		(16,528	)		(141	)
Cash and cash equivalents at beginning of year		47,990			48,131

Cash and cash equivalents at end of year	$	31,462		$	47,990

Supplemental disclosure of cash flow information:
Non cash reduction in other assets from extinguishment of debt and assignment of royalty interests		—			(237	)
Non cash reduction in note payable from extinguishment of debt and assignment of royalty interests		—			(9,101	)

See accompanying Notes to Consolidated Financial Statements.

ARADIGM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization

Aradigm Corporation (the “Company”) is a California corporation, incorporated in 1991, focused on the development and commercialization of drugs delivered by inhalation for the prevention and treatment of severe respiratory diseases. The Company’s principal activities to date have included conducting research and development and developing collaborations. Management does not anticipate receiving revenues from the sale of any of its products in the upcoming year. The Company operates as a single operating segment.

Basis of Presentation and Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

Liquidity and Financial Condition

The Company has incurred significant operating losses and negative cash flows from operations. At December 31, 2015, the Company had an accumulated deficit of approximately $405.5 million, working capital of approximately $27.7 million and shareholders’ equity of approximately $23.1 million. The Company believes that its cash and cash equivalents totaling approximately $31.5 million as of December 31, 2015 will be sufficient to fund its operations at least through 2016. However, the Company will need to raise additional capital in 2016 to maintain the Company’s current level of product development activity. Accordingly, the Company anticipates raising additional capital in 2016, through the issuance of debt or equity securities, strategic transactions or otherwise, to fund the Company’s operations and continue the development of the Company’s leading product candidate Pulmaquin. No assurance can be given that the Company will be successful in raising such additional capital on favorable terms or at all. If the Company is unable to obtain additional funds when required, it will delay or reduce the scope of all or a portion of its development programs or dispose of assets or technology.

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, assumptions for valuing options and warrants, and income taxes. Actual results could differ from these estimates.

Cash Equivalents

All highly liquid investments with maturities of three months or less at the time of purchase are classified as cash equivalents.

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 no internally developed computer software. Leasehold improvements are amortized over the shorter of the term of the lease or useful life of the improvement.

The estimated useful lives of property and equipment are as follows:


Computer equipment and software		3 to 5 years
Furniture and fixtures		5 to 7 years
Lab equipment		5 to 7 years
Machinery and equipment		5 years
Leasehold improvements		5 to 17 years

Impairment 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 estimated fair values and the loss is recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss).

Accounting for Costs Associated with Exit or Disposal Activities

The Company recognizes a liability for the cost associated with an exit or disposal activity that is measured initially at its fair value in the period in which the liability is incurred.

Costs to terminate an operating lease or other contracts are (a) costs to terminate the contract before the end of its term or (b) costs that will continue to be incurred under the contract for its remaining term without economic benefit to the entity. In periods subsequent to initial measurement, changes to the liability are measured using the credit adjusted risk-free rate that was used to measure the liability initially.

Revenue Recognition

Contract revenues consist of revenues from grants, collaboration agreements and feasibility studies. License and collaboration revenue is primarily generated through agreements with strategic partners for the development and commercialization of our product candidates. The terms of the agreement typically include non-refundable upfront fees, funding of research and development activities, payments based upon achievement of milestones and royalties on net product sales. The Company recognizes revenue under the provisions of the Securities and Exchange Commission issued Staff Accounting Bulletin 104, Topic 13, Revenue Recognition Revised and Updated ( “SAB Topic 13”) and ASC 605-25, Revenue Recognition-Multiple Elements. Revenue for arrangements not having multiple deliverables, as outlined in ASC 605-25, is recognized once costs are incurred and collectability is reasonably assured.

Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured. Multiple-deliverable arrangements, such as license and development agreements, are analyzed to determine whether the deliverables can be separated or whether they must be accounted for as a single unit of accounting. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price method and the appropriate revenue recognition principles are applied to each unit. When the Company determines that an arrangement should be accounted for as a single unit of accounting, it must determine the period over which the performance obligations will be performed and revenue will be recognized.

The Company estimates its performance period used for revenue recognition based on the specific terms of each agreement, and adjusts the performance periods, if appropriate, based on the applicable facts and circumstances. Significant management judgment may be required to determine the level of effort required under an arrangement and the period over which the Company is expected to complete its performance obligations

under the arrangement. If the Company cannot reasonably estimate when its performance obligations either are completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.

The Company prospectively adopted the provisions of Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605); Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”) for new and materially modified arrangements originating on or after January 1, 2010. ASU 2009-13 provides updated guidance on how the deliverables in an arrangement should be separated, and how consideration should be allocated, and it changes the level of evidence of standalone selling price required to separate deliverables by allowing a vendor to make its best estimate of the standalone selling price of deliverables when vendor-specific objective evidence or third-party evidence of selling price is not available.

The Company allocates non-contingent consideration to each stand-alone deliverable based upon the relative selling price of each element. When applying the relative selling price method, the Company determines the selling price for each deliverable using vendor-specific objective evidence, or VSOE, of selling price, if it exists, or third-party evidence, or TPE, of selling price, if it exists. If neither VSOE nor TPE of selling price exist for a deliverable, the Company uses best estimated selling price, or BESP, for that deliverable.

Assuming the elements meet the revenue recognition guidelines, the revenue recognition methodology prescribed for each unit of accounting is summarized below:

Upfront Fees —The Company defers recognition of non-refundable upfront fees if there are continuing performance obligations without which the technology licensed has no utility to the licensee. If the Company has continuing performance obligations through research and development services that are required because know-how and expertise related to the technology is proprietary to the Company, or can only be performed by the Company, then such up-front fees are deferred and recognized over the estimated period of the performance obligation. The Company bases the estimate of the period of performance on factors in the contract. Actual time frames could vary and could result in material changes to the results of operations. When the collaboration partners request the Company to continue performing the research and development services in collaboration beyond the initial period of performance the remaining unamortized deferred revenue and any new continuation or license fees are recognized over the extended period of performance.

Funded Research and Development and Grant Revenue —Revenue from research and development services is recognized during the period in which the services are performed and is based upon the number of full-time-equivalent personnel working on the specific project at the agreed-upon rate. The full-time equivalent amount can vary each year if the contracts allow for a percentage increase determined by relevant salary surveys, if applicable. Reimbursements from collaborative partners and grants for agreed upon direct costs including direct materials and outsourced, or subcontracted, pre-clinical studies are classified as revenue and recognized in the period the reimbursable expenses are incurred. Payments received in advance are recorded as deferred revenue until the research and development services are performed or costs are incurred.

Milestones —Substantive milestone payments are considered to be performance bonuses that are recognized upon achievement of the milestone only if all of the following conditions are met: the milestone payments are non-refundable; achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement; substantive effort is involved in achieving the milestone; the amount of the milestone is reasonable in relation to the effort expended or the risk associated with achievement of the milestone; and a reasonable amount of time passes between the up-front license payment and the first milestone payment as well as between each subsequent milestone payment. If any of these conditions are not met, the milestone payments are deferred and recognized as revenue over the term of the arrangement as the Company completes its performance obligations.

Royalties— The Company recognizes royalty revenues from licensed products upon the sale of the related products.

Research and Development

Stock-Based Compensation

The Company accounts for share-based payment arrangements in accordance with ASC 718, Compensation-Stock Compensation and ASC 505-50, Equity-Equity Based Payments to Non-Employees which requires the recognition of compensation expense, using a fair-value based method, for all costs related to share-based payments including stock options and restricted stock awards and stock issued under the Employee Stock Purchase Plan (“ESPP”). These standards require companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. See Note 9 for further discussion of the Company’s stock-based compensation plans.

Income Taxes

The Company makes certain estimates and judgments in determining income tax expense for consolidated financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of the recognition of revenue and expense for tax and financial statement purposes. As part of the process of preparing the financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves the estimation of the current tax exposure under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are included in the Company’s consolidated balance sheets.

The Company assesses the likelihood that it will be able to recover its deferred tax assets. The Company considers all available evidence, both positive and negative, including its historical levels of income and losses, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If the Company does not consider it more likely than not that it will recover its deferred tax assets, it will record a valuation allowance against the deferred tax assets that it estimates will not ultimately be recoverable. At December 31, 2015 and 2014, the Company believed that the amount of its deferred income taxes would not be ultimately recovered. Accordingly, the Company recorded a full valuation allowance for deferred tax assets. However, should there be a change in the Company’s ability to recover its deferred tax assets, it would recognize a benefit to its tax provision in the period in which it determines that it is more likely than not that it will recover its deferred tax assets.

Net Income/(Loss) Per Common Share

Basic net income/(loss) per common share is computed using the weighted-average number of shares of common stock outstanding during the period less the weighted-average number of shares subject to repurchase. Diluted net income/(loss) per common share is based on the weighted average number of common and common equivalent shares, such as stock options and unvested restricted stock shares outstanding during the period. Unvested restricted stock awards subject to repurchase totaled 300 shares for both the years ended December 31, 2015 and 2014. Potentially dilutive securities were included for the year ended December 31, 2014 but were excluded for the year ended December 31, 2015 because the inclusion of such shares would have had an anti-dilutive effect.

Potentially dilutive securities include the following (in thousands):


	Years Ended December 31,
	2015		2014
Outstanding stock options		947		515
Unvested stock units		10		10
Outstanding warrants		71		71

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 and corporate notes 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 accompanying Consolidated Balance Sheets.

Comprehensive Income (Loss)

ASC 220, Comprehensive Income requires that an entity’s change in equity or net assets during a period from transactions and other events from non-owner sources be reported. The Company reports unrealized gains or losses on its available-for-sale securities as other comprehensive income (loss). Total comprehensive income (loss) has been disclosed on the Consolidated Statement of Operations and Comprehensive Income (Loss).

Recently Issued Accounting Pronouncements

In January 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, (“ASU 2015-01”). This ASU eliminates from U.S. GAAP the concept of Extraordinary Items. ASU 2015-01 is effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted, provided that the guidance is applied from the beginning of the fiscal year of adoption. The guidance may be applied prospectively or retrospectively. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2015-08”) which raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. ASU 2015-08 is effective for annual periods beginning on or after December 15, 2015. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.

In May 2015, the FASB issued ASU No. 2015-09, Revenue from Contracts with Customers (“ASU 2015-09”). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) (“ASU 2015-14”), Deferral of the Effective Date. With the issuance of ASU 2015-14, the new revenue guidance ASU 2014-09 as amended by ASU 2015-14 is effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date for ASU 2015-09 for annual reporting periods beginning after December 15, 2016, but otherwise earlier adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods

presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

In June 2015, the FASB issued ASU No. 2015-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. (“ASU 2015-12”). The standard provides guidance that a performance target that affects vesting of a share-based payment and that could be achieved after the requisite service condition is a performance condition. As a result, the target is not reflected in the estimation of the award’s grant date fair value. Compensation cost for such award would be recognized over the required service period, if it is probable that the performance condition will be achieved. ASU 2015-12 is effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The guidance should be applied on a prospective basis to awards that are granted or modified on or after the effective date. Companies also have the option to apply the amendments on a modified retrospective basis for performance targets outstanding on or after the beginning of the first annual period presented as of the adoption date. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

In August 2015, the FASB issued ASU No. 2015-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. (“ASU 2015-15”). This ASU provides guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern and provides principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. ASU 2015-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, requiring all deferred tax assets and liabilities, and any related valuation allowance, to be classified as non-current on the balance sheet. The classification change for all deferred taxes as non-current simplifies entities’ processes as it eliminates the need to separately identify the net current and net non-current deferred tax asset or liability in each jurisdiction and allocate valuation allowances. Early adoption is permitted. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessee’s to recognize assets and liabilities for leases with lease terms of more than 12 months in the balance sheet. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new guidance is effective for fiscal years and for interim periods within those fiscal years, beginning after December 15, 2018. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.

2. Cash and Cash Equivalents

At December 31, 2015 and December 31, 2014, the amortized cost of the Company’s cash and cash equivalents approximated their fair values. The Company currently invests its cash and cash equivalents in money market funds.

3. Fair Value Measurements

The Company follows ASC 820, Fair Value Measurement which clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to

measure fair value and requires certain disclosures about the use of fair value measurements. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 values are based on quoted prices in active markets. Level 2 values are based on significant other observable inputs. Level 3 values are based on significant unobservable inputs.

The Company’s cash and cash equivalents at December 31, 2015 and December 31, 2014 consist of cash and money market funds. Money market funds are valued using quoted market prices.

4. Property and Equipment

Property and equipment consist of the following (in thousands):


	December 31,
	2015			2014
Machinery and equipment	$	4,783		$	4,792
Furniture and fixtures		1,144			1,139
Lab equipment		2,138			2,138
Computer equipment and software		2,679			2,682
Leasehold improvements		1,844			1,844

Property and equipment		12,588			12,595
Less accumulated depreciation and amortization		(12,289	)		(12,093	)

Property and equipment, net	$	299		$	502

Depreciation expense was $203,000 and $310,000 for the years ended December 31, 2015 and 2014, respectively.

5. Sublease Agreement and Lease Exit Liability:

On July 18, 2007, the Company entered into a sublease agreement with Mendel Biotechnology, Inc. (“Mendel”) to lease approximately 48,000 square feet of the Company’s 72,000 square foot headquarters facility located in Hayward, California.

During the year ended December 31, 2007, the Company recorded a $2.1 million lease exit liability and related expense for the expected loss on the sublease, in accordance with ASC 420 Exit or Disposal Cost Obligations, because the monthly payments the Company expects to receive under the sublease are less than the amounts that the Company will owe the lessor for the sublease space. The fair value of the lease exit liability was determined using a credit-adjusted risk-free rate to discount the estimated future net cash flows, consisting of the minimum lease payments to the lessor for the sublease space and payments the Company will receive under the sublease. The sublease loss and ongoing accretion expense required to record the lease exit liability at its fair value using the interest method were recorded as part of restructuring and asset impairment expense in the Consolidated Statement of Operations and Comprehensive Loss in the year ended December 31, 2007. The lease exit liability activity for the years ended December 31, 2015 and 2014 are as follows (in thousands):


	Year Ended December 31,
	2015			2014
Balance at beginning of year	$	297		$	465
Accretion expense		11			19
Lease payments		(204	)		(187	)

Balance at end of the year	$	104		$	297

The Company classified all of the $104,000 lease exit liability in current liabilities in the accompanying Consolidated Balance Sheet at December 31, 2015.

6. Collaboration Agreement

Grifols License and Collaboration Agreement

On May 20, 2013, the Company and Grifols, S.A., (“Grifols”) and certain other investors (the “Investors”) entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”), pursuant to which the Company agreed, subject to the terms and conditions set forth in the Stock Purchase Agreement, to issue and sell a total of 5,244,363 shares of the Company’s common stock (“Common Stock”) to Grifols and an additional 3,104,838 shares of Common Stock to the Investors, for a total sale of 8,349,201 shares of Common Stock (the “Company Stock Sale”) for a purchase price of $4.96 per share. The aggregate gross consideration paid to the Company in August 2013 in the Company Stock Sale was approximately $41.4 million.

In conjunction with signing the Stock Purchase Agreement, the Company and Grifols agreed to enter into a License and Collaboration Agreement (the “License Agreement”) at the closing of the Company Stock Sale; Grifols and the Company are considered to be related parties and as a result, all transactions between the two entities will be recognized as related party transactions. The License Agreement exclusively licenses the Company’s inhaled liposomal ciprofloxacin compounds for the indication of non-cystic fibrosis bronchiectasis and other indications (the “Program”) to Grifols on a worldwide basis. Grifols funds development expenses of up to $65 million for the first indication of non-cystic fibrosis bronchiectasis with all other indications fully funded by Grifols and will commercialize products from the Program (“Products”), and pay development milestones and royalties on future commercial sales of Products. The License Agreement is described further below.

On July 15, 2013 shareholders of the Company (i) approved certain amendments to the Company’s charter including amendments necessary to increase the total number of shares of Common Stock authorized to be issued by the Company to at least 17,670,765 shares, including the 8,349,201 shares to be sold in the Company Stock Sale (the “Charter Amendment”) and (ii) approved the Company’s closing of the Company Stock Sale and entering into the License Agreement, Governance Agreement and other agreements described below and in the Stock Purchase Agreement (the “Transactions”). Shareholders of the Company holding more than 50% of the outstanding shares of the Company’s Common Stock voted in favor of these proposals at a special meeting.

The closing of the Transactions was subject to certain closing conditions, including, among others the Company’s entering into binding terms with a third party to commercially manufacture Products to permit the Company to satisfy its obligation to commercially supply Grifols with Products. All conditions to the closing of the Transactions were met as of August 27, 2013 and the Company Stock Sale was completed on August 27, 2013.

In August of 2013 Grifols paid approximately $26.0 million for the shares of the Company’s common stock at a purchase price of $4.96 per share, which reflected the contractual price for the Company’s common stock as stated in the Stock Purchase Agreement on May 20, 2013. Following the announcement of the collaboration, execution of a supply agreement and satisfaction of the other conditions of closing, the stock price rose to $8.00 per share at the time of closing. Consequently, the contractual price of $4.96 per share resulted in a $3.04 per share discount from the August 27, 2013 closing price of $8.00 per share, a discount of approximately $15.9 million from the fair market value of the common stock on the effective date of the Grifols License and Collaboration Agreement. The Company determined this transaction was not within the scope of ASC 605-25 and, accordingly, the Company recorded the sale of common stock to Grifols at fair value based on the closing price of the Company’s stock on August 27, 2013 at $8.00 per share. This discount, which is a non-cash charge, has been recorded as Collaboration Arrangement Acquisition Cost in the Company’s Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 2013.

License Agreement

The License Agreement was signed simultaneously with the closing of the Company Stock Sale. Under the License Agreement, the Company granted to Grifols an exclusive license to the Program, the lead product candidate of which is named Pulmaquin. The license permits Grifols to commercialize Products throughout the world and grants Grifols a back-up manufacturing right to produce Products.

The Company is responsible for developing the Product for non-cystic fibrosis bronchiectasis or pulmonary infections associated with non-cystic fibrosis bronchiectasis, in accordance with an agreed upon development plan and pursuant to a Grifols-funded budget of $65 million (which includes allocations for the Company’s internal, fully-burdened expenses). Any excess expenses are the responsibility of the Company. The Company will develop the Product for additional indications at Grifols’ sole expense if Grifols elects to pursue such development. Pursuant to the License Agreement, the Company recognized reimbursements of development costs from Grifols as Contract revenue—related party totaling $23.4 million for the year ended December 31, 2015, for the reimbursement of fully burdened development expenses for collaboration services performed and costs incurred related to the development of Pulmaquin for non-cystic fibrosis bronchiectasis.

The Company is responsible for obtaining regulatory approval of the first indication for the Product in the United States and the European Union. Grifols is responsible for additional regulatory expenses, including the cost of obtaining approval outside the United States and European Union, and the cost of maintaining approvals globally. Grifols is responsible to use diligent efforts to commercialize the Product in countries where regulatory approval has been obtained.

The Company is responsible for supplying Grifols’ requirements of the Product, and must establish primary and back-up suppliers acceptable to Grifols. Grifols will purchase Products from the Company on a cost pass-through basis plus a margin.

The collaboration between Grifols and the Company is governed by a joint committee comprised of equal representation by the Company and Grifols and operated on a consensus basis. In the event that the parties do not agree, Grifols has deciding authority, except with respect to specific matters specified in the License Agreement. The Company has no obligation to participate in the joint committee after the first commercial sale of the product, but may do so at its discretion. Accordingly, the Company determined that it can separate performance obligations that occur over the development period from performance obligations that will occur during the commercialization period.

With respect to the US and EU development and approval of Pulmaquin for non-cystic fibrosis bronchiectasis management, Grifols will pay to Aradigm reimbursements of development costs up to $65 million and development milestone payments of up to $25 million. Additionally, royalty payments on a country-by-country basis on net sales at a rate of either 12.5% or 20% (depending on the amount of net sales) for so long as there is patent coverage or orphan drug designation (or, if longer, 10 years), except that payments will be reduced by half on a country-by-country basis in the event that another inhaled liposomal product containing ciprofloxacin is being sold for an indication for which the Aradigm product has regulatory approval. Royalty payments may also be reduced by 50% if Aradigm has no valid patent claim or orphan drug protection in that country.

The Company’s deliverables include an exclusive license for inhaled ciprofloxacin compounds for the indication of non-cystic fibrosis bronchiectasis and other indications, payment of development costs over $65 million for the non-cystic fibrosis bronchiectasis indication and participation on a Joint Steering Committee (“JSC”). Having determined that both the development and JSC do not have standalone value from the license, the Company combined these deliverables into a single unit of accounting. The Company is recognizing reimbursements of development expenses as collaboration services are performed and costs are incurred. During the years ended December 31, 2015 and December 31, 2014, the Company recognized $23.4 million and $33.0

million, respectively, in contract revenue—related party relating to services performed and costs incurred during the period under the License Agreement. In addition, the Company has a current deferred revenue balance at December 31, 2015 of $5.0 million representing a milestone payment which was received upon the dosing of the first patient in a Phase III clinical trial. The $5.0 million milestone payment will be recognized as revenue upon receiving the first regulatory approval.

Pursuant to the License Agreement, the Company recognized reimbursements of development costs from Grifols as Contract revenue—related party totaling $23.4 million for the year ended December 31, 2015. As of December 31, 2015, the Company has utilized the full amount of the $65 million of Grifols-funded budget provided under the License Agreement and will not be recognizing any future revenue related to the $65 million Grifols-funded budget. The Company recognized $33.0 million from Grifols as Contract revenue—related party for the year ended December 31, 2014 for the reimbursement of fully burdened development expenses for collaboration services performed and costs incurred related to the development of Pulmaquin for non-cystic fibrosis bronchiectasis.

Costs incurred under the Grifols License Agreement in the quarters ended December 31, 2015 and 2014 are zero and $8.1 million, respectively. Costs incurred under the Grifols License Agreement for the years ended December 31, 2015 and 2014 are $23.4 million and $33.0 million, respectively. Research and development expenses incurred under the Grifols License Agreement for the years ended December 31, 2015 and 2014 are $22.2 million and $30.2 million, respectively. General and administrative expenses incurred under the Grifols License Agreement for the years ended December 31, 2015 and 2014 are $1.2 million and $2.4 million, respectively. In addition, there are $0.4 million in development costs for equipment and inventory recorded on the Consolidated Balance Sheets as of December 31, 2014. Research and development expenses under the Grifols License Agreement decreased approximately $8.0 million and general and administrative expenses decreased approximately $1.2 million as the $65 million expense reimbursement cap was reached in 2015. Development expenses are fully burdened and include direct costs reported as research and development expenses and collaboration-related general and administrative expenses.

Governance Agreement

The Governance Agreement sets forth certain rights and obligations of the Company and Grifols concerning, among other things, certain corporate governance matters, certain limitations on future acquisitions of shares of Common Stock by Grifols, and certain rights by Grifols to maintain a target level of ownership in the Company.

On the date the Governance Agreement was executed, the Company’s board of directors was reconstituted to consist of its chief executive officer, three independent directors under the NASDAQ Marketplace Rules and two persons designated by Grifols. The number of persons Grifols is entitled to designate for consideration for election to the Company’s board of directors by the Company’s nominating committee will thereafter depend on the percentage of beneficial ownership of the Company held by Grifols.

The Governance Agreement also provides that during the period beginning on the date of Closing and ending 12 months after the first commercial sale of a Product (the “Restricted Period”), Grifols will not directly or indirectly acquire or offer to acquire any shares of Common Stock except (i) with the approval of the Company’s board of directors and a majority of its independent directors, (ii) effected solely to the extent necessary to maintain the beneficial ownership of Grifols and its affiliates at an amount equal to 35% (the “Target Percentage”) of the shares of Common Stock on a Fully Diluted Basis (as defined in the Governance Agreement), or (iii) in order to maintain its ownership percentage in the event that the Company issues new securities, in accordance with the provisions of the Governance Agreement. The Restricted Period terminates upon the occurrence of certain events, including a change in control of the Company and a third party publicly proposing to acquire the Company. The Governance Agreement further imposes certain “standstill” obligations on Grifols during the Restricted Period, pursuant to which Grifols and certain related persons are prohibited from

soliciting proxies from the Company’s shareholders, granting proxies or entering into voting agreements and seeking additional representation on the Company’s Board of Directors.

The Governance Agreement provides Grifols with certain preemptive rights to participate in future issuances of Common Stock or equivalents of Common Stock by the Company, or the right to acquire shares of Common Stock from third parties or on the open market to maintain its Fully Diluted Ownership at the Target Percentage.

The Governance Agreement requires the approval of Grifols for certain actions by the Company which would adversely affect Grifols’ rights under the Governance Agreement, and for the Company to terminate the employment of its Chief Executive Officer or to appoint any successor Chief Executive Officer.

Registration Rights Agreements

In connection with and concurrently with the closing of the Company Stock Sale, the Company entered into a Registration Rights Agreement with Grifols (the “Grifols Registration Rights Agreement”), pursuant to which the Company agreed to provide registration rights to Grifols with respect to the shares of Common Stock to be acquired in the Company Stock Sale. Under such agreement, Grifols will be entitled to require the Company to file with the SEC certain registration statements under the Securities Act of 1933, as amended (the “Securities Act”), with respect to the resale of the shares of Common Stock acquired by Grifols in the Company Stock Sale up to three times on Form S-1 and up to six times on Form S-3, and to include its shares of Common Stock in any registration the Company proposes for its own account or for the account of one or more of its shareholders.

In connection with and concurrently with the closing of the Company Stock Sale, the Company and the Investors also entered into a Registration Rights Agreement (the “Investors Registration Rights Agreement”). Pursuant to the Investors Registration Rights Agreement, the Company is required to file a registration statement to cover the resale of the shares of the Common Stock acquired by the investors in the Company Stock Sale. The failure on the part of the Company to satisfy the deadlines set forth in the Investors Registration Rights Agreement may subject the Company to payment of certain monetary penalties. In addition, pursuant to the terms of the Stock Purchase Agreement, the Company has agreed, among other things, not to file any other registration statement (other than any registration statement on Form S-4 or Form S-8, and subject to certain other limitations and exclusions) until the Common Stock subject thereto is covered by an effective registration statement or freely salable under Rule 144 under the Securities Act.

7. Royalty Agreement, Note Payable, and Accrued Interest

Zogenix

In August 2006, the Company sold all assets related to its needle-free injector technology platform and products, including 12 U.S. patents along with foreign counterparts, to Zogenix, Inc. In July 2009, Zogenix was granted approval by the U.S. Food and Drug Administration (“FDA”) of the SUMAVEL* DosePro* (sumatriptan injection) needle-free delivery system for the treatment of acute migraine and cluster headache. The Company was entitled to quarterly royalty payments of 3% of net sales on all SUMAVEL DosePro sales. The Company recorded royalty revenue of approximately $0.2 million for the twelve months ended December 31, 2014.

Royalty Financing

In June 2011, the Company entered into an $8.5 million royalty financing agreement with a syndicate of lenders. The agreement created a debt obligation (the “Term Loan”) that will be repaid through and secured by royalties from net sales of the SUMAVEL DosePro needle-free delivery system payable to the Company under its Asset Purchase Agreement (“APA”) with Zogenix.

The Company capitalized the fees and expenses of approximately $473,000 and recorded this amount in other assets. The capitalized expenses were to be amortized to interest expense using the effective interest method over a period of 48 months, however, the full amount of the remaining capitalized fees and expenses were recognized in the three months ended March 31, 2014, which was the accounting period following the completion of the transfer of payment rights to the lenders as described below.

In connection with the original royalty financing transaction, the Company issued to the lenders warrants to purchase a total of 71,022 shares of the Company’s common stock (2,840,909 shares prior to the 1-for-40 Reverse Split) at a strike price of $8.80 per share ($0.22 per share prior to the 1-for-40 Reverse Split), representing a 20% premium above the average closing price of the Company’s common stock for the ten trading days immediately preceding the closing of the royalty financing transaction. The warrants expire on December 31, 2016. In accordance with Accounting Standards Topic 815— Derivatives and Hedging , the warrants were accounted for as equity instruments and their fair value was determined to be approximately $390,000. The relative fair value of the warrants is considered a discount against the note and was recorded as a reduction of the note payable. The note discount was being amortized to interest expense using the effective interest method with an annual rate of 18.7% over a period of 48 months, however, the full amount of the remaining note discount was recognized in the three months ended March 31, 2014, which was the accounting period following the completion of the transfer of payment rights to the lenders as described below.

While the term loan was non-recourse to the assets of Aradigm Corporation, the term loan agreement contained a minimum royalty covenant. If the minimum royalty covenant was breached and the subsidiary did not cure the breach through a cash contribution to pay down the accrued principal and interest, then the lenders had the right to declare the agreement in default and obtain the right to all future royalties and payments due to Aradigm under the Zogenix asset purchase agreement. In 2012, the minimum royalty covenant was breached and the Company made cash payments of approximately $167,000 to the lenders for accrued interest in order to cure the breach. In the twelve months ended December 31, 2013, the covenant was again breached and the cumulative cash shortfall the Company would need to contribute to keep the agreement from default stood at $525,000. In the first quarter of 2014, the Company elected not to make this or any future contributions.

On March 4, 2014, the Company and the other parties executed an Assignment Agreement that transferred the rights to the lenders, effective February 28, 2014, for all future royalty payments from Zogenix under the APA in full and complete satisfaction of the Company’s obligations under the loan agreement and the other agreements entered into in connection with the royalty financing. Under the Assignment Agreement, the parties agreed that the value of the Assigned Interest is $5.8 million. Zogenix consented to the Assignment. The Company valued the assignment of the royalty rights at $5.8 million in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) in accordance with the Assignment Agreement which was recorded as a gain on fair value of assigned royalty rights in the quarter ended March 31, 2014. The balance of the note payable and accrued interest extinguished in the transaction offset by deferred loan costs and unamortized debt discount as of the assignment date less the fair value of the royalty rights resulted in a gain from debt extinguishment of $3.0 million which was recognized in the quarter ended March 31, 2014 in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). All debts and obligations of Aradigm and its subsidiary are considered to be paid and satisfied in full.

8. Leases, Commitments and Contingencies

The Company has a lease for a building containing offices, laboratory and manufacturing facilities, which expires in 2016. A portion of this lease obligation was offset by a sublease to Mendel Biotechnology, Inc. (“Mendel”). Future minimum non-cancelable lease payments at December 31, 2015 are as follows (in thousands):


	Operating Leases		Mendel Sub-Lease			Net Operating Lease Payments
Year ending December 31:
2016	$	1,020	$	(640	)	$	380

Total minimum lease payments	$	1,020	$	(640	)	$	380

In July 2007, the Company entered into a sublease agreement with Mendel to lease approximately 48,000 square feet of its 72,000 square foot headquarters located in Hayward, California.

The Company’s monthly rent payments fluctuate under the master lease. In accordance with U.S. generally accepted accounting principles, the Company recognizes rent expense on a straight-line basis. The Company records deferred rent for the difference between the amounts paid and recorded as expense. At December 31, 2015 and 2014, the Company had $37,000 and $97,000 of deferred rent, respectively.

For the years ended December 31, 2015 and 2014, building rent expense under operating leases totaled $591,000 and $593,000, respectively.

Indemnification

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 at December 31, 2015 or 2014.

Legal Matters

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.

9. Shareholders’ Equity

Reserved Shares

At December 31, 2015, the Company had 947,142 shares reserved for future issuance upon exercise of options under all stock option plans and 252,725 shares of common stock reserved for future issuance of new option grants. The Company had 114,293 shares available for future issuances under the ESPP. Additionally, the Company had 71,023 shares reserved for outstanding warrants.

Shareholder Rights Plan

In September 2008, the Company adopted an amended and restated shareholder rights plan, which replaced the rights plan originally adopted in August 1998. Pursuant to the rights plan, as amended and restated, the

Company distributes 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. Until the rights are distributed, the rights trade with, and are not separable from, the Company’s common stock and are not exercisable. 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 the Company or to deprive the Company’s shareholders of their interest in the Company’s long-term value. The shareholder rights plan seeks to achieve these goals by encouraging a potential acquirer to negotiate with the Company’s Board of Directors. The rights will expire at the close of business on September 8, 2018.

Stock Option Plans: 2005 Equity Incentive Plan, and 2015 Equity Incentive Plan

On March 13, 2015 the Board adopted and, on May 14, 2015 the Company’s shareholders approved, the 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan replaces the Company’s 2005 Equity Incentive Plan which expired in March 2015. The 2015 Plan is intended to promote our long-term success and increase shareholder value by attracting, motivating, and retaining non-employee directors, officers, employees, advisors, consultants and independent contractors, and allows the flexibility to grant a variety of awards to eligible individuals, thereby strengthening their commitment to the Company’s success and aligning their interests with those of the Company’s shareholders. The Company did not request that shareholders authorize any new shares of Common Stock in connection with the approval of the 2015 Plan; rather, the shares authorized for issuance under the 2005 Plan are now available for issuance under the 2015 Plan.

Options granted under the 2005 Plan and the 2015 Plan expire no later than 10 years from the date of grant and 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 and the 2015 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. Both Plans also provides for a transition from employee to consultant status without termination of the vesting period as a result of such transition. Under both Plans, employees may exercise options in exchange for a note payable to the Company, if permitted under the applicable grant. As of December 31, 2015 and 2014, 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 or 2015 Plan and no shares have been repurchased. The Company granted options to purchase 604,657 shares and 338,121 shares during the years ended December 31, 2015 and 2014, respectively, under both Plans, which included option grants to the Company’s non-employee directors in the amount of 59,820 and 21,875 shares during 2015 and 2014, respectively. As of December 31, 2015 the Company had 947,142 options outstanding and 252,725 shares were available for future grants under the 2015 Plan.

The following is a summary of activity under the 2005 Plan and the 2015 Plan as of December 31, 2015:


Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2014		515,366		$	15.55
Options granted		604,657		$	7.78
Options cancelled		(169,381	)	$	11.26
Options exercised		(3,500	)	$	6.00

Outstanding at December 31, 2015		947,142		$	11.40		7.88	$	—

Ending Vested and Expected To Vest		922,926		$	11.48		7.86	$	—

Ending Exercisable		306,281		$	18.41		5.90	$	—

The weighted-average grant-date fair value of options granted during the years 2015 and 2014 was $4.95 and $7.57, respectively. The intrinsic value of exercised stock options is calculated based on the difference between the exercise price and the quoted market price of our common stock as of close of the exercise date. The total intrinsic value of stock options exercised in fiscal years 2015 and 2014 was $2,100 and $3,500, respectively.

A summary of the activity of the Company’s unvested restricted stock and performance bonus stock award activities for the year ending December 31, 2015 is presented below. The ending balance represents the maximum number of shares that could be earned or vested under the 2005 Plan:

Restricted Stock Awards


	Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2014		300		57.60
Restricted stock awards granted		—		—
Restricted share awards vested		—		—

Outstanding at December 31, 2015		300		57.60

As of December 31, 2015, there was no unrecognized compensation cost related to restricted stock award arrangements granted under the Plans. Recipients of restricted stock do not pay cash consideration for the shares and have the right to vote all shares subject to the grant. Stock compensation expense for the awards has been recognized in the appropriate period. The total fair value of restricted stock awards vested during the years ended December 31, 2015 and 2014 was zero and $247,000, respectively.

The Company retained purchase rights to 300 shares of unvested restricted stock awards issued pursuant to stock purchase agreements at no cost per share as of December 31, 2015 and 2014, respectively.

Restricted Stock Units


	Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2014		10,306		5.34
Restricted stock units granted		—		—
Restricted share units vested		—		—

Outstanding at December 31, 2015		10,306		5.34

As of December 31, 2015, there was no unrecognized compensation cost related to restricted stock unit arrangements granted under the Plans. The total fair value of shares vested during the years ended December 31, 2015 and 2014 was zero for both years.

Employee Stock Purchase Plan

Employees generally are eligible to participate in the ESPP 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 ESPP 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 December 31, 2015, a total of 171,957 shares had been issued under the ESPP. In April 2008, the Company’s Board of Directors amended, and in May 2008 the Company’s shareholder approved, the amendment to the ESPP increasing the shares of common stock authorized by 25,000. In April 2009, the Company’s Board of Directors amended, and in May 2009 the Company’s shareholders approved, the amendment to the ESPP increasing the number of shares of common stock authorized by 62,500. In March 2013, the Company’s Board of Directors amended, and in May 2013 the Company’s shareholders approved, the amendment to the ESPP increasing the number of shares of common stock authorized by 62,500. In March 2015, the Company’s Board of Directors amended, and in May 2015 the Company’s shareholders approved, the amendment to the ESPP increasing the number of shares of common stock authorized by 110,000. As of December 31, 2015, there was a balance of 114,293 available authorized shares. Compensation expense was $104,000 and $67,000 for the years ended December 31, 2015 and 2014, respectively. The fair value of employee stock purchase rights under the ESPP is determined using the Black-Scholes option pricing model and the following weighted average assumptions:


	Years Ended December 31,
	2015			2014
Employee Stock Purchase Plan
Dividend yield		0.0	%		0.0	%
Volatility factor		65.6	%		65.1	%
Risk-free interest rate		0.06	%		0.07	%
Expected life (years)		2.00			0.50
Weighted-average fair value of purchase rights granted during the period	$	3.38		$	3.20

Stock-Based Compensation Expense

The Company recognizes stock-based compensation expense based on the fair value of that portion of stock options and restricted stock awards that are ultimately expected to vest during the period. Stock-based compensation expense recognized in the Consolidated Statement of Operations and Comprehensive Income (Loss) includes compensation expense for stock-based awards based on the estimated grant date fair value over the requisite service period.

The following table shows stock-based compensation expense included in the Consolidated Statement of Operations and Comprehensive Income (loss) for the years ended December 31, 2015 and 2014, (in thousands, except per share amounts):


	2015			2014
Costs and Expenses
Research and development	$	522		$	197
General and administrative		507			419

Total employee stock-based compensation expense	$	1,029		$	616

Impact on basic and diluted net income (loss) per common share	$	(0.07	)	$	0.04

There was no capitalized stock-based compensation expense as of December 31, 2015. Since the Company has cumulative net losses through December 31, 2015, there was no tax benefit associated with stock-based compensation expense.

The total amount of unrecognized compensation expense related to unvested stock options and stock purchases net of forfeitures was $2,185,000 as of December 31, 2015. This amount will be recognized over a weighted average period of 2.12 years. As of December 31, 2015, there is no unrecognized compensation expenses, net of forfeitures, related to unvested awards that is expected to be recognized.

Valuation Assumptions

The fair value of options was estimated at the date of grant using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of the Company’s common stock for similar terms. The expected term was estimated using a lattice model prior to 2010, and the simplified method was used starting in 2010 as permitted under SAB No. 110, since the Company’s recent exercise and forfeiture history was not representative of the expected term of options granted during the year. The expected term represents the estimated period of time that stock options are expected to be outstanding, which is less than the contractual term which is generally ten years. The risk-free interest rate is based on the U.S. Treasury yield. The expected dividend yield is zero, as the Company does not anticipate paying dividends in the near future. The weighted average assumptions for employee options (which for purposes of this table includes members of the board of directors) are as follows:


	Years Ended December 31
	2015			2014
Dividend yield		0.0	%		0.0	%
Volatility factor		83.9	%		110.0	%
Risk-free interest rate		1.7	%		1.8	%
Expected term (years)		5.7			6.0
Weighted-average fair value of options granted during the periods	$	4.95		$	7.57

The weighted average assumptions for non-employee options, except for members of the board of directors which are reflected above, are as follows:


	Years Ended December 31
	2015			2014
Dividend yield		0.0	%		—
Volatility factor		91.1	%		—
Risk-free interest rate		1.7	%		—
Expected term (years)		10.0			—
Weighted-average fair value of options granted during the periods	$	6.47			—

Stock-Based Compensation for Non-Employees

The Company accounts for options issued to non-employees under ASC 505-50, Equity—Equity Based Payments to Non-Employees, using the Black-Scholes option-pricing model. The value of such non-employee options are periodically re-measured over their vesting terms.

10. Employee Benefit Plans

The Company provides a 401(k) Plan for all full-time employees. Employees can contribute on a pretax basis up to the 2015 statutory limit of $18,000 (plus an additional $6,000 for employees that are 50 years and older). The Company matches employees’ contributions up to a maximum of three percent of an employee’s annual salary based upon the employee’s contribution and certain other limitations. The Company’s employer matching contribution expense was $47,000 and $55,000 in 2015 and 2014, respectively.

11. Income Taxes

In 2015 and 2014, the Company recorded an income tax benefit of zero. 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 as well as net operating loss and tax credit carryforwards.

Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):


	December 31,
	2015			2014
Net operating loss carryforwards	$	18,406		$	14,955
Research and development credits		6,509			6,509
Federal orphan drug credits		11,011			7,217
Other		2,130			1,152

Total deferred tax assets		38,056			29,833
Valuation allowance		(38,056	)		(29,833	)

Net deferred tax assets	$	—		$	—

The Company considers all available evidence, both positive and negative, including historical levels of taxable income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. At December 31, 2015 and 2014, based on the Company’s analysis of all available evidence, both positive and negative, it was considered more likely than not that the Company’s deferred tax assets would not be realized, and as a result, the Company recorded a valuation allowance for its deferred tax assets. The valuation allowance increased by $8.2 million during the year ended December 31, 2015 and decreased by $1.9 million during the year ended December 31, 2014. In accordance with ASC 718 Compensation-Stock Compensation , the Company has excluded from deferred tax assets those tax benefits attributable to employee stock option exercises.

The difference between the income tax benefit and the amount computed by applying the federal statutory income tax rate to loss before income taxes is as follows (in thousands):


	Year Ended December 31,
	2015			2014
Income tax benefit at federal statutory rate	$	(6,016	)	$	1,657
State taxes (net of federal)		(17	)		11
Credits		(2,466	)		—
Other		276			129
Change in valuation allowance		8,223			(1,797	)

Total	$	—		$	—

As of December 31, 2015, the Company had federal net operating loss carryforwards of approximately $45.4 million and federal orphan drug credit carryforwards of approximately $11.0 million, which expire in the years 2019 through 2035. The Company also had California net operating loss carryforwards of approximately $39.0 million, which expire in the years 2016 through 2035, and California research and development tax credit carryforwards of approximately $9.9 million, which do not expire. None of the federal and state net operating loss carryforwards represent stock option deductions arising from activity under the Company’s stock option plan.

The Company’s federal and state net operating loss (NOL’s) and tax credit carryforwards are subject to substantial annual limitations as a result of certain ownership changes that occurred in 2010 and prior years. Federal net operating loss (NOL) carryforwards totaling $45.4 million will begin to expire from 2019 to 2035, subject to the annual limitations. Federal tax credit carryforwards totaling $11.1 million will begin to expire from 2028 to 2035, subject to the annual limitations. State operating loss carryforwards totaling $39.0 million will begin to expire from 2016 to 2035, subject to annual limitations. State tax credit carryforwards may be subject to further annual limitations for ownership changes occurring after December 31, 2015.

Utilization of the Company’s NOL and credit carryforwards may be subject to additional annual limitations based on future stock issuances or ownership changes. Such future limitations could result in the expiration of the net operating loss and credit carryforwards before utilization. Based on the analyses performed on ownership changes that have occurred from inception through December 31, 2015, the Company expects to be able to use the NOL and tax credit carryforwards as noted above.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is subject to U.S. federal and state income tax examinations by tax authorities for tax years from 1998 due to net operating losses and tax credits that are being carried forward for tax purposes.

The Company does not have any unrecognized tax benefits, or interest and penalties accrued on unrecognized tax benefits, at December 31, 2015, or during the two years then ended. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

12. Quarterly Results of Operations (unaudited)

Following is a summary of the quarterly results of operations for the years ended December 31, 2015 and 2014 (in thousands, except per share data):


	March 31, 2015			June 30, 2015			September 30, 2015			December 31, 2015
Total revenue	$	8,768		$	9,952		$	4,674		$	35

Operating expenses:
Research and development		8,361			9,754			8,880			8,281
General and administrative		1,542			1,339			1,320			1,093
Restructuring and asset impairment		4			3			2			2

Total expenses		9,907			11,096			10,202			9,376

Loss from operations		(1,139	)		(1,144	)		(5,528	)		(9,341	)
Interest income/(expense), net		8			7			7			7
Other expense		(32	)		(8	)		(28	)		(18	)

Loss before income taxes		(1,163	)		(1,145	)		(5,549	)		(9,352	)
Income tax provision		—			—			—			—

Net loss and comprehensive loss	$	(1,163	)	$	(1,145	)	$	(5,549	)	$	(9,352	)

Basic and diluted net loss per common share	$	(0.08	)	$	(0.08	)	$	(0.38	)	$	(0.63	)

Shares used in computing basic and diluted net loss per common share		14,727			14,749			14,751			14,761


	March 31, 2014			June 30, 2014			September 30, 2014			December 31, 2014
Total revenues	$	6,631		$	12,245		$	6,617		$	8,068

Operating expenses:
Research and development		5,796			11,656			6,047			7,673
General and administrative		1,651			1,931			1,443			1,201
Restructuring and asset impairment		6			5			4			4

Total expenses		7,453			13,592			7,494			8,878

Loss from operations		(822	)		(1,347	)		(877	)		(810	)
Interest income (expense), net		(286	)		1			5			9
Other expense		(1	)		(12	)		(42	)		(30	)
Gain on assignment of royalty interests		5,823			—			—			—
Gain on extinguishment of debt		3,041			—			—			—

Income (loss) before income taxes		7,755			(1,358	)		(914	)		(831	)
Income tax provision		—			—			—			—

Net income (loss) and comprehensive income (loss)	$	7,755		$	(1,358	)	$	(914	)	$	(831	)

Basic net income (loss) per common share	$	0.53		$	(0.09	)	$	(0.06	)	$	(0.06	)

Diluted net income (loss) per common share	$	0.53		$	(0.09	)	$	(0.06	)	$	(0.06	)

Shares used in computing basic net income (loss) per common share		14,669			14,697			14,706			14,726

Shares used in computing diluted net income (loss) per common share		14,713			14,697			14,706			14,726

13. Subsequent Events

The Company has evaluated subsequent events that have occurred after December 31, 2015 and determined that there were no events or transactions occurring during this reporting period which require recognition or disclosure in the consolidated financial statements.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of the end of the period covered by this report, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of the end of the period covered by this report to ensure that information that we are required to disclose in reports that management files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our chief executive officer and chief financial officer have concluded that these controls and procedures are effective at the “reasonable assurance” level. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control—Integrated Framework . Based on its assessment using the COSO criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2015.

As a result of the enactment of the Dodd-Frank Wall Street reform and Consumer Protection Act, “Exemption for Non-accelerated Filer,” and in accordance with Section 989G of that act, we are not required to provide an attestation report of our independent registered public accounting firm regarding internal control over financial reporting for this fiscal year or thereafter, until such time as we are no longer eligible for the exemption set forth therein.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item concerning (i) identification and business experience of the Company’s directors, as well as legal proceedings involving such directors and any family relationships between directors and executive officers of the Company, (ii) the identification of the members of the Company’s audit committee and (iii) the identification of the Audit Committee Financial Expert is incorporated by reference from the section captioned “Proposal 1: Election of Directors” contained in the Company’s Proxy Statement related to the 2016 Annual Meeting of Shareholders to be filed by the Company with the SEC (the “2016 Proxy Statement”).

We have adopted a code of ethics, which is part of our Code of Business Conduct and Ethics that applies to all of our employees, including our principal executive officer and our principal financial and accounting officer. This code of ethics is posted on our website. If we amend or waive a provision of our Code of Business Conduct and Ethics, we intend to post such amendment or waiver on our website, as required by applicable rules.

Identification of Executive Officers

The information required by this Item is incorporated by reference from the section captioned “Compensation” contained in the 2016 Proxy Statement.

Section 16(a) Beneficial Ownership Reporting Compliance

The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, required by this Item is incorporated by reference from the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2016 Proxy Statement.

Item 11. Executive Compensation

The information required by this Item is incorporated by reference from the section captioned “Compensation” contained in the 2016 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is incorporated by reference from the section captioned “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” contained in the 2016 Proxy Statement.

Item 13. Certain Relationships and Related Transactions and Director Independence

The information required by this Item is incorporated by reference from the section captioned “Certain Transactions” contained in the 2016 Proxy Statement.

Item 14. Principal Accounting Fees and Services

The information required by this item is incorporated by reference from the section titled “Ratification of Selection of Independent Registered Public Accounting Firm” contained in the 2016 Proxy Statement.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)(1) Financial Statements.

Included in Part II of this Annual Report on Form 10-K:


	Page in Form 10-K
Report of Independent Registered Public Accounting Firm		42
Consolidated Balance Sheets — December 31, 2015 and 2014		43
Consolidated Statements of Operations and Comprehensive Income (Loss) — Years ended December 31, 2015 and 2014		44
Consolidated Statements of Shareholders’ Equity — Years ended December 31, 2015 and 2014		45
Consolidated Statements of Cash Flows — Years ended December 31, 2015 and 2014		46
Notes to Consolidated Financial Statements		47

(2) Financial Statement Schedules.

All financial statement schedules are omitted because they are not applicable or not required or because any required information is included in the financial statements or notes thereto.

(3) Exhibits.


Exhibit No.		Description

3.1(1)		Amended and Restated Articles of Incorporation of the Company.

3.2(3)		Certificate of Determination of Series A Junior Participating Preferred Stock.

3.3(4)		Amended and Restated Certificate of Determination of Preferences of Series A Convertible Preferred Stock.

3.4(3)		Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company.

3.5(3)		Certificate of Amendment of Certificate of Determination of Series A Junior Participating Preferred Stock.

3.6(5)		Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company.

3.7(5)		Certificate of Amendment of Certificate of Determination of Series A Junior Participating Preferred Stock.

3.8(6)		Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company.

3.9(14)		Certificate of Correction to Certificate of Amendment of Articles of Incorporation of the Company.

3.10(19)		Certificate of Amendment of Articles of Incorporation of the Company.

3.11(22)		Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company.

3.12(2)		Amended and Restated Bylaws of the Company, as amended.

3.13(24)		Certificate of Amendment to the Amended and Restated Bylaws 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, 3.9, 3.10, 3.11, 3.12 and 3.13.


Exhibit No.		Description

4.2(1)		Specimen common stock certificate.

10.1(1)+		Form of Indemnity Agreement between the Company and each of its directors and officers.

10.2(1)+		Form of the Company’s Incentive Stock Option Agreement under the 2005 Equity Incentive Plan.

10.3(1)+		Form of the Company’s Non-statutory Stock Option Agreement under the 2005 Equity Incentive Plan.

10.4(1)+		1996 Non-Employee Directors’ Stock Option Plan.

10.5(1)+		Form of the Company’s Non-statutory Stock Option Agreement under the 1996 Non-Employee Directors’ Stock Option Plan.

10.6(1)+		Form of the Company’s Employee Stock Purchase Plan Offering Document.

10.7(6)+		Form of the Company’s Restricted Stock Bonus Agreement under the 2005 Equity Incentive Plan.

10.8(7)+		Employment Agreement, dated as of August 10, 2006, with Dr. Igor Gonda.

10.9(8)		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(9)		Sublease between the Company and Mendel Biotechnology, Inc., dated July 11, 2007, under the Lease Agreement by and between the Company and Hayward Point Eden I Limited Partnership, a Delaware limited partnership, as successor-in-interest to Britannia Point Eden, LLC, as amended, for 3929 Point Eden Way, Hayward, California.

10.11(10)+		2005 Equity Incentive Plan, as amended.

10.12(11)+		Employee Stock Purchase Plan, as amended.

10.13(12)		Amended and Restated Rights Agreement, dated as of September 5, 2008 by and between the Company and ComputerShare Trust Company, N.A.

10.14(13)+		Amended and Restated Executive Officer Severance Benefit Plan.

10.15(15)		Amended and Restated Change of Control Agreement entered into between the Company and certain of the Company’s senior officers.

10.16(15)		Amended and Restated Change of Control Agreement, dated as of April 5, 2011 by and between the Company and Igor Gonda.

10.17(15)		Amended and Restated Change of Control Agreement, dated as of April 5, 2011 by and between the Company and Nancy Pecota.

10.18(15)		Form of Indemnification Agreement.

10.19(16)		Securities Purchase Agreement, dated as of December 11, 2012, among the Company and the investors party thereto.

10.20(16)		Registration Rights Agreement, dated as of December 11, 2012 among the Company and the buyers party thereto.

10.21(17)		Form of License and Collaboration Agreement by and among the Company and Grifols, S.A.

10.22(17)		Form of Option Agreement by and among the Company and Grifols, S.A.

10.23(17)		Form of Governance Agreement by and among the Company and Grifols, S.A.


Exhibit No.		Description

10.24(17)		Form of Registration Rights Agreement by and among the Company and Grifols, S.A.

10.25(17)		Form of Registration Rights Agreement by and among the Company and the buyers listed on the signature page thereto.

10.26(18)‡		Clinical Supply and Commercial Manufacturing Services Agreement, dated as of August 27, 2013, by and between SIGMA-TAU Pharmasource Inc. and the Company.

10.27(20)		Change of Control Agreement, dated November 5, 2013, by and between the Company and Dr. Juergen Froehlich.

10.28(20)		Offer Letter, dated November 5, 2013, between the Company and Dr. Juergen Froehlich.

10.29(21)		Assignment, Assumption, Waiver and Consent, effective February 28, 2015, by and among the Aradigm Royalty Financing LLC, the Company, R&D Bauer Ventures, LP and SG-PBS LLC.

10.30(23)		Form of Non-statutory Stock Option Agreement, by and between the Company and Igor Gonda.

10.31(25)		Board Observer Rights Agreement, dated September 1, 2015, between the Company and Grifols, S.A.

10.32(26)+		Aradigm Corporation 2015 Equity Incentive Plan.

10.33(26)+		Form of Stock Option Agreement pursuant to Aradigm Corporation 2015 Stock Incentive Plan.

10.34(26)+		Aradigm Corporation Employee Stock Purchase Plan.

10.35+		Form of Amendment to the Stock Option Agreement

10.36		Supply Agreement between the Company and Grifols, S.A. dated October 22, 2015.

21.1		List of Subsidiaries of the Company.

23.1		Consent of OUM & Co. LLP, Independent Registered Public Accounting Firm.

24.1		Power of Attorney. Reference is made to the signature page.

31.1		Section 302 Certification of the Chief Executive Officer.

31.2		Section 302 Certification of the Chief Financial Officer

32.1		Section 906 Certification of the Chief Executive Officer and the Chief Financial Officer.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Document

101.PRE		XBRL Taxonomy Presentation Document

+	Represents a management contract or compensatory plan or arrangement.

‡	Portions of this exhibit have been omitted pursuant to a request for confidential treatment and the non-public information has been separately with the Securities and Exchange Commission.

(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 S-1 (No. 333-138169) filed on October 24, 2006, as amended.

(8)	Incorporated by reference to the Company’s Form 10-K filed on March 24, 1998, as amended.

(9)	Incorporated by reference to the Company’s Form 8-K filed on July 24, 2007.

(10)	Incorporated by reference to the Company’s definitive proxy statement filed on April 7, 2008.

(11)	Incorporated by reference to the Company’s Form 8-K filed on May 21, 2009.

(12)	Incorporated by reference to the Company’s Form 10-Q filed on November 12, 2008.

(13)	Incorporated by reference to the Company’s Form 8-K filed on January 8, 2009.

(14)	Incorporated by reference to the Company’s Form 8-K filed on September 20, 2010.

(15)	Incorporated by reference to the Company’s Form 8-K filed on April 18, 2011.

(16)	Incorporated by reference to the Company’s Form 8-K filed on December 13, 2012.

(17)	Incorporated by reference to the Company’s Form 8-K filed on May 24, 2013.

(18)	Incorporated by reference to the Company’s Form 10-Q filed on October 28, 2013.

(19)	Incorporated by reference to the Company’s Form 8-K filed on February 4, 2015.

(20)	Incorporated by reference to the Company’s Form S-1 (No. 333-193751) filed on February 4, 2015, as amended.

(21)	Incorporated by reference to the Company’s Form 8-K filed on February 4, 2015, as amended.

(22)	Incorporated by reference to the Company’s Form 10-Q filed on May 14, 2015.

(23)	Incorporated by reference to the Company’s Form 10-K filed on March 13, 2015.

(24)	Incorporated by reference to the Company’s Form 8-K filed on September 4, 2015.

(25)	Incorporated by reference to the Company’s Form 10-Q filed on November 12, 2015.

(26)	Incorporated by reference to the Company’s Form S-8 (No. 333-205613) filed on July 10, 2015.

(b) Index to Exhibits.

See Exhibits listed under Item 15(a) (3).

All financial statement schedules are omitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto.

Aradigm, Lipoquin, Pulmaquin and AERx, are registered trademarks of the Company.

*	Other names and brands may be claimed as the property of others.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hayward, State of California, on the 30th day of March 2016.


ARADIGM CORPORATION

By:		/s/ Igor Gonda
		Igor Gonda
		President and Chief Executive Officer

KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Igor Gonda and Nancy E. Pecota, and each one of them, attorneys-in-fact for the undersigned, each with power of substitution, for the undersigned in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or their substitutes, may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his or her name.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


Signature	Title	Date

/s/ Igor Gonda	President, Chief Executive Officer and Director	March 30, 2016
Igor Gonda	(Principal Executive Officer)

/s/ Nancy E. Pecota	Vice President, Finance and Chief Financial Officer	March 30, 2016
Nancy E. Pecota	(Principal Financial and Accounting Officer)

/s/ Virgil D. Thompson	Chairman of the Board and Director	March 30, 2016
Virgil D. Thompson

/s/ David Bell	Director	March 30, 2016
David Bell

/s/ Frederick Hudson	Director	March 30, 2016
Frederick Hudson

/s/ John M. Siebert	Director	March 30, 2016
John M. Siebert

EXHIBIT INDEX


Exhibit No.		Description

3.1(1)		Amended and Restated Articles of Incorporation of the Company.

3.2(3)		Certificate of Determination of Series A Junior Participating Preferred Stock.

3.3(4)		Amended and Restated Certificate of Determination of Preferences of Series A Convertible Preferred Stock.

3.4(3)		Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company.

3.5(3)		Certificate of Amendment of Certificate of Determination of Series A Junior Participating Preferred Stock.

3.6(5)		Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company.

3.7(5)		Certificate of Amendment of Certificate of Determination of Series A Junior Participating Preferred Stock.

3.8(6)		Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company.

3.9(14)		Certificate of Correction to Certificate of Amendment of Articles of Incorporation of the Company.

3.10(19)		Certificate of Amendment of Articles of Incorporation of the Company.

3.11(22)		Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company.

3.12(2)		Amended and Restated Bylaws of the Company, as amended.

3.13(23)		Certificate of Amendment to the Amended and Restated Bylaws 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, 3.9, 3.10, 3.11, 3.12 and 3.13.

4.2(1)		Specimen common stock certificate.

10.1(1)+		Form of Indemnity Agreement between the Company and each of its directors and officers.

10.2(1)+		Form of the Company’s Incentive Stock Option Agreement under the 2005 Equity Incentive Plan.

10.3(1)+		Form of the Company’s Non-statutory Stock Option Agreement under the 2005 Equity Incentive Plan.

10.4(1)+		1996 Non-Employee Directors’ Stock Option Plan.

10.5(1)+		Form of the Company’s Non-statutory Stock Option Agreement under the 1996 Non-Employee Directors’ Stock Option Plan.

10.6(1)+		Form of the Company’s Employee Stock Purchase Plan Offering Document.

10.7(6)+		Form of the Company’s Restricted Stock Bonus Agreement under the 2005 Equity Incentive Plan.

10.8(7)+		Employment Agreement, dated as of August 10, 2006, with Dr. Igor Gonda.

10.9(8)		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(9)		Sublease between the Company and Mendel Biotechnology, Inc., dated July 11, 2007, under the Lease Agreement by and between the Company and Hayward Point Eden I Limited Partnership, a Delaware limited partnership, as successor-in-interest to Britannia Point Eden, LLC, as amended, for 3929 Point Eden Way, Hayward, California.


Exhibit No.		Description

10.11(10)+		2005 Equity Incentive Plan, as amended.

10.12(11)+		Employee Stock Purchase Plan, as amended.

10.13(12)		Amended and Restated Rights Agreement, dated as of September 5, 2008 by and between the Company and ComputerShare Trust Company, N.A.

10.14(13)+		Amended and Restated Executive Officer Severance Benefit Plan.

10.15(15)		Amended and Restated form of Change of Control Agreement entered into between the Company and certain of the Company’s senior officers.

10.16(15)		Amended and Restated Change of Control Agreement, dated as of April 5, 2011 by and between the Company and Igor Gonda.

10.17(15)		Amended and Restated Change of Control Agreement, dated as of April 5, 2011 by and between the Company and Nancy Pecota.

10.18(15)		Form of Indemnification Agreement.

10.19(16)		Securities Purchase Agreement, dated as of December 11, 2012, among the Company and the investors party thereto.

10.20(16)		Registration Rights Agreement, dated as of December 11, 2012 among the Company and the buyers party thereto.

10.21(17)		Form of License and Collaboration Agreement by and among the Company and Grifols, S.A.

10.22(17)		Form of Option Agreement by and among the Company and Grifols, S.A.

10.23(17)		Form of Governance Agreement by and among the Company and Grifols, S.A.

10.24(17)		Form of Registration Rights Agreement by and among the Company and Grifols, S.A.

10.25(17)		Form of Registration Rights Agreement by and among the Company and the buyers listed on the signature page thereto.

10.26(18)‡		Clinical Supply and Commercial Manufacturing Services Agreement, dated as of August 27, 2013, by and between SIGMA-TAU Pharmasource Inc. and the Company.

10.27(20)		Change of Control Agreement, dated November 5, 2013, by and between the Company and Dr. Juergen Froehlich.

10.28(20)		Offer Letter, dated November 5, 2013, between the Company and Dr. Juergen Froehlich.

10.29(21)		Assignment, Assumption, Waiver and Consent, effective February 28, 2015, by and among the Aradigm Royalty Financing LLC, the Company, R&D Bauer Ventures, LP and SG-PBS LLC.

10.30(23)		Form of Non-statutory Stock Option Agreement, by and between the Company and Igor Gonda.

10.31(25)		Board Observer Rights Agreement, dated September 1, 2015, between the Company and Grifols, S.A.

10.32(26)+		Aradigm Corporation 2015 Equity Incentive Plan.

10.33(26)+		Form of Stock Option Agreement pursuant to Aradigm Corporation 2015 Equity Incentive Plan.

10.34(26)+		Aradigm Corporation Employee Stock Purchase Plan.

10.35+		Form of Amendment to the Stock Option Agreement

10.36		Supply Agreement between the Company and Grifols, S.A. dated October 22, 2015.

21.1		List of Subsidiaries of the Company.

23.1		Consent of OUM & Co LLP, Independent Registered Public Accounting Firm.


Exhibit No.		Description

24.1		Power of Attorney (signature page).

31.1		Section 302 Certification of the Chief Executive Officer.

31.2		Section 302 Certification of the Chief Financial Officer.

32.1		Section 906 Certification of the Chief Executive Officer and the Chief Financial Officer.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Document

101.PRE		XBRL Taxonomy Presentation Document

+	Represents a management contract or compensatory plan or arrangement.

‡	Portions of this exhibit have been omitted pursuant to a request for confidential treatment and the non-public information has been filed separately with the Securities and Exchange Commission.

(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 S-1 (No. 333-138169) filed on October 24, 2006, as amended.

(8)	Incorporated by reference to the Company’s Form 10-K filed on March 24, 1998, as amended.

(9)	Incorporated by reference to the Company’s Form 8-K filed on July 24, 2007.

(10)	Incorporated by reference to the Company’s definitive proxy statement filed on April 7, 2008.

(11)	Incorporated by reference to the Company’s Form 8-K filed on May 21, 2009.

(12)	Incorporated by reference to the Company’s Form 10-Q filed on November 12, 2008.

(13)	Incorporated by reference to the Company’s Form 8-K filed on January 8, 2009.

(14)	Incorporated by reference to the Company’s Form 8-K filed on September 20, 2010.

(15)	Incorporated by reference to the Company’s Form 8-K filed on April 18, 2011.

(16)	Incorporated by reference to the Company’s Form 8-K filed on December 13, 2012.

(17)	Incorporated by reference to the Company’s Form 8-K filed on May 24, 2013.

(18)	Incorporated by reference to the Company’s Form 10-Q filed on October 28, 2013.

(19)	Incorporated by reference to the Company’s Form 8-K filed on February 4, 2015.

(20)	Incorporated by reference to the Company’s Form S-1 (No. 333-193751) filed on February 4, 2015 as amended.

(21)	Incorporated by reference to the Company’s Form 8-K filed on February 4, 2015.

(22)	Incorporated by reference to the Company’s Form 10-Q filed on May 14, 2015.

(23)	Incorporated by reference to the Company’s Form 10-K filed on March 13, 2015.

(24)	Incorporated by reference to the Company’s Form 8-K filed on September 4, 2015.

(25)	Incorporated by reference to the Company’s Form 10-Q filed on November 12, 2015.

(26)	Incorporated by reference to the Company’s Form S-8 (no. 333-205613) filed on July 10, 2015.

Exhibit 10.35

AMENDMENT TO THE STOCK OPTION AGREEMENT

This Amendment to the Stock Option Agreement (this “ Amendment ”) is made and entered into effective as of November 12, 2015 by and between Aradigm Corporation, a California corporation (the “ Company ”), and [NAME] (the “ Participant ”). Defined terms used herein but not defined herein shall have the meanings ascribed to them in the Stock Option Agreement (as defined below).

WHEREAS, the Company and the Participant are parties to the Stock Option Agreements listed on Exhibit A hereto (the “ Stock Option Agreements ”);

WHEREAS, the Company and the Participant would like to amend the Stock Option Agreements as set forth in this Amendment; and

WHEREAS, the Stock Option Agreements may be amended by a written instrument executed by the Company and the Participant;

NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby confirmed, the parties agree that the Stock Option Agreements are hereby amended as follows:

1. The vesting schedule set forth in each of the Stock Option Agreements shall be amended by inserting the following at the end of such vesting schedule:

Notwithstanding the foregoing, if Participant is involuntarily terminated without Cause by the Company and if the performance-based vesting conditions set forth under, “Vesting Schedule” herein (the “Milestones”) are achieved within one year after the date of Participant’s involuntary termination without Cause (the “Involuntary Termination Date”), then the Shares subject to this Option shall vest on a prorated basis in an amount equal to: the total number of Shares subject to the Option, multiplied by a factor equal to one minus a fraction, the numerator of which is the number of whole month anniversaries from the Involuntary Termination Date to the date that the Milestones are achieved, the denominator of which is twelve. For example, if the Involuntary Termination Date is February 1, 2016, and the Milestones are achieved on May 15, 2016, the number of Shares that will vest is equal to the total number of Shares subject to the Option multiplied by .75 (= 1 - (3 x 1/12)).

2. Section 2(a) of each of the Stock Option Agreements is hereby amended and restated in its entirety to read as follows:

(a) General Rule . If Participant’s Service terminates for any reason, the unvested portion of the Option shall be forfeited to the Company upon termination, and all rights Participant has to Shares subject to the unvested portion of this Option shall immediately terminate. Except as provided is this Section 2 and subject to the Plan, the Shares subject

to the outstanding and vested portion of the Option Award may be exercised for ninety (90) days after Participant’s termination of Service; provided, however, if the Participant is involuntarily terminated without Cause, then the following post-termination exercise period shall apply: (i) all unvested Shares subject to the Option will be forfeited on the one (1) year anniversary of the Involuntary Termination Date, and (ii) all vested Shares subject to the Option, if unexercised, will be forfeited ninety (90) days after the date such Shares vest. Notwithstanding the foregoing, in no event shall this Option be exercised later than the Expiration Date set forth in this Option Agreement.

3. This Amendment shall be governed by and construed under the laws of the State of California without regard to conflicts of law provisions.

4. This Amendment may be executed in one or more counterparts, including by facsimile, PDF or electronic transmission, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

5. Except as specifically amended hereby, the Stock Option Agreements shall remain in full force and effect.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

Exhibit 10.36

SUPPLY AGREEMENT

This Supply Agreement (“ Agreement ”) is made this 22nd day of October, 2015 (“Effective Date”) by and between Aradigm Corporation , a California corporation having a principal place of business at 3929 Point Eden Way, Hayward, CA 94545 (“ Aradigm ”), and Grifols, S.A ., a company (sociedad an6nima) organized under the laws of Spain having a principal place of business at Avinguda de la Generalitat, 152-158, Pare de Negocis Can Sant Joan, Sant Cugat del Valles 08174, Barcelona, Spain (“Grifols”). Grifols and Aradigm may each be referred to as a “ Party ” or collectively be referred to as the “Parties”. All capitalized terms used but not defined herein shall have the meaning ascribed to such term in the License Agreement.

RECITALS

WHEREAS , Aradigm and Grifols entered into a License and Collaboration Agreement as of August 27, 2013 (as may be amended, the “License Agreement”) under which Aradigm granted certain rights to Grifols to market and sell inhaled ciprofloxacin, including the product candidate referred to by Aradigm as ARD-3150, for the treatment of non-cystic fibrosis bronchiectasis;

WHEREAS , in connection with the License Agreement, pursuant to a binding term sheet between the Parties, as amended (“Binding Term Sheet”), the Parties agreed to negotiate and enter into an agreement for Aradigm to supply to Grifols, and Grifols to purchase from Aradigm, Grifols’ entire requirements (except as othe1wise provided herein) for Compound (as defined herein) and Pulmaquin (as defined herein) for distribution and sale in the Territory;

WHEREAS , Aradigm is currently outsourcing the manufacture of such Supplied Products (as defined herein) to Sigma Tau Pharmasource Inc. (“Sigma Tau”) in accordance with a Clinical Supply and Commercial Manufacturing Services Agreement approved by Grifols, by and between Sigma Tau and Aradigm, dated August 26, 2013 (as may be amended, the “ Sigma Tau Agreement ”); and

WHEREAS , pursuant to, among other things, Aradigm’s relationship with Sigma Tau, Aradigm agrees to supply to Grifols the Supplied Products pursuant to the terms and conditions set forth in this Agreement.

NOW THEREFORE , inconsideration of the mutual covenants and premises contained in this Agreement, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows.

ARTICLE 1 — DEFINITIONS

1.1 “ Acceptable Supplied Product ” has the meaning ascribed to it in Section 5.1.

1.2 “ Act ” means the Federal Food, Drug, and Cosmetic Act, as amended, and the rules, regulations, guidelines and requirements of the FDA as may be in effect from time to time.

1.3 “ Adverse Event ” means any adverse event associated with the use of a Supplied Product in humans in whatever form, whether or not considered drug-related, including an adverse event occurring in the course of the use of a Supplied Product in professional practice, in studies, in investigations or in tests or an adverse event occurring from a Supplied Product overdose (whether accidental or intentional), abuse, or from Product withdrawal, as well as any toxicity, sensitivity, failure of expected pharmacological action, or laboratory abnormality that is, or is thought by the reporter of such event to be, serious or associated with a Supplied Product.

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1.4 “ Affiliate ” means, with respect to a Person, any Person that controls, is controlled by or is under common control with such first Person. For purposes of this definition only, “control” means (a) to possess, directly or indirectly, the power to direct the management or policies of a Person, whether through ownership of voting securities, by contract relating to voting rights or corporate governance or otherwise, or (b) to own, directly or indirectly, fifty percent (50%) or more of the outstanding securities or other ownership interest of such Person. For the purposes of this Agreement, neither Party shall be considered an Affiliate of the other, and the Affiliates of each Party shall not be considered Affiliates of the other Party or of any of such other Party’s Affiliates.

1.5 “ Agreement ” has the meaning ascribed to it in the preamble hereto.

1.6 “ Aradigm ” has the meaning ascribed to it in the preamble hereto.

1.7 “ Aradigm Indemnified Parties ” has the meaning ascribed to it in Section 7.2.

1.8 “ Batch ” means a quantity of Supplied Product produced that (a) is expected to have uniform character and quality within specified limits, and (b) is produced according to a single manufacturing run during the same cycle of the process as defined in a batch record. The size of each Batch intended for commercial sale and distribution will be mutually agreed under the terms of the Sigma Tau Agreement.

1.9 “ Bio-Defense Application ” has the meaning ascribed to it in the License Agreement.

1.10 “ Business Day ” means any day (other than a Saturday, Sunday or a legal holiday) on which banks are open for general business in Barcelona, Spain and San Francisco, California, USA.

l.11 “ Calendar Quarter ” means each successive period of three (3) calendar months commencing on January 1, April 1, July 1and October 1.

1.12 “ Calendar Year ” means each successive period of twelve (12) calendar months commencing on January 1.

1.13 “ Certificate of Analysis ” means a document, which is dated and signed by a duly authorized representative of the quality assurance department of a Permitted Subcontractor, certifying that a Batch of Supplied Product meets all Specifications.

1.14 “ cGMP ” means the standards relating to manufacturing practices as required by the rules and regulations of the FDA under the Act, including 21C.F.R Part 210, as amended from time to time and of the EMA of the European Union for fine chemicals, active pharmaceutical ingredients, intermediates or bulk products as established by the principles detailed in the guidance document developed by the International Conference on Harmonization known as “Q7A Good Manufacturing Practice Guidance for Active Pharmaceutical Ingredients”.

1.15 “ COGS ” has the meaning ascribed to it in Section 4.1(a).

1.16 “ Commercially Reasonable Efforts ” means, with respect to Aradigm’s obligations under this Agreement or Grifols’ when supplying Compound or Manufactured Product to Aradigm, the carrying out of such obligations with a level of effort and resources consistent with those commercially reasonable efforts and industry standard practices of a company performing contract manufacturing of commercial products.

1.17 “ Compliant Regulatory Authority ” means the FDA and EMA and other Regulatory Authorities with the same regulatory requirements for the Supplied Product.

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1.18 “ Compound ” means Lipoquin (“Ciprofloxacin for Inhalation”, “CFI”) and/or Free Ciprofloxacin (“Free Ciprofloxacin for Inhalation”, “FCI”).

1.19 “ Confidential Information ” of a Party means any and all information or material, that, at any time before, on or after the Effective Date has been or is provided, communicated or otherwise made known to the receiving Party or its Affiliates, whether orally, visually, electronically, in writing, or in any other form now known or hereafter invented, by or on behalf of the disclosing Party or any of its Affiliates pursuant to this Agreement, the License Agreement, Permitted Subcontractor Agreements, the Quality Agreement or the Prior NDA or in connection with the transactions contemplated hereby or thereby or any discussions or negotiations with respect hereto or thereto (including the terms of this Agreement and the Quality Agreement); any data, ideas, concepts or techniques contained therein; and any modifications thereof 01·derivations therefrom.

1.20 “ Control ” means, with respect to any particular Know-How or Patent, that a Party (a) owns or (b) has a license (other than a license granted to such Party under this Agreement) to such Know-How or Patent and, in each case, has the ability to grant to the other Party access, a license, 01·a sublicense (as applicable) to such Know-How or Patent on the terms and conditions set forth in this Agreement without violating the terms of any then-existing agreement or other arrangement with any Third Party.

1.21 “ DDP ” shall have the meaning as set forth in the 2010 edition of the International Commercial terms published by the International Chamber of Commerce, as may be amended or modified from time to time.

1.22 “ Effective Date ” has the meaning ascribed to it in the preamble hereto.

1.23 “ EMA ” means the European Medicines Agency or any successor agency performing a similar function.

1.24 “ Existing Manufacturing Agreements ” means the Sigma Tau Agreement and any other Permitted Subcontractor Agreement reviewed and approved by Grifols prior to execution of this Agreement.

1.25 “ FDA ” means the United States Food and Drug Administration or any successor agency performing a similar function.

1.26 “ Firm Order ” means a written irrevocable firm purchase order for Supplied Products, which order shall include a delivery schedule specifying the Compliant Regulatory Authority applicable to the Batch or parts thereof, the required delivery date and quantity for each Supplied Product stock keeping unit ordered and the location to which shipment of the Supplied Product is to be delivered.

1.27 “ First Commercial Sale ” means, with respect to Pulmaquin, the first sale, transfer or disposition for value to a Third Party in a given regulatory jurisdiction after Regulatory Approval has been obtained in such jurisdiction.

1.28 “ Free Ciprofloxacin ” means “Free Ciprofloxacin for Inhalation” (“FCI”) formulated as described in Aradigm’s regulatory filings with the Compliant Regulatory Authority.

1.29 “ Governmental Authority ” means any country, including any political subdivision thereof, court instrumentality, or agency thereof (including the FDA, the EMA, and any equivalent governmental regulatory body in any territory in the world, and any successor entity or entities to any of the preceding), and any other federal, state, or public authority, domestic or foreign, exercising governmental powers and having jurisdiction over any activity of a Party under this Agreement.

1.30 “ Grifols ” has the meaning ascribed to it in the preamble hereto.

1.31 “ Grifols Indemnified Parties ” has the meaning ascribed to it in Section 7.1.

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1.32 “ Indemnification Claim Notice ” has the meaning ascribed to it in Section 7.3(a).

1.33 “ Indemnified Party ” has the meaning ascribed to it in Section 7.3(a).

1.34 “ Indemnifying Party ’’ has the meaning ascribed to it in Section 7.3(a).

1.35 “ Indirect Taxes ” means value added taxes, sales taxes, use taxes, excise taxes, documentary taxes, intangibles taxes, consumption taxes, duties and tariffs and other similar taxes, including and interest, additions to tax and penalties applicable thereto.

1.36 “ Know-How ” means all technical information and know-how, including inventions, discoveries, trade secrets, specifications, instructions, processes, formulae, expertise, materials, methods, protocols and other technology applicable to formulations, compositions or products or to their manufacture, development, registration, use or marketing or processes for their manufacture, formulations containing them or compositions incorporating or comprising them, and including all biological, chemical, pharmacological, biochemical, toxicological, pharmaceutical, physical and analytical, safety, quality control, manufacturing, preclinical and clinical data, instructions, processes, formula, and expertise.

1.37 “ Knowledge ” means the good faith understanding of the facts and information by any officer of Aradigm or any of its Affiliates, or any in-house legal counsel of, or in-house patent agents of, Aradigm or any of its Affiliates after performing a diligent investigation with respect to such facts and information. For purposes of this definition, an “officer” means any individual in the position of vice president, senior vice president, president or chief executive officer.

1.38 “ Late Delivery ” shall mean a Batch of Supplied Product that delivery is more than (5) Business Days after the delivery date specified in an accepted Firm Order for delivery to within the USA and (10) Business Days after the delivery date specified in an accepted Firm Order for delivery outside the USA. A Batch will not be considered a Late Delivery to the extent due to any changes (i) mandated by Governmental Authority or (ii) requested by Grifols that cause such delay, after the Firm Order has been accepted by Aradigm. Likewise, a Batch will not be considered a Late Delivery until ten (10) Business Days after the delivery date specified in an accepted Firm Order to the extent due to:

with respect to the first six (6) Batches of CFI and FCI Processed by a Permitted Subcontractor (including the process validation Batches), a failure of any such Batches to meet Specifications, provided Permitted Subcontractor has, without undue delay, initiated Processing of an additional Batch to address the shortfall;

orders in excess of 125 % of the Firm Order;

the inability to release a Batch for which the reason for the Batch not being a released Batch cannot be ascribed to a specific cause, provided the Permitted Subcontractor has, without undue delay, initiated processing of an additional Batch to address the shortfall; or

Permitted Subcontractor actively pursuing an open investigation on a Batch, provided such open investigation reasonably prohibits additional Processing.

1.39 “ Law ” means all laws, statutes, rules, regulations, ordinances and other pronouncements having the effect of law of any federal, national, multinational, state, provincial, county, city or other political subdivision, domestic or foreign, including, but not limited to any rules, regulations, guidelines or other requirements of all U.S. Governmental Authorities, that may be in effect in the United States from time to time during the Term, including the Act (including for clarity cGMP), the US Prescription Drug Marketing Act, the American Medical Association Guidelines on Gifts to Physicians from Industry and the PhRMA Code on Interactions with Healthcare Professionals.

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1.40 “ License Agreement ” has the meaning ascribed to it in the recitals hereto.

1.41 “ Lipoquin ” means Aradigm’s proprietary liposomal ciprofloxacin formulation (“Ciprofloxacin for Inhalation”, “CFI”).

1.42 “ Long Range Forecast ” has the meaning ascribed to it in Section 2.2(a).

1.43 “ Losses ” has the meaning ascribed to it in Section 7.1.

1.44 “ MAA ” means, with respect to any jurisdiction, a marketing authorization application, New Drug Application, Supplementary New Drug Application, Abbreviated New Drug Application, Supplementary Abbreviated New Drug Application or other registration application filed with the applicable Compliant Regulatory Authority in such jurisdiction to obtain approval to market and sell a Supplied Product in such jurisdiction.

1.45 “ Manufactured Product ” , means Pulmaquin, Lipoquin or Free Ciprofloxacin manufactured by or on behalf of Grifols that is not Supplied Product.

1.46 “ Packaged Product ” means the Supplied Product, packaged in any of the forms set forth on Exhibit B and as may be amended in writing by the Parties from time to time.

1.47 “ Party ” or “ Parties ” has the meaning ascribed to it in the preamble hereto.

1.48 “ Patents ” means, collectively, (a) pending patent applications (and patents issuing therefrom), issued patents, regional patents, utility models and designs; and (b) reissues, divisions, substitutions, confirmations, renewals, extensions, provisionals, registrations, validations, re-exanimations, additions, continuations, continued prosecution applications, continuations-in-part, divisionals, or any Supplementary Protection Certificates or restoration of patent terms of or to any patents, patent applications, utility models or designs, in each case being enforceable within the applicable territory.

1.49 “ Payments ” has the meaning ascribed to it in Section 4.2(a).

1.50 “ Permitted Subcontractor ” has the meaning ascribed to it in Section 2.1(d).

1.51 “ Permitted Subcontractor Agreement ” means the Sigma Tau Agreement and any other agreement between Aradigm and a Permitted Subcontractor, including the associated quality agreement.

1.52 “ Person ” means an individual, sole proprietorship, partnership, limited partnership, limited liability partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or other similar entity or organization, including a government or political subdivision, department or agency of a government.

1.53 “ Prior NDA ” means that certain Mutual Non-Disclosure Agreement between the Parties dated April 19, 2012.

1.54 “ Process ” or “ Processing ” shall mean the act of manufacturing, handling, storing, analyzing, testing, packaging, inspecting, labeling and preparing for shipment of Supplied Product.

1.55 “ Pulmaquin ” means Aradigm’s proprietary inhaled liposomal and free ciprofloxacin product, comprising a mixture of Lipoquin and Free Ciprofloxacin as defined in the applicable Aradigm regulatory filing with the Compliant Regulatory Authority.

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1.56 “ Purchase Price ” has the meaning ascribed to it in Section 4.1(b).

1.57 “ Quality Agreement ” has the meaning ascribed to it in Section 3.8.

1.58 “ Recipients ” has the meaning ascribed to it in Section 8.1.

1.59 “ Regulatory Approval ” means any approvals, licenses, registrations or authorizations necessary for the marketing, manufacture, use, storage, import, transport, or sale of the Supplied Products in a given country 01· regulat01y jurisdiction in the Territory, which shall include satisfaction of a1I applicable regulatory and notification requirements, but which shall exclude any pricing and reimbursement approvals.

1.60 “ Regulatory Authority ” means the FDA or any corollary agency involved in the Regulatory Approval process in any other country or jurisdiction in the Territory, including the EMA in the EU.

1.61 “ Required Labeling Documentation ” has the meaning ascribed to it in Section 2.l(c).

1.62 “ Required Manufacturing Changes ” has the meaning ascribed to it in Section 3.2.

1.63 “ Rolling Forecast ” has the meaning ascribed to it in Section 2.2(a).

1.64 “ Second Source ” has the meaning ascribed to it in Section 2.4.

1.65 “ Selected Termination ” has the meaning ascribed to it in Section 9.3(a).

1.66 “ Sigma Tau Agreement ” has the meaning ascribed to it in the recitals hereto.

1.67 “ Specifications ” means the applicable specifications for manufacturing, storage, testing, packaging and labeling of a Supplied Product as set forth in Exhibit A, as may be amended from time to time pursuant to Section 3.2 and the Quality Agreement.

1.68 “ Stability Product ” has the meaning ascribed to it in Section 3.4.

1.69 “ Standard Operating Procedures ” or “ SOP ” means written procedures requiring uniform performance of specific functions, or uniform use of specific equipment or resources to ensure data, analysis and manufacturing quality and uniformity agreed between Aradigm and a Permitted Subcontractor.

1.70 “ Supplied Product ” means Pulmaquin, Lipoquin or Free Ciprofloxacin manufactured by Sigma Tau or another Permitted Subcontractor.

1.71 “ Supply Failure ” means any period that the circumstances below in clause (a) or (b) have occurred twice within a six (6) month period or three (3) times within a twelve (12) month period until neither of the circumstances below in clause (a) or (b) has occurred for a period of at least six (6) months: (a) the failure of Aradigm or its Permitted Subcontractor to accept a Firm Order in accordance with the most recent Rolling Forecast; or (b) a Late Delivery of a Batch.

1.72 “ Technology Transfer ” means the transfer to Grifols by Aradigm or any Third Party designated by Aradigm of the full and complete Standard Operating Procedures, all tangible and intangible information relating to the process of manufacturing Supplied Product, including all documents, manufacturing instructions, specifications, and any other relevant documentation, and all relevant manufacturing know-how, licenses and materials (including raw materials specifications), in each case that relates to Supplied Product and Aradigm or its Affiliates, as applicable, controls or has the right to license at any time during the Term and that is necessary to enable Grifols or its designee to manufacture Manufactured Product in accordance with the Specifications, and

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to comply with applicable regulatory requirements (including obtaining any necessary regulatory approvals, conducting any required studies and developing any other regulatory documentation) and all Applicable Laws in connection with such transfer.

1.73 “ Term ” has the meaning ascribed to it in Section 9.1.

1.74 “ Territory ” means worldwide.

1.75 “ Third Party ” means any entity other than Grifols, Aradigm or any Affiliate of Grifols or Aradigm.

1.76 “ Third Party Claims ” has the meaning ascribed to it in Section 7.1.

1.77 “ United States ” means the United States of America, including its territories, possessions and Puerto Rico.

ARTICLE 2 — SUPPLY OF SUPPLIED PRODUCT

2.1 Sale and Purchase of the Supplied Product .

(a) Aradigm shall supply and sell to Grifols, and Grifols shall purchase from Aradigm, subject to Section 2.6, one hundred percent (100%) of Grifols’ requirements for the Supplied Product in the form of Packaged Product for use in the Territory under the License Agreement, pursuant to Firm Orders submitted by Grifols to Aradigm from time to time in accordance with Section 2.2, at a Purchase Price determined in accordance with Section 4.1.

(b) Aradigm shall manufacture, store, test, package and label Supplied Product in conformity with the applicable Specifications for such Supplied Product and in compliance with all applicable Law, including cGMP, and the terms and conditions of this Agreement, the associated Permitted Subcontractor Agreement and the Quality Agreement. References in this Agreement to “Aradigm shall” or “Aradigm will” or similar wording describing manufacturing and supply obligations and activities of Aradigm shall be deemed to include reference to Permitted Subcontractors (e.g., “Aradigm shall, itself or using a Permitted Subcontractor”). In the event of a conflict between a Permitted Subcontractor Agreement and this Agreement with regard to the manufacture, storage, testing, packaging, labeling or supply of Supplied Product by the applicable Permitted Subcontractor, the Permitted Subcontractor Agreement will govern.

(c) Grifols shall control the configuration and type of physical labeling and packaging, excluding the regulatory elements of labeling and package inserts (and any revisions thereto), for each Supplied Product and Manufactured Product in the Territory and shall have the responsibility, at Grifols’ expense, which expense shall be commercially reasonable and documented, for any revisions thereto; provided, however, that Grifols shall provide Aradigm with drafts of the initial label and package configuration and all subsequent revisions intended for submission to the applicable Regulatory Authority to obtain its approval for review and comment at least twenty (20) Business Days prior to submission. Grifols shall consider Aradigm’s comments in good faith and will comply with any requirements of any Regulatory Authority regarding labeling and packaging. As per the regulatory elements of labeling and package inserts, Aradigm shall consider Grifols’ comments in good faith. For the avoidance of doubt, Aradigm shall have the final decision as to all label and package content (including the configuration and type of physical labeling and packaging) submitted to the applicable Regulatory Authority for its approval. With respect to the initial content and type of labeling and packaging approved by the applicable Regulatory Authority and any subsequent revisions for each Supplied Product, Aradigm shall implement such labeling and packaging as soon as reasonably practicable following its receipt of the required documentation specifying the content to be included in the labeling and packaging including all necessary photo-ready art (the “ Required Labeling Documentation ”) with respect thereto from Grifols. Aradigm shall ship Supplied Product

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pursuant to the initial Firm Order with such labeling and packaging as soon as reasonably practical (or, if later, its first Batch run following the approval of the change by the Permitted Subcontractor and availability of the revised labeling and packaging materials) following Aradigm’s receipt of such Required Labeling Documentation; and provided further, that the Firm Order is submitted by Grifols to Aradigm in accordance with Section 2.2(b).

(d) Subject to any legal requirements under applicable Law, Aradigm has engaged and may in the future engage subcontractors and suppliers to manufacture, store, test, package and label the Compound and the Supplied Product or otherwise perform some or all of Aradigm’s obligations under this Agreement, including Sigma Tau under the existing Sigma Tau Agreement; provided, however that Aradigm shall obtain Grifols’ prior written consent to the selection of each such additional subcontractor or supplier directly contracted by Aradigm (each, including Sigma Tau, a “ Permitted Subcontractor ”) and the approval of each additional agreement between Aradigm and such additional subcontractor or supplier, such consent not to be unreasonably withheld or delayed. Aradigm shall not, and shall not permit any Permitted Subcontractor to, change the facility at which it manufactures, stores, tests, packages or labels the Compound or Supplied Product, as applicable, to the extent that it impacts the manufacture of the Supplied Product without Grifols’ prior written consent, such consent not to be unreasonably withheld or delayed, except no consent is required for any change in accordance with any Permitted Subcontractor Agreement previously approved in writing by Grifols or if failure to make such change would cause Aradigm to breach this Agreement or cause a Supply Failure. Aradigm shall not amend or otherwise modify any Existing Manufacturing Agreement (including to extend the term thereof) without the prior written consent of Grifols, such consent not to be unreasonably withheld or delayed, except no consent is required to extend an Existing Manufacturing Agreement if such failure to extend the Existing Manufacturing Agreement would cause Aradigm to breach this Agreement or cause a Supply Failure.

(e) At all times during the Term, Aradigm shall, in accordance with this Agreement and the License Agreement, maintain as safety stock an amount of Compound usable to manufacture, store, test, package and label the Supplied Products hereunder equal to the amount of Compound necessary to manufacture, store, test, package and label the aggregate quantity of the Supplied Products as agreed by Grifols and stated in the Sigma-Tau Agreement.

2.2 Forecasts; Firm Orders .

(a) Grifols shall submit to Aradigm within one hundred eighty (180) days following execution of this Agreement, and in any event not later than nine (9) months prior to the anticipated First Commercial Sale, and thereafter no later than the fifth (5th) Business Day of every month during the Term, (i) an eighteen (18) month rolling forecast (“ Rolling Forecast ”) organized by months and Supplied Product stock keeping units setting forth the quantities of each Supplied Product in whole Batches that Grifols expects to purchase from Aradigm during the eighteen (18)-month period commencing with the beginning of said month and (ii) a thirty- six (36) month rolling forecast (“Long Range Forecast”) organized by months (except for the last twelve (12) months of each Long Range Forecast, which shall be organized as one twelve (12)- month period) and Supplied Product stock keeping units setting forth the quantities of each Supplied Product that Grifols expects to purchase from Aradigm in whole Batches during the thirty six (36)-month period commencing with the beginning of said month.

Grifols shall make all Rolling Forecasts and Long Range Forecasts in good faith given market and other information available to Grifols. Each Rolling Forecast shall constitute a binding commitment of Grifols to purchase the percentages of Supplied Products set forth below pursuant to Firm Orders issued in accordance with Section 2.2(b), notwithstanding any change in the quantity of a Supplied Product specified in a subsequent Rolling Forecast. Except as set forth below, each Long Range Forecast shall be non-binding on Grifols. Grifols

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shall be required to purchase at least that percentage of the quantity of each of the Supplied Products specified in the Forecast as follows:


Period of the Rolling Forecast		Percentage of the aggregate amount of Supplied Product that Grifols is required to purchase for such period
First Three Months		At least 100%
Fourth Month		At least 75%

For clarity, months five (5) through eighteen (18) of each Rolling Forecast and months five (5) through thirty-six (36) of each Long Range Forecast shall be made in good faith given market and other information available to Grifols for information and planning purposes only.

(b) Grifols shall purchase Supplied Product solely by Firm Orders for such Supplied Product. Grifols may submit Firm Orders for quantities of Supplied Product up to one hundred twenty-five percent (125%) in excess of the quantity set forth in the binding portion of the Rolling Forecast most recently submitted for such month; provided, however, that if, with respect to any month, Grifols orders any Supplied Product in excess of one hundred twenty-five percent (125%) of the quantity set forth in the binding portion of the Rolling Forecast most recently submitted for such month, Aradigm shall use Commercially Reasonable Efforts to supply such excess but shall not be liable for its inability to do so.

(c) No terms and conditions contained in any Firm Order, acknowledgment, invoice, bill of lading, acceptance or other preprinted form issued by either Party shall be effective to the extent they are inconsistent with or modify the terms and conditions contained herein. Grifols shall submit each such Firm Order to Aradigm in connection with its submission of the Rolling Forecast for which the month in which Grifols desires delivery of the Supplied Product is the third month of such Rolling Forecast including the destination for delivery of such Supplied Product. Aradigm shall, within ten (10) Business Days after Aradigm receives each Firm Order submitted in accordance with the foregoing sentence, accept in writing such Firm Order or reject it to the extent it does not comply with any of the terms or conditions of this Agreement. Subject to any other term or condition of this Agreement, Grifols shall be obligated to purchase, and Aradigm shall be obligated to deliver by the required delivery date set forth therein, such quantities of each Supplied Product as are set forth in each Firm Order. If Grifols requests changes to any Firm Order previously submitted by Grifols, including any increases or decreases in quantity of Supplied Product, required delivery date or form of Supplied Product, Aradigm shall use Commercially Reasonable Efforts to comply with such changes but shall not be liable for its inability to do so or any costs associated with such change, and Grifols shall be responsible for all costs associated with such change.

(d) Aradigm shall promptly notify Grifols in writing if at any time Aradigm has reason to believe that Aradigm will not be able to (i) fill a Firm Order for any Supplied Product in accordance with the delivery schedule specified therein by Grifols and pursuant to the terms and conditions of this Agreement and the Quality Agreement, or (ii) supply Supplied Product to Grifols in satisfaction of the most recent Rolling Forecast, which notice in either case shall provide Grifols with information on the extent of the expected shortfall of supply. Upon such notice of a supply problem, or in any event upon Aradigm’s failure to satisfy, within the delivery time frame specified by Grifols, a portion of the Supplied Product ordered by Grifols in compliance with this Agreement and the Quality Agreement, Grifols and Aradigm will immediately meet and work together, in good faith, to identify an appropriate resolution to the supply problem. Any agreed resolution to the supply problem will be set forth in writing and the Parties will use Commercially Reasonable Efforts to execute it. Compliance by Aradigm with this Section 2.2(c) shall not relieve Aradigm of any other obligation or liability under this Agreement, including any obligation or liability under clause (e), (f) and (g) below.

(e) If Aradigm fails to deliver the full quantity of any Supplied Product specified in a Firm Order by the required delivery date specified therein and in conformity with the applicable Specifications, the Parties will

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follow the actions and remedies that are outlined in the Permitted Subcontractor Agreement between Aradigm and the Permitted Subcontractor, to ensure continuity of supply, then Grifols may, at its option:

(i) cancel all or any portion of such Firm Order with respect to such Supplied Product, in which event Grifols shall have no liability with respect to the portion of such Firm Order so; and/or as appropriate.

(ii) accept late delivery of any non-cancelled portion of such Firm Order with respect to such Supplied Product, in which event the Purchase Price otherwise payable by Grifols with respect to all Supplied Product accepted by Grifols under such Firm Order that is Late Delivered shall be reduced by one percent (1.0%) of the original Purchase Price per day for each day after a term of five (5) Business Days from the delive1y date specified in an accepted Firm Order has elapsed and until, but not including, the date on which Aradigm has delivered one hundred percent (100%) of the quantity of Supplied Product under such Firm Order; provided that in no event will the Purchase Price be reduced to less than eighty percent (80%) of the original Purchase Price.

(f) If Aradigm fails to deliver Supplied Product, and such failure is due to the failure of the Permitted Subcontractor to deliver Supplied Product to Aradigm in accordance with Firm Order, Aradigm shall procure Supplied Product from the Second Source, if available at such time, in order to fill Grifols’ Firm Order; provided that in the event there has been a Supply Failure or Grifols reasonably believes following previous failures to meet Firm Orders or quality-related concerns there is likely to be a Supply Failure, Grifols may, without waiving any other rights Grifols may have at law or in equity, manufacture Manufactured Product itself or through a third party manufacturer as provided in Section 2.5.

(g) In no event will Section 2.2(e) apply in the case of any failure of Aradigm to deliver Supplied Product if such failure is due to actions taken by Aradigm in accordance with prior written instructions provided by Grifols or failure of Grifols to provide instructions, including, without limitation, packaging changes requested by Grifols as described in Section 2.3(a) or 2.l(c).

2.3 Shipment and Delivery .

(a) Aradigm shall deliver to Grifols the Supplied Product ordered pursuant to a Firm Order by the required delive1y dates therefor DDP the destination indicated by Grifols in the applicable Firm Order. Title and risk of loss for each Firm Order of the Supplied Product will pass to Grifols at the time of delivery of the Supplied Product to the applicable destination. Aradigm shall package each Supplied Product for shipment in accordance with the SOPs, which shall be previously approved by Grifols in writing, at least six months prior to such Firm Order. The SOPs shall be customary and reasonable in the pharmaceutical industry with respect to similarly situated products including shipping validation, unless otherwise specified in writing by Grifols in which event Aradigm shall package each Supplied Product for shipment in accordance with such instructions and any commercially reasonable, documented external costs incurred by Aradigm on account of the packaging changes requested by Grifols shall be promptly reimbursed by Grifols.

(b) Prior to shipment, Aradigm’s Permitted Subcontractors shall perform release testing for the Supplied Product pursuant to the Specifications, cGMP, the Quality Agreement and the Permitted Subcontractor Agreement.

2.4 Second Source . Aradigm shall, subject to Grifols’ prior written consent, (a) engage and qualify one or more contract manufacturers as Permitted Subcontractors to act as a second source contract manufacturer(s), to manufacture and supply Packaged Product (each a “ Second Source ”) by the date three (3) months after the first Regulatory Approval for the Supplied Product, then entering into a supply agreement and quality agreement with such Second Source that is commercially reasonable and consistent with the Sigma Tau Agreement and ensure it is approved by appropriate Regulatory Authorities and (b) keep such Second Source (or a subsequently-licensed Second Source) qualified to manufacture and supply Packaged Product to Aradigm during the Term. Following

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engaging and qualifying a Second Source, Aradigm will provide a timeline, agreement, quality agreement, budget for the regulatory approval of such second source and the price of Supplied Product from the Second Source. Following approval by Grifols of the Second Source, such approval not to be unreasonably withheld, Aradigm will use Commercially Reasonable Efforts to gain regulatory approval of such Second source to provide Supplied Product in accord with the Rolling Forecast. All costs associated with gaining Regulatory Approval of the Second Source will be borne by Grifols but shall not exceed the agreed budget without written approval from Grifols. Such costs will be invoiced to Grifols in accord with the payment schedule agreed in the budget provided to Grifols by Aradigm and paid within thirty (30) days of receipt of an invoice by Grifols.

2.5 Grifols Step-In Right . Aradigm acknowledges and agrees that during the Term or after the Term for so long as Grifols has the right to promote and sell Supplied Product in the Territory under the License Agreement, Grifols or any person or entity designated by Grifols (including an Affiliate of Grifols) may manufacture, store, test, package and label such quantities of Manufactured Product (including any intermediate or component thereof) as shall be reasonably necessary or appropriate solely to permit Grifols or such designee(s) to exercise the limited non-exclusive manufacturing rights granted to it under Section 2.1 of the License Agreement. Upon Grifols’ request in connection with its exercise of its rights under this Section 2.5, Aradigm shall, and shall cause its Affiliates and Permitted Subcontractors to, commence and implement the obligations under the Permitted Subcontractor Agreements for existing Permitted Subcontractors or the Technology Transfer pursuant to this Agreement. Likewise, in connection with the exercise of Grifols’ rights under this Section 2.5 and if necessary, Aradigm shall assign to Grifols any and all approvals, licenses, registrations or authorizations necessary for the marketing, manufacture, use, storage, import, transport, or sale of the Supplied Product to the extent assignable with Grifols to bear the expense of any such assignment; provided, however, that Aradigm shall not be required to assign any such approvals, licenses, registrations or authorizations that are necessary for Aradigm to continue to manufacture Supplied Products, or any components thereof, either for supply to Grifols under this Agreement or use by or on behalf of Aradigm in the exercise of its retained rights under Section 2.1of the License Agreement to manufacture and Develop Aradigm Products (as such terms are defined in the License Agreement). Should Grifols exercise its rights set forth in this Section 2.5, Grifols shall use Commercially Reasonable Efforts to supply Aradigm with Compound for Bio- Defense Applications under terms and conditions equivalent to the terms of this Agreement, the License Agreement and the Quality Agreement and a purchase price of COGS + 5% as defined in Section 4.1(a). In such circumstances, Grifols will provide Aradigm with all information required by Regulatory Authorities for Bio-Defense Applications. Should Grifols exercise its rights set forth in this Section 2.5, Grifols shall have sole responsibility and liability with respect to the manufacture, storage, testing, packaging and labeling of all quantities of Manufactured Product (including any intermediate or component thereof) by Grifols or its Affiliates or any third party contractor engaged by Grifols or its Affiliates (which may include a Permitted Subcontractor), and Aradigm shall have no responsibility or liability with respect to such activities or such Manufactured Product after Grifols completes this transition.

2.6 Supply Chain Communications . No later than the tenth (10th) Business Day of each quarter during the Term (or such other timing agreed by the Parties in light of timing under the applicable Permitted Subcontractor Agreement), Aradigm shall provide Grifols a brief report (in a format reasonably agreed by the Parties) that details the inventory held by a Permitted Subcontractor on behalf of Aradigm of the Compound designated for use in the Supplied Product. No later than the twentieth (20th) day of each quarter during the Term (or such other timing agreed by the Parties in light of timing under the applicable Permitted Subcontractor Agreement), Aradigm and Grifols shall have a sales and operations planning meeting at which the Parties will exchange information regarding forward looking demand forecasts, inventories, supply and capacity assessments, anticipated shortages of component/Compound/ raw material, future order supply performance management and other supply chain concerns. This meeting will be used to inform and remedy any anticipated future issues. The operational, day- to-day issues will be managed via ad hoc communications (by phone or email) between Grifols and Aradigm, as soon as such issues are recognized. To the above extent, prior to the initiation of any commercial activity, each Party shall designate a specific qualified individual who will (i) become the primary contact between the Parties to coordinate the communications derived from or under this Agreement and ensure its full implementation and (ii) ensure that both Parties act in good faith to maintain continuity of supply under

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all circumstances that are common to the industry and make Commercially Reasonable Efforts to resolve such issues. Aradigm will use Commercially Reasonable Effort to maximize the remaining shelf life of any Supplied Product.

2.7 Knowledge Transfer. Promptly after the Effective Date, the Parties shall prepare and agree on a written knowledge transfer plan which will be sufficient to allow for the transfer of the reasonably necessary knowledge to Grifols for the purposes of understanding the manufacturing process of Supplied Product. Grifols will reimburse Aradigm for all internal Aradigm costs and third party costs associated with the preparation and implementation of the knowledge transfer plan. Fm clarity, this requirement is merely to prepare a knowledge transfer plan, not to conduct complete technology transfer from Aradigm to Grifols, unless and until the provisions of Section 2.5 are triggered. The scope of the transfer plan and the associated preparation costs are provided in Exhibit 3.

ARTICLE 3 — REGULATORY AND QUALITY MATTERS

3.1 Regulatory Responsibility . Subject to the terms of this Agreement and the License Agreement, all matters in the Territory regarding obtaining and supporting Regulatory Approval of the Supplied Product, and manufacturing, storing, testing, packaging and labeling of the Supplied Product in compliance with the applicable Specifications for the Supplied Product and applicable Law (including cGMP), shall be the responsibility of, and shall remain under the control of Aradigm. Each Party shall promptly (within three (3) Business Days) provide the other Party with copies of all communications received from any Regulatory Authority concerning the Supplied Products which directly or is determined to indirectly affect or relate to the manufacturing, storing, testing, packaging or labeling thereof, and shall submit copies of all such communications and any filings that directly or indirectly affect or relate to the manufacturing, storing, testing, packaging or labeling of the Supplied Product to be made to any such agency for prior review and comment at least five (5) Business days prior to such submission. Each Party shall provide notice to the other Party of meetings with any Regulatory Authority, whether in person, or otherwise, which affect or relate to the manufacturing, storing, testing, packaging or labeling of the Supplied Product. Aradigm shall advise Grifols of any occurrence or new information, including that arises out of Aradigm’s manufacturing, storing, testing, packaging or labeling, which may reasonably be expected to have regulatory compliance or reporting consequences concerning Supplied Product.

3.2 Change Control . For changes to the Specifications or manufacturing processes that are required by applicable Laws (collectively, “ Required Manufacturing Changes ”) and replacement of equipment, Aradigm and Grifols shall cooperate in making such changes timely in accordance with the Quality Agreement and the applicable Permitted Subcontractor Agreements. The commercially reasonable, documented, external costs attributable to the Required Manufacturing Change, including the cost of a reasonable quantity (in light of the Forecasts submitted by Grifols) of raw materials, work-in-process, Supplied Product and packaging and labeling materials rendered obsolete as a result of any such Required Manufacturing Changes, shall be borne by Grifols. Process changes or additional regulatory filings proposed by Aradigm, Grifols or a Permitted Subcontractor and agreed by Grifols will be governed by the terms of the applicable Permitted Subcontractor Agreement and Grifols will be responsible for the cost associated with all such changes, if such changes are agreed by Grifols in writing.

3.3 Records and Release . Aradigm shall, and shall require its Affiliates and each Permitted Subcontractor to, keep complete, accurate and authentic accounts, notes, data and records of the work performed under this Agreement and shall maintain complete and adequate records pertaining to the methods and facilities used by it for the manufacture, storage, testing, packaging and labeling of Supplied Product in accordance with applicable Law, including cGMP, and the terms and conditions of this Agreement and the Quality Agreement. Aradigm shall provide Grifols with a copy of a Certificate of Analysis with each batch of Supplied Product delivered to Grifols, as set forth in the Quality Agreement.

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3.4 Stability Testing . Aradigm shall, and shall require its Affiliates and each Permitted Subcontractor to (a) take and maintain quality control and stability samples of all Supplied Product delivered to Grifols (collectively, the “ Stability Product ”), and (b) testing stability samples of all Stability Products, in each case ((a) and (b)) in accordance with the Quality Agreement and the Permitted Subcontractor Agreement. Aradigm shall promptly provide data resulting from stability testing related to the Stability Products for distribution in the Territory to Grifols as such information becomes available, including any discovery of any negative or adverse trending in stability data. The costs of stability testing will be invoiced to Grifols on a quarterly basis and will be paid by Grifols.

3.5 Government Inquiries . Upon being contacted by any Regulatory Authority for any regulatory purpose pertaining to this Agreement or to the Supplied Product, including notice of the initiation of any inquiries, notices or inspection activity by any such agency, a Party shall immediately notify the other Party and provide the other Party with (a) a reasonable description of any such inquiries and related documentation and correspondence, (b) an opportunity to comment with respect thereto and (c) if appropriate , an opportunity to participate with respect thereto to the extent such matters relate to the Supplied Product in the Territory.

3.6 Notice of Government Inspections . Each Party agrees that it will (a) advise the other Party of any requests by any Regulatory Authority for any inspections with respect to the manufacturing, storing, testing, packaging and labeling of Supplied Product, (b) provide the other Party with copies of any correspondence related thereto, and, to the extent it becomes aware of the results, observations or outcome of any inspections or audits of the facilities or operations involved in the manufacture, storage, testing, packaging or labeling of the Supplied Product conducted by any Regulatory Authority, including providing the other Party an opportunity to review and comment within three (3) Business Days with respect to any correspondence to be provided by such Party to the applicable Regulatory Authority, and (c) notify the other Party of any such information as it relates to the Supplied Product in the Territory within three (3) Business days of obtaining the information.

3.7 Recalled Supplied Product . The provisions of the License Agreement and any applicable provisions of the Quality Agreement shall govern the recall of any Supplied Product.

3.8 Quality Agreement . The Parties will enter into a reasonable and customary quality agreement within ninety (90) days after the Effective Date (the “Quality Agreement”). The Quality Agreement will include provisions with respect to, among other things, release testing, change control procedures with respect to the Specifications and the manufacturing processes for the Supplied Product, stability testing and record retention requirements. Each Party shall duly and punctually perform all of its obligations under the Quality Agreement. In the event of any conflict between terms of the Quality Agreement and the terms of this Agreement, with respect to quality-related matters, the terms of the Quality Agreement shall govern, and with respect to all other matters, the terms of this Agreement shall govern.

3.9 Quality Audits .

(a) From and after the Effective Date and with reasonable advance notice, Grifols shall have the right to inspect and audit those portions of Aradigm’s and its Affiliates’ and its Permitted Subcontractors’ facilities in accordance with Existing Manufacturing Agreements or Permitted Subcontractors Agreements executed during the Term of this Agreement in which the Supplied Product are manufactured, stored, tested, packaged or labeled to ascertain compliance with cGMP, applicable Laws, and the terms and conditions of this Agreement and the Quality Agreement; provided, however, that (i) Grifols’ representatives shall follow all security, and facility access procedures as reasonably required by Aradigm or its Affiliate or Permitted Subcontractor, as applicable, and other requirements of the applicable Permitted Subcontractor Agreement and (ii) Grifols may not exercise its right under this Section 3.9(a) more than twice in any Calendar Year (unless such inspection and audit reveals a material compliance issue, in which event Grifols shall have the right to conduct additional inspections and audits during such Calendar Year to verify that such issue has been remedied). Aradigm shall coordinate the audits with Permitted Subcontractors, and shall ensure that each Permitted Subcontractor complies with the

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provisions of this Section 3.9. Grifols will be responsible for the costs associated with a second annual inspection and audit.

(b) Aradigm shall use Commercially Reasonable Efforts to cause its Affiliates and its Permitted Subcontractors to promptly resolve any quality issues raised by any inspections in accord with existing Permitted Subcontractor Agreement.

(c) Except as otherwise set forth in this Agreement, each Party shall, at its sole cost and expense, make Commercially Reasonable Efforts to maintain in full force and effect all necessary licenses, approvals, permits and other authorizations required by applicable Law to carry out its duties and obligations under this Agreement and the Quality Agreement. Aradigm shall make Commercially Reasonable Efforts to maintain and renew all MAAs in the Territory in accordance with applicable Law and to comply with all other obligations that it has as a holder of any MAAs in the Territory.

3.10 Compliance with Law .

(a) Grifols shall use Commercially Reasonable Efforts to comply with all applicable Law with respect to its obligations under this Agreement, including with respect to its use, importation, storage, handling, distribution, promotion, marketing and sale of the Supplied Product and Manufactured Product in the Territory, and including advertising and promotion requirements, and distribution of product samples.

(b) under clause (a) above, Aradigm shall use Commercially Reasonable Efforts to comply with all applicable Law with respect to its obligations under this Agreement, including, as applicable, the applicable Laws, rules and regulations of any jurisdiction in which Aradigm manufactures, stores, tests, packages or labels, or has manufactured, stored, tested, packaged and labeled, the Supplied Product.

3.11 Regulatory Cooperation of Aradigm . Aradigm shall, and shall use Commercially Reasonable Efforts to cause each Affiliate and Permitted Subcontractor to, cooperate with any reasonable requests for assistance from Grifols with respect to Supplied Product that is in accord with Permitted Subcontractor Agreements, including by: (a) making its employees, consultants and other staff available upon reasonable notice during normal business hours to attend meetings with Regulatory Authorities concerning the Supplied Product; and (b) disclosing and making available to Grifols, in whatever form Grifols may reasonably request,all manufacturing and quality control data, chemistry, manufacturing and controls data and other information related to the Supplied Product and the manufacturing process therefor.

3.12 Labeling .

(a) Pursuant to the License Agreement and solely in respect of those countries part of the Territory in which Aradigm is not responsible for the control of any labeling and packaging activities, Grifols shall control the content and type of all such labeling and packaging, including package inserts (and any revisions thereto) for each Supplied Product worldwide and shall have the responsibility, at Grifols’ expense, for any revisions thereto. Grifols shall provide Aradigm with drafts of the label content and consider Aradigm’s comments in good faith; provided that Grifols shall have the final decision as to such label and package content submitted to the applicable Regulatory Authority for its approval. Grifols shall have sole responsibility and liability for labeling and packaging content determined by Grifols.

(b) With respect to the initial content and type of labeling and packaging approved by the applicable Regulatory Authority and any subsequent revisions for each Supplied Product, Aradigm shall implement such labeling and packaging as soon as reasonably practicable following Aradigm’ s receipt of the required documentation specifying the content to be included in the labeling and packaging, including all necessary photo-ready art, with respect thereto from Grifols.

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ARTICLE 4 — PRICE AND PAYMENT TERMS

4.1 Purchase Price .

(a) Grifols shall pay Aradigm a purchase price for each conforming quantity of Supplied Product delivered hereunder as detailed below in subsection (b). “ COGS ” means, with respect to a Supplied Product, Aradigm’s documented, actual, external out-of-pocket costs, including costs paid to a Permitted Subcontractor, to have such Supplied Product manufactured, stored, tested, packaged and labeled (including the cost of the compound), excluding (i) any indirect taxes and (ii) any amounts payable by Aradigm to a third party due to Aradigm’ s gross negligence or willful misconduct.

(b) The purchase price (the “ Purchase Price ”) for Supplied Product delivered hereunder shall be equal to the greater of (a) COGS + 5% with respect to such Supplied Product or (b) COGS + 2.5% with respect to such Supplied Product plus $250,000 per calendar month.

(c) At least ninety (90) days prior to the first day of each Calendar Year, Aradigm shall notify to Grifols in writing of the COGS for each Supplied Product for such Calendar Year, which notice shall set forth in reasonable detail each cost that is included in the COGS calculation within the Purchase Price. Upon Grifols’ request, Aradigm shall provide copies to Grifols of all documentation relating to the Purchase Price, including, but not limited to, documentation provided by Sigma Tau with respect to any manufacturing costs.

(d) Aradigm shall use Commercially Reasonable Efforts to cause the COGS for any Supplied Product supplied by Aradigm hereunder to be as low as possible.

4.2 Taxes .

(a) The Purchase Price and other amounts payable by Grifols to Aradigm pursuant to this Agreement (“ Payments ”) shall not be reduced on account of any taxes unless required by applicable Law. Aradigm alone shall be responsible for paying any and all taxes (other than withholding taxes required by applicable Law to be paid by Grifols) levied on account of, or measured in whole or in part by reference to, any Payments it receives. Grifols shall deduct or withhold from the Payments any taxes that it is required by applicable Law to deduct or withhold. Notwithstanding the foregoing, if Aradigm is entitled under any applicable tax treaty to a reduction of rate of, or the elimination of, applicable withholding tax, it may deliver to Grifols or the appropriate Governmental Authority (with the assistance of Grifols to the extent that this is reasonably required and is expressly requested in writing) the forms (completed in a manner satisfactory to Grifols) necessary to reduce the applicable rate of withholding or to relieve Grifols of its obligation to withhold tax, and Grifols shall apply the reduced rate of withholding, or dispense with withholding, as the case may be, provided that Grifols has received evidence, in a form satisfactory to Grifols, of Aradigm’ s delivery of all applicable forms (and, if necessary, its receipt of appropriate governmental authorization from the applicable Governmental Authority) at least fifteen (15) Business days prior to the time that the Payments are due. If, in accordance with the foregoing, Grifols withholds any amount, it shall pay to Aradigm the balance when due, make timely payment to the proper taxing authority of the withheld amount, and send to Aradigm proof of such payment as soon as reasonably practicable following that payment.

4.3 Freight and Insurance . In addition to the Purchase Price, Grifols shall pay all actual freight and insurance expenses incurred by Grifols in connection with the sale and shipment of the Supplied Product. Aradigm shall be responsible for any shipping liability to Grifols, for which Aradigm shall procure sufficient insurance for such shipping liability. Grifols shall be responsible for the payment of all duties, shipping charges and insurance related to delivery of Supplied Product that are incurred by Aradigm, which costs shall be set forth in invoices submitted to and paid by Grifols pursuant to Section 4.4.

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4.4 Payments .

(a) Upon each delivery of Supplied Product in accordance with Section 2.3, Aradigm shall promptly submit an invoice to Grifols. All invoices and payments for the Supplied Product shall be in United States dollars by wire transfer to an account designated in writing by Aradigm. Grifols shall pay the invoice within thirty (30) days after receipt of a correct invoice unless such invoice is disputed in accord with this Agreement, in which case Grifols shall make payment of the undisputed portion of such invoice and the Parties shall promptly discuss the disputed portion of such invoice in order to resolve the matter as quickly as possible.

(b) If an inconsistency between any invoice and this Agreement exists, the terms of this Agreement shall control.

4.5 Interest Charges . If a Party does not receive payment of any sum due to it on or before the due date, simple interest shall thereafter accrue on the sum due until the date of payment at the per annum rate of one and one half percent (1.5%) over the then current prime rate reported in The Wall Street Journal or the maximum rate allowable by applicable Law, whichever is lower.

4.6 Records . Each Party shall maintain complete and accurate records in sufficient detail to permit the other Party to confirm the accuracy of the calculation of payments hereunder. Each Party shall have the right to audit such records in accordance with Section 4.7.

4.7 Audits . For a period of two (2) years from the end of the Calendar Year in which a payment was due hereunder, upon thirty (30) days prior notice, each Party (the “ Audited Party ”) shall make such records relating to such payment available, during regular business hours and not more often than once each Calendar Year, for examination by an independent certified public accountant selected by the other Party (the “ Auditing Party ”) and reasonably acceptable to the Audited Party, for the purposes of verifying compliance with this Agreement and the accuracy of the financial reports and/ or invoices furnished pursuant to this Agreement. The results of any such audit shall be shared by the auditor with both Parties and shall be considered Confidential Information of both Parties. Any amounts shown to be owed by either Party to the other shall be paid within thirty (30) Business days from the auditor’s report, plus interest (as set forth in Section 4.5) from the original due date. The Auditing Party shall bear the full cost of such audit unless such audit discloses a deficiency in the Audited Party’s payments of greater than five percent (5%), in which case the Audited Party shall bear the full cost of such audit.

ARTICLE 5 — INSPECITON OF SUPPLIED PRODUCT

5.1 Inspection by Grifols . Grifols may inspect and analyze the Supplied Product delivered to Grifols for purposes of determining whether the Supplied Product meet the applicable Specifications at the time of delivery (such Supplied Product, “ Acceptable Supplied Product ”). Grifols shall notify Aradigrn in writing within thirty (30) Business days from the date of delivery to the destination specified by Grifols (or within thirty (30) Business days after discovery that any Supplied Product was not Acceptable Supplied Product at the time of delivery for reasons that could not reasonably have been detected by Grifols on delivery) of any Supplied Product or portion thereof which Grifols is returning because it is not an Acceptable Supplied Product, including documentation of the reasons therefor.

5.2 Disputes Over Supplied Product . If Aradigm, after good faith consultation with Grifols, disputes any determination by Grifols that a Supplied Product is not an Acceptable Supplied Product, then representative samples of such Supplied Product shall be f01warded to an independent Third Party laboratory jointly selected by Aradigrn and Grifols with consideration of the Permitted Subcontractor if necessary, in their reasonable discretion, for analysis, which analysis shall be performed in compliance with industry standards and applicable Law for re- testing of pharmaceutical products. The findings of such Third Party laboratory regarding whether

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the Supplied Product was an Acceptable Supplied Product shall be binding upon the Parties. The cost of such analysis by such Third Party laboratory shall be borne by the Party whose analysis was not substantiated by the findings of such Third Party laboratory.

5.3 Replacement of Supplied Product That Are Not Acceptable Supplied Product . Aradigm shall, at Grifols’ option, either replace any Supplied Product order or portion thereof which is not Acceptable Supplied Product as soon as reasonably practicable at Aradigm’s cost and expense, including shipping costs (provided that, if Grifols has not already paid for the rejected Supplied Product, Grifols shall pay for the replacement Supplied Product), or promptly apply a credit against the next payment of Purchase Price due under this Agreement or refund to Grifols the payments made for such 1·eturned Supplied Product (including Grifols’ shipping costs) if Grifols has already paid for the rejected Supplied Product. At the sole option of Aradigm, said Supplied Product may be returned to Aradigm, at Aradigm’s expense including shipping costs, 01· destroyed in an environmentally acceptable manner, in accordance with applicable Law, at Aradigm’s expense and as agreed in writing by Aradigm prior to such destruction.

ARTICLE 6 — REPRESENTATIONS AND WARRANTIES

6.1 Mutual Representations and Warranties . Each Party represents and warrants to the other Party as of the Effective Date as follows: (a) it is a duly organized and validly existing corporation or limited partnership under the laws of its jurisdiction of incorporation or formation; (b) it has full corporate or partnership power and authority and has taken all corporate or partnership action necessary to enter into and perform this Agreement; (c) the execution and delivery of this Agreement and the performance of its obligations hereunder do not violate, conflict with, or constitute a default or require any consent under its charter or similar organization document, its by-laws or partnership agreement, or the terms or provisions of any material agreement or other instrument to which it is a party or by which it is bound, or any order, award, judgment or decree to which it is a party or by which it is bound; and (d) this Agreement is its legal, valid and binding obligation, enforceable against it in accordance with the terms and conditions hereof, subject to the effects of bankruptcy, insolvency or other laws of general application affecting the enforcement of creditor rights and judicial principles affecting the availability of specific performance and general principles of equity, whether enforceability is considered in a proceeding at law or equity. Each Party covenants to the other Party that it will not enter into any agreement or other instrument that would conflict with its obligations under this Agreement.

6.2 Aradigm Representations and Warranties .

(a) Aradigm represents and warrants to Grifols that at the time each Supplied Product is delivered to Grifols such Supplied Product, based upon representations of the applicable Permitted Subcontractor:

(i) will meet the Specifications therefor;

(ii) will have been manufactured, stored, tested, packaged and labeled in accordance with the applicable Specifications, including cGMP;

(iii) will have remaining shelf life of no less than fifteen (15) months for Supplied Products delivered within the USA, and will have remaining shelf life of no less than fourteen (14) months for Supplied Product delivered outside the USA; and

(iv) will not be (A) adulterated, (B) labeled, packaged, treated, processed, sold or advertised in a manner that is false, misleading or deceptive or is likely to create an erroneous impression, or (C) manufactured, stored, tested, packaged or labeled under unsanitary conditions, within the meaning of Sections 8, 9, and 11, respectively, of the Act, or any other applicable Law.

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(b) Aradigm has (and will use Commercially Reasonable Efforts to maintain, at all relevant times throughout the Term of this Agreement), all rights, approvals, consents, qualifications, and registrations reasonably required for Aradigm to perform its obligations under this Agreement and the Quality Agreement.

(c) Aradigm represents, covenants and warrants to Grifols that Aradigm, and each Aradigm owner, director, employee and agent, and to Aradigm’ s Knowledge each Aradigm vendor is not, has not been and shall not be excluded, disqualified, or debarred by any Governmental Authority for any purpose pursuant to applicable Law. All Permitted Subcontractors (and each respective owner, director, employee and agent thereof) must provide an equivalent representation to Aradigm prior to approval of a Permitted Subcontractor Agreement by Grifols. Aradigm shall immediately notify Grifols in the event of any failure or likely failure to comply with the representations, covenants and warranties set forth in this Section 6.2(c), but in any event within three (3) Business days.

6.3 Grifols Representations and Warranties . Grifols represents and warrants to Aradigm as of the Effective Date that:

(a) Grifols shall at all times handle, warehouse, store, market, sell, distribute and otherwise dispose of the Supplied Product in the Territory in accordance with customary industry practice and in compliance with all applicable Laws, Regulatory Approvals, Specifications and cGMP; and

(b) Grifols has, or will obtain, all applicable licenses, registrations and permits necessary to take control of, handle, warehouse, store, market, sell and distribute and otherwise dispose of such Supplied Product in the Territory.

6.4 Disclaimer . EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT OR ANY OTHER AGREEMENT BETWEEN THE PARTIES, NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, WHETHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON- INFRINGEMENT, OR NON-MISAPPROPRIATION OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS ARE MADE OR GIVEN BY OR ON BEHALF OF A PARTY, AND ALL IMPLIED REPRESENTATIONS AND WARRANTIES, WHETHER ARISING BY OPERATION OF LAW OR OTHERWISE, ARE HEREBY EXPRESSLY DISCLAIMED.

ARTICLE 7 — INDEMNIFICATION AND INSURANCE

7.1 Aradigm Indemnification . Subject to the procedures set forth in Section 7.3, Aradigm shall indemnify Grifols, its Affiliates and its and their respective directors, officers, employees and agents (the “ Grifols Indemnified Parties ”), and defend and save each of them harmless, from and against any and all claims, lawsuits, losses, damages, liabilities, penalties, costs and expenses (including reasonable attorneys’ fees and disbursements) (collectively, “ Losses ”) incurred by any of them in connection with any and all suits, investigations, claims or demands of Third Parties (collectively, “ Third Party Claims ”) in connection with, arising from or occurring as a result of: (a) the breach or inaccuracy of any representation or warranty made by Aradigm in this Agreement or the Quality Agreement (provided that the remedy for failure of Supplied Product to meet the applicable Specifications at the time of delivery shall be as provided in Article 5); (b) the breach by Aradigm of any of its obligations under this Agreement or the Quality Agreement; (c) the negligence, recklessness or willful misconduct of any Aradigm Indemnified Party in performing any activities in connection with this Agreement or the Quality Agreement; or (d) any Third Party Claim brought by any Permitted Subcontractor due to Aradigm’s breach of the applicable Permitted Subcontractor Agreement provided that such breach was not caused by any action or inaction attributable to Grifols, in each case except for (i) those Losses for which Grifols has an obligation to indemnify any Aradigm Indemnified Parties pursuant to Section 7.2 or the License Agreement, as to which Losses Party shall indemnify the Grifols Indemnified Parties or Aradigm Indemnified Parties, as applicable, for the applicable Losses to the extent of its indemnification obligation,

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relative to the other Party, with respect to the facts underlying the applicable Third Party Claim, or (ii) Losses or claims to the extent they are solely the result of Grifols’ failure to assure proper storage, transport or use of Supplied Product after receipt by Grifols.

7.2 Grifols Indemnification . Subject to the procedures set forth in Section 7.3, Grifols shall indemnify Aradigm, its Affiliates and its and their respective directors, officers, employees and agents (the “ Aradigm Indemnified Parties ”), and defend and save each of them harmless, from and against any and all Losses incurred by any of them in connection with any Third Party Claims in connection with, arising from or occurring as a result of: (a) the breach or inaccuracy of any representation or warranty made by Grifols in this Agreement or the Quality Agreement; (b) the breach by Grifols of any of its obligations under this Agreement or the Quality Agreement; (c) the negligence, recklessness or willful misconduct of any Grifols Indemnified Party in performing any activities in connection with this Agreement or the Quality Agreement; (d) any action or inaction attributable to Grifols that results in a breach of a Permitted Subcontractor Agreement; or (e) the manufacture, supply, storage, transport, handling or use of Manufactured Product by Grifols or its Affiliate or any Third Party, or the storage, transport, handling or use of Supplied Product by Grifols or its Affiliate or any Third Party after delivery of such Supplied Product to Grifols; in each case except for those Losses for which Aradigm has an obligation to indemnify any Grifols Indemnified Parties pursuant to Section 7.1 or the License Agreement, as to which Losses the applicable Party shall indemnify the Grifols Indemnified Parties or Aradigm Indemnified Parties, as applicable, for the applicable Losses to the extent of its indemnification obligation, relative to the other Party, with respect to the facts underlying the applicable Third Party Claim

7.3 Indemnification Procedure .

(a) Notice of Claim. A Party seeking recovery under this Article 7 with respect to any Losses incurred by it or, in the case of Grifols, one or more Grifols Indemnified Parties, and in the case of Aradigm, one or more Aradigm Indemnified Parties (the “ Indemnified Party ”) shall give the indemnifying Party (the “ Indemnifying Party ”) prompt written notice (an “ Indemnification Claim Notice ”) of any claim of Loss or discovery of facts upon which such Indemnified Party intends to base a request for indemnification under Section 7.1or Section 7.2, but in no event shall the Indemnifying Party be liable for any Losses to the extent resulting from any delay in providing such notice. Each Indemnification Claim Notice shall contain a description of the claim and the nature and amount of such Loss (to the extent that the nature and amount of such Loss are known at such time). The Indemnified Party shall furnish promptly to the Indemnifying Party copies of all papers and official documents received in respect of any Losses. For the avoidance of doubt, all indemnification claims in respect of a Party, its Affiliates and its and their respective directors, officers, employees and agents shall be made solely by such Party to this Agreement.

(b) Third Party Claims . The obligations of an Indemnifying Party under this Article 7 shall be governed by and be contingent upon the following additional terms and conditions:

(i) Control of Defense . At its option, the Indemnifying Party may assume the defense of any Third Party Claim by giving written notice to the Indemnified Party within fourteen (14) Business Days after the Indemnifying Party’s receipt of an Indemnification Claim Notice with respect to such Third Party Claim. The assumption of the defense of a Third Party Claim by the Indemnifying Party shall not be construed as an acknowledgment that the Indemnifying Party is liable to indemnify any Grifols Indemnified Party or any Aradigm Indemnified Party, as applicable, in respect of such Third Party Claim, nor shall it constitute a waiver by the Indemnifying Party of any defenses it may assert against the applicable Indemnified Party’s claim for indemnification. Upon assuming the defense of a Third Party Claim, the Indemnifying Party may appoint as lead counsel in the defense of the Third Party Claim any legal counsel selected by the Indemnifying Party, which shall be reasonably acceptable to the Indemnified Party. In the event the Indemnifying Party assumes the defense of a Third Party Claim, to the extent legally permissible, the Indemnified Party shall promptly deliver to the Indemnifying Party all original notices and documents (including court papers) received by the applicable Indemnified Party in connection with such Third Party Claim. Subject to clause (ii) below, if the Indemnifying Party assumes the defense of a Third Party Claim, the Indemnifying Party shall not be liable to the Indemnified

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Party for any legal expenses subsequently incurred by such Indemnified Party in connection with the analysis, defense or settlement of the Third Party Claim. In the event that it is ultimately determined that the Indemnifying Party is not obligated to indemnify, defend or hold harmless a Grifols Indemnified Party or an Aradigm Indemnified Party, as applicable, from and against the Third Party Claim, the applicable Indemnified Party shall reimburse the Indemnifying Party for any and all costs and expenses (including attorneys’ fees and costs of suit) and any Losses incurred by the Indemnifying Party in its defense of the Third Party Claim with respect to such Grifols Indemnified Party or Aradigm Indemnified Party, as applicable.

(ii) Right to Participate in Defense . Without limiting Section 7.3(b)(i), any Indemnified Party shall be entitled to participate in, but not control, the defense of a Third Party Claim and to employ counsel of its choice for such purpose; provided, however, that such employment shall be at the Indemnified Party’s own expense unless (A) the employment thereof has been specifically authorized by the Indemnifying Party in writing, (B) the Indemnifying Party has failed to assume the defense and employ counsel in accordance with Section 7.3(b)(i) (in which case the Indemnified Party shall control the defense) or (C) the interests of the Indemnified Party and the Indemnifying Party with respect to such Third Party Claim are sufficiently adverse to prohibit the representation by the same counsel of both Parties under applicable Law, ethical rules or equitable principles.

(iii) Settlement . With respect to any Losses relating solely to the payment of money damages in connection with a Third Party Claim and that will not result in the applicable Indemnified Party’s becoming subject to injunctive or other relief or otherwise adversely affect the business of the applicable Indemnified Party in any manner, and as to which the Indemnifying Party shall have acknowledged in writing the obligation to indemnify the applicable Indemnified Party hereunder, the Indemnifying Party shall have the sole right to consent to the entry of any judgment, enter into any settlement or otherwise dispose of such Loss, on such terms as the Indemnifying Party, in its sole discretion, shall deem appropriate. With respect to all other Losses in connection with Third Party Claims, where the Indemnifying Party has assumed the defense of the Third Party Claim in accordance with Section 7.3(b)(i), the Indemnifying Party shall have authority to consent to the entry of any judgment, enter into any settlement or othe1wise dispose of such Loss provided that it obtains the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld or delayed). The Indemnifying Party shall not be liable for any settlement or other disposition of a Loss by an Indemnified Party that is reached without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld or delayed). Regardless of whether the Indemnifying Party chooses to defend or prosecute any Third Party Claim, no Indemnified Party shall admit any liability with respect to, or settle, compromise or discharge, any Third Party Claim without the prior written consent of the Indemnifying Party (which consent shall not be unreasonably withheld or delayed).

(iv) Cooperation . If the Indemnifying Party chooses to defend or prosecute any Third Party Claim, the Indemnified Party shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, provide such witnesses and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested in connection therewith. Such cooperation shall include access during normal business hours afforded to the Indemnifying Party to, and reasonable retention by the Grifols Indemnified Party or the Aradigm Indemnified Party, as applicable, of, records and information that are reasonably relevant to such Third Party Claim, and making employees and agents available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder, and the Indemnifying Party shall reimburse the Indemnified Party for all its reasonable out-of-pocket expenses in connection therewith.

(v) Expenses . Except as provided above, the reasonable and verifiable costs and expenses, including fees and disbursements of counsel, incurred by the Indemnified Party in connection with any Third Party Claim shall be reimbursed on a Calendar Quarter basis in arrears by the Indemnifying Party, without prejudice to the Indemnifying Party’s right to contest the Grifols Indemnified Party’s or the Aradigm Indemnified Party’s, as applicable, right to indemnification and subject to refund in the event the Indemnifying

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Party is ultimately held not to be obligated to indemnify the Grifols Indemnified Party or the Aradigm Indemnified Party, as applicable.

7.4 Limitation on Damages and Liability . EXCEPT (A) IN CIRCUMSTANCES OF GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT BY A PARTY OR ITS AFFILIATES, (B) WITH RESPECT TO THIRD PARTY CLAIMS UNDER SECTIONS 7.1 OR 7.2, OR (C) WITH RESPECT TO DAMAGES AVAILABLE FOR A PARTY’S BREACH OF CONFIDENTIALITY OBLIGATIONS IN ARTICLE 8,NEITHER PARTY NOR ANY OF ITSAFFILIATES SHALL BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, OR FOR LOST PROFITS, WHETHER IN CONTRACT, WARRANTY, NEGLIGENCE, TORT, STRICT LIABILITY OR OTHERWISE, ARISING OUT OF OR RELATING TO ANY BREACH OF OR FAILURE TO PERFORM ANY OF THE PROVISIONS OF THIS AGREEMENT.

7.5 Insurance . Each Party shall have and maintain during the Term the types and amounts of insurance set forth in Section 10.5 of the License Agreement.

ARTICLE 8 — CONFIDENTIAL INFORMATION

8.1 Confidential Information . Except to the extent permitted by this Agreement or the License Agreement and subject to the provisions of Sections 8.2 and 8.3, at all times during the Term and for five (5) years following the expiration or termination hereof, (or such longer period as provided in Article 11of the License Agreement) the receiving Party (a) shall keep completely confidential and shall not publish or otherwise disclose any Confidential Information furnished to it by the disclosing Party, except to those officers, directors, employees, representatives or consultants of the receiving Party and its Affiliates (including in the case of Aradigm, Permitted Subcontractors and their officers, directors, employees, representatives or consultants) who have a need to know such information (collectively, “ Recipients ”) to perform such Party’s obligations, or exercise such Party’s rights, hereunder (and who shall be advised of the receiving Party’s obligations hereunder and who are bound by confidentiality obligations with respect to such Confidential Information consistent with those set forth in this Agreement) and (b) shall not use any Confidential Information of the disclosing Party directly or indirectly for any purpose other than performing its obligations, or exercising its rights, under this Agreement, the Quality Agreement or the License Agreement.

8.2 Exceptions to Confidentiality . The receiving Party’s obligations set forth in this Agreement shall not extend to any Confidential Information of the disclosing Party:

(a) that is or hereafter becomes part of the public domain by public use, publication, general knowledge or the like through no wrongful act, fault or negligence on the part of the receiving Party or any of its Representatives;

(b) that is received by the receiving Party or its Affiliate from a Third Party without restriction and without breach of any obligation of confidentiality of such Third Party;

(c) that the receiving Party can demonstrate by competent evidence was already in its possession without any limitation on use or disclosure prior to its receipt from the disclosing Party; or

(d) that the rece1vmg Party can demonstrate by competent evidence was independently developed by the receiving Party without the aid, use or application of any Confidential Information of the disclosing Party.

8.3 Authorized Disclosure . Each Party and its Recipients may disclose Confidential Information to the extent that such disclosure is:

(a) made in response to a valid order of a court of competent jurisdiction or other Governmental Authority of competent jurisdiction; provided, however, that the receiving Party shall first have given notice to

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the disclosing Party and given the disclosing Party a reasonable opportunity to quash such order or to obtain a protective order requiring that the Confidential Information that is the subject of such order be held in confidence by such court or Governmental Authority or, if disclosed, be used only for the purposes for which the order was issued; and provided further that if a disclosure order is not quashed or a protective order is not obtained, the Confidential Information disclosed in response to such court or governmental order shall be limited to that information that is legally required to be disclosed in such response to such court or governmental order; or

(b) otherwise required by applicable Law or the requirements of a national securities exchange or another similar regulatory body, with the receiving Party providing prior written notice thereof to the disclosing Party and a reasonable opportunity for the disclosing Party to review and comment on such required disclosure and propose that portions be subject to a request for confidential treatment thereof or a protective order therefor prior to making such disclosure and the receiving Party using reasonable efforts to secure confidential treatment or any other applicable protection for the portions of the Confidential Information that the disclosing Party requests be redacted;

(c) made by Grifols or its Affiliates to Third Parties as may be reasonably necessary in connection with (i) the use, importation, transportation, promotion, marketing, distribution, offering to sell, selling or otherwise disposing of or offering to dispose of the Supplied Product in the Territory or (ii) the manufacture, storage, testing, packaging or labeling of Supplied Product that will be used, imported, transported, promoted, marketed, distributed, offered for sale, sold or otherwise disposed of or offered to be disposed of in the Territory, in each case of (i) and (ii), as contemplated by this Agreement, the Quality Agreement or the License Agreement; provided that any such Third Party that is not a Governmental Authority or Regulatory Authority shall, to the extent feasible, be advised of Grifols’ obligations hereunder and bound by confidentiality obligations with respect to such Confidential Information consistent with those set forth in this Agreement; or

(d) reasonably necessary to any bona fide potential or actual investor, acquirer, merger partner or other financial or commercial partner for the sole purpose of evaluating an actual or potential investment, acquisition or other business relationship; provided in each case that any such disclose shall be previously authorized in writing by the other Party and that the potential or actual investor, acquirer, merger partner or other financial or commercial partner shall be bound by confidentiality obligations with respect to such Confidential Information consistent with those set forth in this Agreement.

8.4 Notification. The receiving Party shall notify the disclosing Party promptly, and cooperate with the disclosing Party as the disclosing Party may reasonably request, upon the receiving Party’s discove1y of any loss or compromise of the disclosing Party’s Confidential Information.

8.5 Return or Destruction of Confidential Information . Upon the expiration or termination of this Agreement or a written request by the disclosing Party, whichever occurs first, the receiving Party shall (a) destroy all tangible embodiments of Confidential Information of the disclosing Party, including any and all copies thereof, and those portions of any documents, memoranda, notes, studies and analyses prepared by the receiving Party that contain, incorporate or are derived from such Confidential Information and provide written certification of such destruction to the disclosing Party in a form reasonably acceptable to the disclosing Party and (b) promptly cease use of such Confidential Information as well as any information or materials that contain, incorporate or are derived from such Confidential Information; provided, however, that the receiving Party shall have the right to retain (x) one (1) copy of any such tangible embodiments for the purpose of performing any obligations or exercising any rights under this Agreement, the Quality Agreement or the License Agreement that may survive the expiration or termination hereof or thereof, as applicable, for archival purposes or to comply with applicable Law and (y) such additional copies of, or any computer records or files containing, such Confidential Information that have been created solely by the receiving Party’s automatic archiving and back-up procedures, to the extent created and retained in a manner consistent with the receiving Party’s standard archiving and back-up procedures, but not for any other use or purpose.

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8.6 Remedies . Each Party acknowledges that the failure by the receiving Party to comply with any of the provisions of this Article 8 will result in irreparable injury and continuing damage to the disclosing Party for which there will be no adequate remedy at law and that, in the event of a failure of the receiving Party so to comply, the disclosing Party shall be entitled to such preliminary and permanent injunctive relief as may be necessary to ensure compliance with all the provisions of this Article 8.

8.7 Press Release . Each Party agrees that the terms of this Agreement shall be considered Confidential Information of each Party subject to the exceptions and authorized disclosure provisions in this Agreement or the License Agreement. Any press release or other public announcement regarding this Agreement, the Quality Agreement or the transactions contemplated hereby or the exploitation of the Supplied Product or use of or reference to the other Party or its Affiliates in any press release, promotional material or other form of publicity will be subject to the procedures regarding press releases in Section 11.4(b) of the License Agreement, provided however that any authorization of the disclosing Party shall not be unreasonably withheld or delayed. In addition, in the event that either Party is required by applicable Law, or the requirements of a national securities exchange or another similar regulatory body to disclose or file this Agreement or the Quality Agreement, in whole or in part, such Party shall be entitled to make such required disclosure or filing; provided that it shall (a) provide prior written notice thereof to the other Party, (b) seek and use Commercially Reasonable Efforts to secure confidential treatment or any other applicable protection for commercial terms and sensitive technical terms of this Agreement or the Quality Agreement and (c) provide a reasonable opportunity for such other Party to review and comment on such required disclosure and reasonably consider and incorporate such other Party’s comments to the extent consistent with legal requirements.

ARTICLE 9 — TERM AND TERMINATION

9.1 Term . The term of this Agreement shall commence on the Effective Date and shall continue, unless earlier terminated pursuant to this Article 9 (the “ Term ”).

9.2 Termination . This Agreement may be terminated as follows:

(a) By either Party:

(i) in the event of a material breach of this Agreement by the other Party, which breach remains uncured for ninety (90) days , thirty (30) days in the case of any payment breach, after written notice is given to the breaching Party specifying the nature of the breach, requiring the breaching Party to cure such breach and stating its intention if such breach is not cured to terminate this Agreement; provided, however, that if the alleged breaching Party disputes in good faith the existence or materiality of a breach specified in a notice provided by the other Party in accordance with this Section 9.2(a)(i), and such alleged breaching Party provides the other Party notice of such dispute within the applicable cure period, then the non- breaching Party shall not have the right to terminate this Agreement under this Section 9.2(a)(i) unless and until an arbitrator, in accordance with Article 10, has determined that the alleged breaching Party has materially breached this Agreement and such breaching Party fails to cure such breach within the applicable cure period (measured as commencing after the arbitrator’s decision, and it is understood and agreed that during the pendency of such dispute, all of the terms and conditions of this Agreement shall remain in effect and the Parties shall continue to perform all of theil’ respective obligations hereunder; or

(ii) immediately upon written notice if the other Party shall file in any court or with any other Governmental Authority, pursuant to any statute or regulation of any state or country, a petition in bankruptcy or insolvency or for reorganization or for an arrangement or for the appointment of a receiver or trustee of the other Party or of its assets, or if the other Party proposes a written agreement of composition or extension of its debts, or if the other Party shall be served with an involuntary petition against it, filed in any insolvency proceeding, and such petition shall not be dismissed within sixty (60) days after the filing thereof, or if the other Party shall

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propose or be a Party to any dissolution or liquidation, or if the other Party shall make an assigrunent for the benefit of its creditors.

(b) Grifols may terminate this Agreement:

(i) in its sole discretion immediately upon written notice to Aradigm in the event of a Supply Failure; provided that notwithstanding the foregoing, Grifols may not terminate this Agreement under this clause (i) unless the respective Executive Officers of the Parties, or their designees, have engaged in a good faith discussion attempting to resolve the Supply Failure and prevent future such occurrences; or

(ii) in the event that any non-compliance with cGMP or other applicable Law raised by any inspections by a Regulatory Authority are not cured within thirty (30) days by Aradigm or the applicable Permitted Subcontractor after written notice is given to Aradigm specifying the nature of the non-compliance with cGMP or other applicable Law, requiring Aradigm or the applicable Permitted Subcontractor to cure such non-compliance with cGMP or other applicable Law and stating its intention if such non-compliance with cGMP or other applicable Law is not cured to terminate this Agreement, except in the case of any non- compliance that cannot be cured within such thirty (30)-day period, if Aradigm or the applicable Permitted Subcontractor commences good faith, diligent actions to cure such non- compliance within such thirty (30)-day period, in which event the cure period shall be extended for so long as Aradigm or the applicable Permitted Subcontractor is thereafter diligently continuing such good faith, diligent actions to cure such non-compliance or otherwise meets the requirements of the Regulatory Authority.

9.3 Effects of Termination .

(a) Upon termination of this Agreement for any reason other than (i) by Aradigm pursuant to Section 9.2(a), or (ii) due to termination of the License Agreement by Aradigm pursuant to Section 12.2(a) of the License Agreement (any such termination, a “ Selected Termination ”), all submitted but unfilled Firm Orders automatically shall be cancelled, and Grifols shall have no obligation to Aradigm with respect thereto. Grifols will make Commercially Reasonable Efforts to provide to Aradigm Compound under the terms and conditions equivalent to this Agreement for a Bio-Defense Application.

(b) Upon any termination of this Agreement that constitutes a Selected Termination, Aradigm may, in its sole discretion, require Grifols to purchase from Aradigm any Supplied Product for which Grifols has delivered a Firm Order prior to the effective date of termination at the applicable Purchase Price, which Supplied Product Grifols shall have the right to sell off for a period of one year.

(c) Termination or expiration of this Agreement for any reason shall be without prejudice to any rights that shall have accrued to the benefit of a Party prior to such termination or expiration.

(d) Any termination of this Agreement (howsoever occasioned) shall not affect any accrued rights or liabilities of either Party. Articles 1, 8 and 10 and Sections 2.5 (for the period set forth therein, except in the case of termination of this Agreement by Aradigm pursuant to Section 9.2(a), in which event Section 2.5 shall terminate), 4.7 (for the period set forth therein), 6.4, 7.1, 7.2, 7.3, 7.4, 9.3, 11.1, 11.2, 11.3, 11.4, 11.5, 11.6, 11.7, 11.8, 11.9, 11.10 and 11.11 shall survive any expiration or termination of this Agreement.

ARTICLE 10 — DISPUTE RESOLUTION

10.1 Disputes . The Parties recognize that disputes as to certain matters may from time to time arise that relate to either Party’s rights and/ or obligations hereunder. It is the objective of the Parties to establish

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procedures to facilitate the resolution of disputes arising under this Agreement in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the Parties agree to follow the procedures set forth in this Article 10 to resolve any controversy or claim arising out of, relating to or in connection with any provision of this Agreement, if and when a dispute arises under this Agreement.

10.2 Internal Resolution . With respect to all disputes arising between the Parties under this Agreement, including any alleged breach under this Agreement or any issue relating to the interpretation or application of this Agreement, if the Parties are unable to resolve such dispute within thirty (30) days after such dispute is first identified by either Party in writing to the other, the Parties shall refer such dispute to the Executive Officers of the Parties for attempted resolution by good faith negotiations within thirty (30) days after such notice is received, including at least one (1) in-person meeting of the Executive Officers within twenty (20) days after such notice is received.

10.3 Arbitration . If the Executive Officers of the Parties are not able to resolve such dispute referred to them under Section 10.2 within such thirty (30) day period, then subject to Section 10.4, such dispute shall be settled by binding arbitration in accordance with the then current rules of commercial arbitration of the American Arbitration Association (“AAA”). A single arbitrator with experience in the development and commercialization of drugs and diagnostics shall be appointed by each of the Parties, and the two arbitrators appointed by the Parties shall appoint the third arbitrator with experience in the development and commercialization of drugs and diagnostics. The place of arbitration shall be New York, New York. The arbitrator’s fees and expenses shall be shared equally by the Parties. Each Party shall bear and pay its own expenses incurred in connection with any dispute resolution under this Section 10.3. The proceedings, including any outcome, shall be confidential. Notwithstanding the foregoing, either Party shall have the right, without waiving any right or remedy available to such Party under this Agreement or otherwise, to seek and obtain from any court of competent jurisdiction any interim or provisional relief that is necessary or desirable to protect the rights or property of such Party, pending the selection of the arbitrator hereunder or pending the arbitrator’s decision of the dispute subject to arbitration.

10.4 Patent and Trademark Disputes . Section 13.4 of the License Agreement shall apply with respect to any patent or trademark dispute as described therein.

I 0.5 Equitable Relief. Nothing in this Article 10 shall prevent either Party from seeking equitable or other relief in a court of competent jurisdiction. All rights and remedies provided to each Party in this Agreement are cumulative and in addition to any other rights and remedies available to such Party at law or in equity.

ARTICLE 11 — GENERAL PROVISIONS

11.1 Entire Agreement; Amendment . This Agreement, together with the exhibits attached hereto, which are hereby incorporated herein, represents the entire agreement and understanding between the Parties with respect to its subject matter and supersedes and terminates any prior and/ or contemporaneous discussions, representations or agreements, whether written or oral, of the Parties regarding the subject matter, including, without limitation, the Binding Term Sheet; for clarity, the License Agreement shall stay in full force and effect in accordance with its terms. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the Parties with respect to the subject matter hereof other than as are set forth in this Agreement. Amendments or changes to this Agreement shall be valid and binding only if in writing and signed by duly authorized representatives of the Parties.

11.2 Force Majeure . Both Parties shall be excused from the performance of their obligations under this Agreement to the extent that such performance is prevented by force majeure and the nonperforming Party promptly provides notice of the prevention to the other Party. Such excuse shall be continued so long as the condition constituting force majeure continues and the nonperforming Party takes reasonable efforts to remove the condition. For purposes of this Agreement, force majeure shall mean conditions beyond the control of the

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Parties, including an act of God, war, civil commotion, terrorist act, labor strike or lock-out, epidemic, failure or default of public utilities or common carriers, destruction of production facilities or materials by fire, earthquake, storm or like catastrophe, and failure of plant or machinery (provided that such failure could not have been prevented by the exercise of skill, diligence, and prudence that would be reasonably and ordinarily expected from a skilled and experienced person engaged in the same type of undertaking under the same or similar circumstances). If a force majeure persists for more than ninety (90) days, then the Parties shall discuss in good faith the modification of the Parties’ obligations under this Agreement in order to mitigate the delays caused by such force majeure.

11.3 Notices . Any notice required or permitted to be given under this Agreement shall be in writing, shall specifically refer to this Agreement, and shall be addressed to the appropriate Party at the address specified below or such other address as may be specified by such Party in writing in accordance with this Section 11.3, and shall be deemed to have been given for all purposes (a) when received, if hand-delivered or sent by

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confirmed facsimile or a reputable courier service, or (b) five (5) Business Days after mailing, if mailed by first class certified or registered airmail, postage prepaid, return receipt requested.


If to Aradigm:		Aradigm Corporation
		Attn.: Chief Executive Officer
		3929 Point Eden Way
		Hayward, CA 94545

With a copy to (which shall not constitute notice):







If to Grifols:		Grifols, S.A.
		Avinguda de la Generalitat, 152-158
		Pare de Negocis Can Sant Joan
		Sant Cugat del Valles 08174
		Barcelona, Spain
		Facsimile: +34.93.571.0267
		Attention: Victor Grifols

With a copy to (which shall not constitute notice):

		Osborne Clarke S.L.P.
		Avenida Diagonal, 477
		Planta 20
		08036 Barcelona
		Spain
		Facsimile: +34.93.410.2513
		Attention: Tomas Daga
		Raimon Grifols

		and

		Proskauer Rose LLP
		Eleven Times Square
		New York, NY 10036
		Attn: Peter G. Samuels, Esq.
		Daryn A. Grossman, Esq.

11.4 No Strict Construction; Headings. This Agreement has been prepared jointly by the Parties and shall not be strictly construed against either Party. Ambiguities, if any, in this Agreement shall not be construed against any Party, irrespective of which Party may be deemed to have authored the ambiguous provision. The headings of each Article and Section in this Agreement have been inserted for convenience of reference only and are not intended to limit or expand on the meaning of the language contained in the particular Article or Section. Except where the context otherwise requires, the use of any gender shall be applicable to all genders, and the word “or” is used in the inclusive sense (and/or). The term “including” as used herein means including, without limiting the generality of any description preceding such term.

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11.5 Assignment . Neither Party may assign this Agreement without the prior written consent of the other Party, such consent not to be unreasonably withheld, except that either Party may assign this Agreement without the prior consent of the other Party: (a) to a Third Party successor to all or substantially all of its stock or assets relating to the Supplied Product (an “ Acquiror ”), whether in connection with a merger, consolidation or sale of assets or other transaction, provided that, in the case of clause (a), Grifols shall remain secondarily liable with respect to any obligations of Grifols or such assignee under this Agreement (except in the case of a sale of all or a majority of the stock or assets of Grifols, whether in connection with a merger, consolidation or sale of assets or other transaction, in which case Grifols shall be released from any obligations under this Agreement); or (b) to its Affiliate; provided that, in the case of clause (b), as between Grifols and its assignee, on the one hand, and Aradigm, on the other hand, Grifols shall remain the primary obligor with respect to its and its assignee’s obligations under this Agreement. Notwithstanding the foregoing, (i) Aradigm may assign without Grifols’ consent its rights to royalties received under this Agreement and (ii) Grifols may assign this Agreement, and all of its rights or obligations hereunder, to any Pharmaceutical Company without the prior consent of Aradigm. Any permitted assignment shall be binding on the successors of the assigning Party. Any attempted or purported assignment in violation of this Section 11.5 shall be null and void.

1 1.6 Performance by Affiliates . Each Party may discharge any obligations and exercise any right hereunder through any of its Affiliates (and, for the avoidance of doubt, Grifols may sublicense its rights and obligations under this Agreement to any of its wholly-owned subsidiaries). Each Party hereby guarantees the performance by its Affiliates of such Party’s obligations under this Agreement, and shall cause its Affiliates to comply with the provisions of this Agreement in connection with such performance. Any breach by a Party’s Affiliate of any of such Party’s obligations under this Agreement shall be deemed a breach by such Party, and the other Party may proceed directly against such Party without any obligation to first proceed against such Party’s Affiliate.

11.7 Further Actions . Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

11.8 Severability . If any provision of this Agreement is found by a court of competent jurisdiction to be unenforceable, then such provision shall be construed, to the extent feasible, so as to render the provision enforceable, and if no feasible interpretation would save such provision, it shall be severed from the remainder of this Agreement. The remainder of this Agreement shall remain in full force and effect, unless the severed provision is essential and material to the rights or benefits received by either Party. In such event, the Parties shall negotiate, in good faith, and substitute a valid and enforceable provision or agreement that most nearly implements the Parties’ intent in entering into this Agreement.

11.9 No Waiver . No provision of this Agreement can be waived except by the express written consent of the Party waiving compliance. Except as specifically provided for herein, the

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IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed in duplicate, as of the Effective Date, by its duly authorized officer or representative.

ARADIGM CORPORATION

GRIFOLS, S.A.

By:

/s/ Igor Gonda

By:

/s/ Ramon Riera



Name:	Igor Gonda	Name:	Ramon Riera

Title:	President and CEO	Title:	Chief Operations Officer

Date:	October 22, 2015	Date:	16 Nov 15

[Signature Page to Supply Agreement]

EXHIBIT A

SPECIFICATIONS

Specifications will be defined and incorporated based on the filing and acceptance of the NDA.

EXHIBIT B

PACKAGED PRODUCT FORMS

Commercial Package Product Forms will be agreed to and incorporated promptly after the Effective Date but no later than nine (9) months prior to the anticipated First Commercial Sale.

Exhibit 3 — Commercial Supply Agreement

(Subject to Section 2.7)

Technology Transfer Plan will include the following elements:

•

Raw material specifications and suppliers

•

Component specification and suppliers

•

Dedicated process equipment specifications and suppliers

•

Requirements for specialized analytical equipment

•

Particle sizer

•

HPLC/ELSD (evaporative light scattering detector)

•

Batch process description to support engineering run

•

Process parameters

•

Process characterization summary

•

Analytical Methods transfer

•

Written copy of methods

•

Method transfer protocol

•

Method transfer report (Grifols to provide report)

•

Method transfer completion report

•

Estimated Timeline and Cost Structure for Technology Transfer

The actual Technology Transfer Process is expected to include the following steps after Section 2.5 is triggered:

•

Kick off meeting

•

Procurement of specified equipment and materials

•

Qualification of necessary suppliers

•

Engineering Run

•

Equipment and process validation

•

Registration Batches (3)

•

Release and stability testing

Note: The Technology Transfer Plan will be limited to the information reasonably available to Aradigm about the manufacture and quality control of the approved components of Pulmaquin (CFI and FCJ) at the same production scales and the same material and equipment that Aradigm’s contract manufacturing organization will be using at the time of this Technology Transfer.

Plan Preparation Costs : As the Parties meet to discuss how and when to complete the Technology Transfer Plan, Aradigm will provide a full cost estimate for the direct costs to be incurred including costs associated with direct costs of Sigma Tau or other external parties required to execute this technology transfer. Grifols will pay the actual costs incurred based on procedures outline in Section 4.3 (Development Costs) in the License Agreement (Dated August 27, 2013).

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-15947, No. 333-62039, No. 333-92169, No. 333-43152, No. 333-63116, No. 333-85244, No. 333-107157, No. 333-128525, No. 333-135122, No. 333-148226, No. 333-152501, No. 333-161142, No. 333-169580, No. 333-187947, No. 333-195920 and No. 333-205613) and on Form S-3 (No. 333-191469 and No. 333-193751) and the related prospectuses, as applicable, of our report dated March 30, 2016, relating to the consolidated financial statements of Aradigm Corporation, which appears in this Annual Report on Form 10-K.

/s/ OUM & Co. LLP

San Francisco, California

March 30, 2016

EXHIBIT 31.1

CERTIFICATION

I, Igor Gonda, certify that:

1. I have reviewed this Annual Report on Form 10-K of Aradigm Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Igor Gonda

Igor Gonda

President and Chief Executive Officer

Dated: March 30, 2016

EXHIBIT 31.2

CERTIFICATION

I, Nancy E. Pecota, certify that:

1. I have reviewed this Annual Report on Form 10-K of Aradigm Corporation;

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Nancy E. Pecota

Nancy E. Pecota

Vice President, Finance and Chief Financial Officer

Dated: March 30, 2016

EXHIBIT 32.1

CERTIFICATION*

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code, Igor Gonda, President and Chief Executive Officer of Aradigm Corporation (the “Company”), and Nancy E. Pecota, Vice President Finance and Chief Financial Officer of the Company, each hereby certify that, to the best of his or her knowledge:

1. The Company’s Annual Report on Form 10-K for the year ended December 31, 2015, to which this Certification is attached as Exhibit 32.1 (the “Annual Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and

2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Annual Report and results of operations of the Company for the period covered by the Annual Report. IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 30th day of March 2016.


/s/ Igor Gonda				/s/ Nancy E. Pecota
President and Chief Executive Officer				Vice President, Finance and Chief Financial Officer

Dated: March 30, 2016				Dated: March 30, 2016

This certification accompanies the Annual Report on Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Aradigm Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Annual Report on Form 10-K), irrespective of any general incorporation language contained in such filing.