that any of our products or manufacturing processes violated third-party proprietary rights, our clinical trials could be delayed and there can be no assurance
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that we would be able to reengineer the product or processes to avoid those rights, or to obtain a license under those rights on commercially reasonable terms, if at all.
Risks Related to Regulatory Approval of Our Product Candidates
If we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.
Our product candidates, and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Failure to obtain regulatory approval for a product candidate will prevent us from commercializing the product candidate. We have not received regulatory approval to market any of our product candidates in any jurisdiction. Securing FDA approval may require the submission of extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing FDA approval requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the FDA. Our future products may not be demonstrated effective, may be demonstrated only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or may prevent or limit commercial use.
The process of obtaining FDA and other regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved and challenges by competitors. Changes in regulatory approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying agency interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.
If the FDA does not believe that our product candidates satisfy the requirements for the Section 505(b)(2) approval procedure, or if the requirements for our product candidates under Section 505(b)(2) are not as we expect, the approval pathway will take longer and cost more than anticipated.
anticipated and in either case may not be successful.
We believe that VIAjecttmour ultra-rapid-acting insulin formulations and VIAtabtmour stable glucagon presentation for use as a rescue product qualify for approval under Section 505(b)(2) of the FFDCA. Because we are developing improvednew formulations of previously approved chemical entities, such as insulin this may enable us to avoid having to submit certain types of data and studies that are required in full NDAs and instead submit a Section 505(b)(2) NDA. The FDA may not agree that our products are approvable under Section 505(b)(2). Insulin is a unique and complex drug in that it is a complex hormone molecule that is more difficult to replicate than many small molecule drugs. The availability of the Section 505(b)(2) pathway for insulin is even more controversial than for small molecule drugs, and the FDA may not accept this pathway for our insulin product candidates. The FDA has not published any guidance that specifically addresses insulin Section 505(b)(2) NDAs. No other insulin product has yet been approved under a Section 505(b)(2) NDA. If the FDA determines that Section 505(b)(2) NDAs are not appropriate and that full NDAs are required for our product candidates, the time and financial resources required to obtain FDA approval for our product candidates could substantially and materially increase. This would require us to obtain substantially more funding than previously anticipated which could significantly dilute the ownership interests of our stockholders. Even with this investment, the prospect for FDA approval may be significantly lower. If the FDA requires full NDAs for our product candidates or requires more extensive testing and development for some other reason, our ability to compete with alternative products that arrive on the market more quickly than our product candidates would be adversely impacted.
Notwithstanding the approval of many products by the FDA under Section 505(b)(2) over the last few years, certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may be required
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to change its interpretation of Section 505(b)(2) which could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit. The pharmaceutical industry is highly competitive, and it is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition.
Moreover, even if VIAjecttm and VIAtabtm are approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product.
Any product for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we
experience unanticipated problems with our products, when and if any of them are approved.
Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and comparable regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Discovery after approval of previously unknown problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in actions such as:
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| • | restrictions on such products’ manufacturers or manufacturing processes; |
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| • | restrictions on the marketing of a product; |
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| • | warning letters; |
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| • | withdrawal of the products from the market; |
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| • | refusal to approve pending applications or supplements to approved applications that we submit; |
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| • | recall of products; |
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| • | fines, restitution or disgorgement of profits or revenue; |
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| • | suspension or withdrawal of regulatory approvals; |
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| • | refusal to permit the import or export of our products; |
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| • | product seizure; |
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| • | injunctions; or |
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| • | imposition of civil or criminal penalties. |
Failure to obtain regulatory approval in international jurisdictions would prevent us from marketing our products abroad.
We intend to have our products marketed outside the United States. In order to market our products in the European Union and many other jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ from that required to obtain FDA approval. The regulatory approval process outside the United States may include all of the risks associated with obtaining FDA
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approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.
Reports of side effects or safety concerns in related technology fields or in other companies’ clinical trials could delay or prevent us from obtaining regulatory approval or negatively impact public perception of our product candidates.
At present, there are a number of clinical trials being conducted by us and by other pharmaceutical companies involving insulin or insulin delivery systems. The major safety concern with patients taking insulin is the occurrence of hypoglycemic events, which we monitor on a daily basis in our clinical trials. As of March 12, 2007, we have had a total of 113 mild and moderate hypoglycemic events in our Phase III clinical trials, 73 in patients receiving Humulin® R and 40 in patients receiving VIAjecttm. As of that date, we have also had a total of four severe hypoglycemic events, three in patients receiving Humulin® R and one in a patient receiving VIAjecttm. If we discover that our product is associated with a significantly increased frequency of hypoglycemic or other adverse events, or if other pharmaceutical companies announce that they observed frequent or significant adverse events in their trials involving insulin or insulin delivery systems, we could encounter delays in the commencement or completion of our clinical trials or difficulties in obtaining the approval of our product candidates. In addition, the public perception of our products might be adversely affected, which could harm our business and results of operations, even if the concern relates to another company’s product.
Risks Related to Employee Matters and Managing Growth
Our future success depends on our ability to retain our chief executive officer and other key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on Dr. Solomon S. Steiner, our Chairman, President and Chief Executive Officer, Dr. Roderike Pohl, our Vice President, Research, and F. Scott Reding, our Chief Financial Officer. Dr. Steiner and Dr. Pohl are the inventors of our VIAdeltm technology. The loss of the services of any of these persons might impede the achievement of our research, development and commercialization objectives. With the exception of Dr. Steiner, Dr. Pohl and Mr. Reding, who each have employment agreements, all of our employees are “at will” and we currently do not have employment agreements with any of the other members of our management or scientific staff. Replacing key employees may be difficult and time-consuming because of the limited number of individuals in our industry with the skills and experience required to develop, gain regulatory approval of and commercialize our product candidates successfully. Other than a $1 million key person insurance policy on Dr. Steiner, we do not have key person life insurance to cover the loss of any of our other employees.
Recruiting and retaining qualified scientific personnel, clinical personnel and sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms, if at all, given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from other companies, universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.
We expect to expand our development, regulatory and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of manufacturing, clinical trials management, regulatory affairs, business development and
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sales and marketing. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems and continue to recruit and train additional qualified personnel. Due to our limited financial resources we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
Risks Related to Our Common Stock and This Offering
After this offering, our executive officers, directors and principal stockholders will maintain the ability to control all matters submitted to stockholders for approval.
When this offering is completed, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately 57.9% of our capital stock. As a result, these stockholders, if they act together, will be able to exercise a controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations and sales of all or substantially all of our assets, and will have significant control over our management and policies. The interests of this group of stockholders may not always coincide with our corporate interests or the interests of other stockholders. This significant concentration of stock ownership could also result in the entrenchment of our management and adversely affect the price of our common stock.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our corporate charter and bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.
Among others, these provisions:
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| • | establish a classified board of directors such that not all members of the board are elected at one time; |
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| • | allow the authorized number of our directors to be changed only by resolution of our board of directors; |
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| • | limit the manner in which stockholders can remove directors from the board; |
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| • | establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors; |
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| • | require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent; |
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| • | limit who may call stockholder meetings; |
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| • | authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a stockholder rights plan or “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and |
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| • | require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws. |
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In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
We may not be able to comply on a timely basis with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules of the Securities and Exchange Commission, beginning with our fiscal year ending September 30, 2008, we will be required to include in our annual report an assessment of the effectiveness of our internal control over financial reporting. Furthermore, our registered independent public accounting firm will be required to report on our assessment of the effectiveness of our internal control over financial reporting and separately report on the effectiveness of our internal control over financial reporting. We have not yet completed our assessment of the effectiveness of our internal control over financial reporting. We restated our financial statements for the year ended September 30, 2006 to correct an error in the calculation of non-cash compensation expense related to options issued to non-employees. In connection with the restatement it was determined that we have a material weakness in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board. We are in the process of addressing this material weakness. We are also in the process of documenting, reviewing and, where appropriate, improving our internal controls and procedures in anticipation of being a public company and eventually being subject to the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules. Implementing appropriate changes to our internal controls may entail substantial costs in order to modify our existing financial and accounting systems, take a significant period of time to complete, and distract our officers, directors and employees from the operation of our business. Moreover, these changes may not be effective in maintaining the adequacy or effectiveness of our internal controls. If we fail to complete the assessment on a timely basis, or if our independent registered public accounting firm cannot attest to our assessment, we could be subject to regulatory sanctions and a loss of public confidence. Also, the lack of effective internal control over financial reporting may adversely impact our ability to prepare timely and accurate financial statements.
If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment.
We expect the initial public offering price of our common stock to be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. To the extent outstanding options or warrants are exercised, you will incur further dilution. Based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, you will experience immediate dilution of $10.82 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately 72.3% of the aggregate price paid by all purchasers of our stock but will own only approximately 25.8% of our common stock outstanding after this offering.
An active trading market for our common stock may not develop.
Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters. Although we have applied to have our common stock approved for listing on the Nasdaq Global Market, an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop, it may be difficult for you to sell shares you purchase in this offering without depressing the market price for the shares or at all.
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If our stock price is volatile, purchasers of our common stock could incur substantial losses.
Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:
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| • | results of clinical trials of our product candidates or those of our competitors; |
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| • | regulatory or legal developments in the United States and other countries; |
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| • | variations in our financial results or those of companies that are perceived to be similar to us; |
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| • | developments or disputes concerning patents or other proprietary rights; |
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| • | the recruitment or departure of key personnel; |
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| • | changes in the structure of healthcare payment systems; |
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| • | market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations; |
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| • | general economic, industry and market conditions; and |
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| • | the other factors described in this “Risk Factors” section. |
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. We expect to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures and further clinical development of our product candidates. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delay the development of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
We have never paid any cash dividends on our capital stock and we do not anticipate paying any cash
dividends in the foreseeable future.
We have paid no cash dividends on our capital stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash dividends, if any, will depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends. Capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop
significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding 19,410,836 shares of common stock. This includes the shares that we are selling in this offering, which may be resold in the public market immediately. Of the remaining shares, 14,410,836 shares are currently restricted as a result of securities laws orlock-up agreements but will be able to be sold after the offering as described in the “Shares Eligible for Future Sale”
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section of this prospectus. Moreover, after this offering, holders of an aggregate of 9,056,823 shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. After the effective date of the registration statement of which this prospectus is a part, we intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to thelock-up agreements described in the “Underwriters” section of this prospectus.
Our costs will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to comply with public company regulations.
As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002 as well as other federal and state laws. These requirements may place a strain on our people, systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, significant resources and management oversight will be required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
Forward-looking statements in this prospectus include statements about:
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| • | our ability to secure FDA approval for our product candidates under Section 505(b)(2) of the FFDCA; |
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| • | our ability to market, commercialize and achieve market acceptance for product candidates developed using our VIAdeltm technology; |
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| • | the progress or success of our research, development and clinical programs, the initiation and completion of our clinical trials, the timing of the interim analyses and the timing or success of our product candidates, particularly VIAjecttm and VIAtabtm; |
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| • | our ability to secure patents for VIAjecttm and our other product candidates; |
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| • | our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; |
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| • | our estimates for future performance; |
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| • | our ability to enter into collaboration arrangements for the commercialization of our product candidates; |
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| • | the rate and degree of market acceptance and clinical utility of our products; |
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| • | our commercialization, marketing and manufacturing capabilities and strategy; and |
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| • | our estimates regarding anticipated operating losses, future revenues, capital requirements and our needs for additional financing. |
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make.
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements.
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USE OF PROCEEDS
We estimate that the net proceeds from our issuance and sale of 5,000,000 shares of common stock in this offering will be approximately $68.0 million, assuming an initial public offering price of $15.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) our net proceeds from this offering by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds to us from this offering will be approximately $78.5 million, assuming an initial public offering price of $15.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us.
We intend to use the net proceeds from this offering as follows:
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| • | approximately $40.0 million to fund clinical development of VIAjecttm; |
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| • | approximately $20.0 million to fund clinical development of VIAtabtm; and |
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| • | approximately $8.0 million to fund research and development, working capital, capital expenditures and other general corporate purposes, which may include acquiring additional technologies. |
This expected use of net proceeds of this offering represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures depend on numerous factors, including the ongoing status of and results from clinical trials for VIAjecttm and VIAtabtm, as well as the development of our preclinical product pipeline, any collaborations we may enter into with third parties for our product candidates and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. Upon the completion of the offering, we expect to have sufficient funding to complete the FDA approval process for VIAjecttm and, if we collaborate with a leading pharmaceutical or biotechnology company, for its commercialization as well. If we do not collaborate with a leading pharmaceutical or biotechnology company, we do not expect to have sufficient funding from the proceeds of this offering to commercialize VIAjecttm. Although we expect the net proceeds from this offering and our other available funds to be sufficient to fund the completion of the FDA approval process for VIAjecttm, we expect that we will need to raise additional funds to fund the completion of the development of our other product candidates. We have no current plans, agreements or commitments for any material acquisitions or licenses of any technologies, products or businesses.
Pending use of the proceeds from this offering, we intend to invest the proceeds in a variety of capital preservation investments, including short-term or long-term investment-grade, interest-bearing instruments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to finance the operation and expansion of our business. Accordingly, we do not anticipate paying any cash dividends to our stockholders in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, operating results and anticipated cash needs.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2006:
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| • | on a pro forma basis to give effect to (1) our issuance in March 2007 of an aggregate of 2,636,907 shares of common stock upon the exercise of outstanding warrants on a cashless basis and for aggregate cash proceeds of approximately $0.4 million and the resulting deemed dividend of approximately $4.5 million and (2) the conversion of all outstanding shares of our preferred stock into an aggregate of 6,407,008 shares of our common stock upon the closing of this offering; and |
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| • | on a pro forma as adjusted basis to give further effect to the issuance and sale by us of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses to be paid by us. |
The pro forma and pro forma as adjusted information below is illustrative only. Our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing at the end of this prospectus.
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| | As of December 31, 2006 | |
| | | | | | | | Pro Forma
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| | Actual | | | Pro Forma | | | as Adjusted | |
| | (restated) | | | (restated) | | | | |
| | | | | (unaudited) | | | (restated) | |
| | (in thousands, except share data) | |
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Cash and cash equivalents(1) | | $ | 14,563 | | | $ | 14,986 | | | $ | 82,986 | |
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Long-term liabilities | | | — | | | | — | | | | — | |
Stockholders’ equity: | | | | | | | | | | | | |
Series A convertible preferred stock, par value $0.01 per share, 1,050,000 shares authorized and 569,000 shares issued and outstanding, with a liquidation preference of $2,845 and an 8% non-cumulative dividend, actual; no shares authorized, issued or outstanding, pro forma or pro forma as adjusted | | | 6 | | | | — | | | | | |
Series B convertible preferred stock, par value $0.01 per share, 6,500,000 shares authorized, 6,198,179 shares issued and outstanding, with a liquidation preference of $24,421, actual; no shares authorized, issued or outstanding, pro forma or pro forma as adjusted | | | 62 | | | | — | | | | | |
Preferred stock, par value $0.01 per share, no shares authorized, issued or outstanding, actual and pro forma; 50,000,000 shares authorized and no shares issued or outstanding, pro forma as adjusted | | | | | | | | | | | — | |
Common stock, par value $0.01 per share; 50,000,000 shares authorized, actual and pro forma; and 5,366,921 shares issued and outstanding, actual; 14,410,836 shares issued and outstanding, pro forma; 100,000,000 million shares authorized and 19,410,836 shares issued and outstanding, pro forma as adjusted | | | 54 | | | | 144 | | | | 194 | |
Additional paid-in capital(1) | | | 29,534 | | | | 34,435 | | | | 102,385 | |
Deficit accumulated during the development stage | | | (16,496 | ) | | | (20,996 | ) | | | (20,996 | ) |
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Total capitalization(1) | | $ | 13,160 | | | $ | 13,583 | | | $ | 81,583 | |
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(1) | | A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) each of cash and cash equivalents and marketable securities, additional paid-in capital and total capitalization by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. |
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The table above excludes:
| | |
| • | 1,107,207 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2006, at a weighted average exercise price of $5.43 per share; |
| | |
| • | 3,720,935 shares of common stock issuable upon the exercise of warrants outstanding on an actual basis as of December 31, 2006, with a weighted average exercise price of $5.34 per share and 198,025 shares of common stock issuable upon the exercise of warrants outstanding on a pro forma and pro forma as adjusted basis as of December 31, 2006 at a weighted average exercise price of $1.41; |
| | |
| • | 1,092,793 shares of common stock reserved for future issuance upon exercise of stock options granted after December 31, 2006 under our 2004 Stock Incentive Plan, as amended and restated upon the closing of this offering; |
| | |
| • | 1,300,000 shares of common stock reserved for future issuance under our 2005 Employee Stock Purchase Plan upon the closing of this offering; and |
|
| • | 500,000 shares of common stock reserved for future issuance under our 2005 Non-Employee Directors’ Stock Option Plan upon the closing of this offering. |
28
DILUTION
If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.
The historical net tangible book value of our common stock as of December 31, 2006 was approximately $12.7 million, or $2.37 per share, based on 5,366,921 shares of common stock outstanding as of December 31, 2006. Historical net tangible book value per share is equal to our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of December 31, 2006. The pro forma net tangible book value of our common stock as of December 31, 2006 was approximately $13.2 million, or $0.91 per share. Pro forma net tangible book value per share gives effect to (1) our issuance in March 2007 of an aggregate of 2,636,907 shares of our common stock upon the exercise of outstanding warrants on a cashless basis and for aggregate cash proceeds of approximately $0.4 million and the resulting deemed dividend of approximately $4.5 million and (2) the conversion of all outstanding shares of our preferred stock into an aggregate of 6,407,008 shares of our common stock upon the closing of this offering.
After giving further effect to our issuance and sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us, our pro forma net tangible book value as of December 31, 2006 would have been approximately $81.2 million, or $4.18 per share. This represents an immediate decrease in pro forma net tangible book value of $1.46 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $10.82 per share to new investors purchasing common stock in this offering at the initial public offering price. Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this offering from the initial public offering price per share paid by a new investor. The following table illustrates this calculation on a per share basis:
| | | | | | | | |
Assumed initial public offering price per share | | | | | | $ | 15.00 | |
Historical net tangible book value per share as of December 31, 2006 | | $ | 2.37 | | | | | |
Decrease attributable to the exercise of warrants on March 30, 2007 and the conversion of outstanding preferred stock | | $ | (1.46 | ) | | | | |
| | | | | | | | |
Pro forma net tangible book value as of December 31, 2006 | | $ | 0.91 | | | | | |
| | | | | | | | |
Increase per share attributable to new investors | | $ | 3.27 | | | | | |
| | | | | | | | |
Pro forma net tangible book value per share after this offering | | | | | | $ | 4.18 | |
| | | | | | | | |
Dilution per share to new investors | | | | | | $ | 10.82 | |
| | | | | | | | |
A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) our pro forma net tangible book value after the offering by approximately $4.7 million, our pro forma net tangible book value per share after this offering by approximately $0.24 and dilution per share to new investors by approximately $0.24, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.
If the underwriters exercise their over-allotment option in full or if any shares are issued in connection with outstanding options or warrants, you will experience further dilution.
29
The following table summarizes, as of December 31, 2006, the number of shares purchased from us after giving effect to the (1) exercise of warrants on March 30, 2007 and (2) conversion of all of outstanding shares of our preferred stock into an aggregate of 6,407,008 shares of common stock upon the closing of this offering, the total consideration and average price per share paid, or to be paid, to us by existing stockholders and by new investors in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses payable by us:
| | | | | | | | | | | | | | | | | | | | |
| | Shares Purchased | | | Total Consideration | | | Average Price
| |
| | Number | | | Percent | | | Amount | | | Percent | | | Per Share | |
|
Existing stockholders | | | 14,410,836 | | | | 74.2 | % | | $ | 28,703,000 | | | | 27.7 | % | | $ | 1.99 | |
New investors | | | 5,000,000 | | | | 25.8 | % | | $ | 75,000,000 | | | | 72.3 | % | | $ | 15.00 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | | 19,410,836 | | | | 100.0 | % | | $ | 103,703,000 | | | | 100.0 | % | | | | |
| | | | | | | | | | | | | | | | | | | | |
A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the total consideration paid by new investors by $5.0 million and increase (decrease) the percentage of total consideration paid by new investors by approximately 6.7%, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.
The table above is based on 5,366,921 shares of common stock outstanding as of December 31, 2006 and an additional 6,407,008 shares of common stock issuable upon the conversion of all outstanding shares of our preferred stock upon the closing of this offering and excludes:
| | |
| • | 1,107,207 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2006, at a weighted average exercise price of $5.43 per share; |
| | |
| • | 3,720,935 shares of common stock issuable upon the exercise of warrants outstanding on an actual basis as of December 31, 2006, at a weighted average exercise price of $5.34 per share and 198,025 shares of common stock issuable upon the exercise of warrants outstanding on a pro forma and pro forma as adjusted basis as of December 31, 2006 at a weighted average exercise price of $1.41; |
| | |
| • | 1,092,793 shares of common stock reserved for future issuance upon exercise of stock options granted after December 31, 2006 under our 2004 Stock Incentive Plan, as amended and restated effective upon the closing of this offering; |
| | |
| • | 1,300,000 shares of common stock reserved for future issuance under our 2005 Employee Stock Purchase Plan upon the closing of this offering; and |
|
| • | 500,000 shares of common stock reserved for future issuance under our 2005 Non-Employee Directors’ Stock Option Plan upon the closing of this offering. |
If the underwriters exercise their over-allotment option in full, the following will occur:
| | |
| • | the percentage of shares of common stock held by existing stockholders will decrease to approximately 71.5% of the total number of shares of our common stock outstanding after this offering; and |
| | |
| • | the pro forma as adjusted number of shares held by new investors will be increased to 5,750,000, or approximately 28.5%, of the total pro forma as adjusted number of shares of our common stock outstanding after this offering. |
30
SELECTED FINANCIAL DATA
You should read the following selected financial data together with our financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus. We have derived the statement of operations data set forth below and the balance sheet data as of September 30, 2005 and 2006 set forth below from our audited financial statements which are included in this prospectus. We have derived the balance sheet data as of September 30, 2004 set forth below from our audited financial statements, which are not included in this prospectus. We have derived the statement of operations information set forth below for the three months ended December 31, 2005 and 2006 and the balance sheet data as of December 31, 2006 from our unaudited financial statements, which are included in this prospectus. Our unaudited financial statements include, in the opinion of our management, all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of those statements. Historical results for any prior or interim period are not necessarily indicative of results to be expected in any future period or for a full fiscal year. See our financial statements and related notes for a description of the calculation of the historical and pro forma net loss per common share and the weighted average number of shares used in computing the historical and pro forma per share data. The statement of operations data below gives effect to the reverse split and does not give effect to the exercise of warrants on March 30, 2007.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 3,
| | | | | | | | | | | | | | | December 3,
| |
| | 2003
| | | | | | | | | | | | | | | 2003
| |
| | (inception) to
| | | | | | | | | | | | | | | (inception) to
| |
| | September 30,
| | | Year ended September 30, | | | Three months ended December 31 | | | December 31,
| |
Statement of operations data: | | 2004 | | | 2005 | | | 2006 | | | 2005 | | | 2006 | | | 2006 | |
| | | | | (restated) | | | (restated) | | | (restated)
| | | (restated)
| | | (restated)
| |
| | | | | | | | | | | (unaudited) | | | (unaudited) | | | (unaudited) | |
|
Revenue | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development | | | 580 | | | | 2,666 | | | | 5,987 | | | | 865 | | | | 2,515 | | | | 11,748 | |
General and administrative | | | 193 | | | | 724 | | | | 1,548 | | | | 281 | | | | 1,343 | | | | 3,808 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 773 | | | | 3,390 | | | | 7,535 | | | | 1,146 | | | | 3,858 | | | | 15,556 | |
Other (income) and expense: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest and other income | | | — | | | | (9 | ) | | | (182 | ) | | | (1 | ) | | | (190 | ) | | | (381 | ) |
Interest expense | | | — | | | | — | | | | 78 | | | | 3 | | | | — | | | | 78 | |
Loss on settlement of debt | | | — | | | | — | | | | 627 | | | | — | | | | — | | | | 627 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating loss before tax provision | | | (773 | ) | | | (3,381 | ) | | | (8,058 | ) | | | (1,148 | ) | | | (3,668 | ) | | | (15,880 | ) |
Tax provision | | | 1 | | | | 2 | | | | 10 | | | | 3 | | | | — | | | | 13 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | (774 | ) | | | (3,383 | ) | | | (8,068 | ) | | | (1,151 | ) | | | (3,668 | ) | | | (15,893 | ) |
Charge for accretion of beneficial conversion rights | | | — | | | | — | | | | (603 | ) | | | — | | | | — | | | | (603 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss applicable to common stockholders | | | (774 | ) | | | (3,383 | ) | | | (8,671 | ) | | | (1,151 | ) | | | (3,668 | ) | | | (16,496 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss per share — basic and diluted | | $ | (0.15 | ) | | $ | (0.64 | ) | | $ | (1.62 | ) | | $ | (0.21 | ) | | $ | (0.68 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding — basic and diluted | | | 5,313,744 | | | | 5,322,559 | | | | 5,358,223 | | | | 5,356,543 | | | | 5,359,668 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Pro forma net loss per share — basic and diluted (unaudited) | | | | | | | | | | $ | (1.05 | ) | | | | | | $ | (0.39 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Pro forma weighted average shares outstanding — basic and diluted (unaudited) | | | | | | | | | | | 8,252,113 | | | | | | | | 9,360,430 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
31
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | As of
| |
| | As of September 30, | | | December 31,
| |
| | 2004 | | | 2005 | | | 2006 | | | 2006 | |
| | | | | (restated) | | | (restated) | | | (restated)
| |
| | | | | | | | | | | (unaudited) | |
| | (in thousands) | |
|
Balance sheet data: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 221 | | | $ | 368 | | | $ | 17,539 | | | $ | 14,563 | |
Working capital (deficit) | | | 194 | | | | (98 | ) | | | 15,307 | | | | 11,902 | |
Total assets | | | 611 | | | | 1,195 | | | | 18,659 | | | | 15,843 | |
Long-term debt | | | — | | | | — | | | | — | | | | — | |
Deficit accumulated during the development stage | | | (774 | ) | | | (4,157 | ) | | | (12,828 | ) | | | (16,496 | ) |
Total stockholders’ equity | | | 581 | | | | 654 | | | | 16,348 | | | | 13,160 | |
32
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a specialty pharmaceutical company focused on the development and commercialization of innovative treatments for endocrine disorders such as diabetes and osteoporosis, which may be safer, more effective and convenient. We develop our product candidates by applying our proprietary formulation technologies to existing drugs in order to improve their therapeutic results. Our initial development efforts are focused on peptide hormones. We have two insulin product candidates currently in clinical trials for the treatment of diabetes and two preclinical product candidates for the treatment of osteoporosis.
Our most advanced product candidate is VIAjecttm, a proprietary injectable formulation of recombinant human insulin designed to be absorbed into the blood faster than the currently marketed rapid-acting insulin analogs. We are currently conducting two pivotal Phase III clinical trials of VIAjecttm, one in patients with Type 1 diabetes and the other in patients with Type 2 diabetes. In addition to VIAjecttm, we are developing VIAtabtm, a sublingual tablet formulation of insulin. We are currently conducting a Phase I clinical trial of VIAtabtm in patients with diabetes. Our preclinical product candidates for the treatment of osteoporosis are VIAmasstm, a sublingual rapid-acting formulation of parathyroid hormone 1-34, and VIAcaltm, a sublingual rapid-acting formulation of salmon calcitonin.
We have developed all of our product candidates utilizing our proprietary VIAdeltm technology which allows us to study the interaction between peptide hormones and small molecules. We use our technology to reformulate existing peptide drugs with small molecule ingredients that are generally regarded as safe by the FDA to improve their therapeutic effect by entering the blood more rapidly and in greater quantities.
We are a development stage company. We were incorporated in December 2003 and commenced active operations in January 2004. To date, we have generated no revenues and have incurred significant losses. We have financed our operations and internal growth through private placements of convertible preferred stock and other securities. We have devoted substantially all of our efforts to research and development activities, including clinical trials. Our net loss applicable to common stockholders was $3.7 million for the three months ended December 31, 2006 and $8.7 million for the year ended September 30, 2006. As of December 31, 2006, we had a deficit accumulated during the development stage of $16.5 million. The deficit accumulated during the development stage is attributable primarily to our research and development activities, which represent approximately 71% of the expenses that we have incurred since our inception. We expect to continue to generate significant losses as we continue to develop our product candidates.
Financial Operations Overview
Revenues
To date, we have generated no revenues. We do not expect to begin generating any revenues unless any of our product candidates receive marketing approval or if we receive payments in connection with strategic collaborations that we may enter into for the commercialization of our product candidates.
Research and Development Expenses
Research and development expenses consist of the costs associated with our basic research activities, as well as the costs associated with our drug development efforts, conducting preclinical studies and clinical trials,
33
manufacturing development efforts and activities related to regulatory filings. Our research and development expenses consist of:
| | |
| • | external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants; |
|
| • | employee-related expenses, which include salaries and benefits for the personnel involved in our preclinical and clinical drug development and manufacturing activities; and |
|
| • | facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies. |
We use our employee and infrastructure resources across multiple research projects, including our drug development programs. To date, we have not tracked expenses related to our product development activities on aprogram-by-program basis. Accordingly, we cannot reasonably estimate the amount of research and development expenses that we incurred with respect to each of our clinical and preclinical product candidates. However, we estimate that the majority of our research and development expenses incurred to date are attributable to our VIAjecttm program. The following table illustrates, for each period presented, our research and development costs by nature of the cost.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 3,
| | | | | | | | | | | | | | | December 3,
| |
| | 2003
| | | | | | | | | | | | | | | 2003
| |
| | (inception) to
| | | Year ended
| | | Three months ended
| | | (inception) to
| |
| | September 30,
| | | September 30, | | | December 31 | | | December 31,
| |
| | 2004 | | | 2005 | | | 2006 | | | 2005 | | | 2006 | | | 2006 | |
| | | | | (restated) | | | (restated) | | | (restated)
| | | (restated)
| | | (restated)
| |
| | | | | | | | | | | (unaudited) | | | (unaudited) | | | (unaudited) | |
| | (in thousands) | |
|
Research and development expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Preclinical expenses | | $ | 495 | | | $ | 1,261 | | | $ | 1,575 | | | $ | 286 | | | $ | 313 | | | $ | 3,644 | |
Manufacturing expenses | | | 13 | | | | 241 | | | | 1,264 | | | | 53 | | | | 598 | | | | 2,116 | |
Clinical/regulatory expenses | | | 72 | | | | 1,164 | | | | 3,148 | | | | 526 | | | | 1,604 | | | | 5,988 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 580 | | | $ | 2,666 | | | $ | 5,987 | | | $ | 865 | | | $ | 2,515 | | | $ | 11,748 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The successful development of our product candidates is highly uncertain. We expect to complete our Phase III clinical trials of VIAjecttm and intend to submit an NDA to the FDA for this product candidate in 2008. We are currently conducting a Phase I clinical trial of VIAtabtm in patients with Type 1 diabetes. If the trial is successful, we plan to initiate later stage clinical trials of VIAtabtm in 2008. In addition, we expect to submit investigational new drug applications to the FDA for our preclinical product candidates, VIAmasstm and VIAcaltm, in 2008. However, at this time, we cannot reasonably estimate or know the nature, specific timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
| | |
| • | the progress and results of our clinical trials of VIAjecttm and VIAtabtm; |
|
| • | the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for VIAmasstm, VIAcaltm and other potential product candidates; |
|
| • | the costs, timing and outcome of regulatory review of our product candidates; |
|
| • | the costs of commercialization activities, including product marketing, sales and distribution; |
|
| • | the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; |
|
| • | the emergence of competing technologies and products and other adverse market developments; |
|
| • | the effect on our product development activities of actions taken by the FDA or other regulatory authorities; |
34
| | |
| • | our degree of success in commercializing VIAjecttm and our other product candidates; and |
|
| • | our ability to establish and maintain collaborations and the terms and success of those collaborations, if any, including the timing and amount of payments that we might receive from potential strategic partners. |
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of the clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of that clinical development program.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related expenses for personnel, including stock-based compensation expenses, in our executive, legal, accounting, finance and information technology functions. Other general and administrative expenses include facility-related costs not otherwise allocated to research and development expense, travel expenses, costs associated with industry conventions and professional fees, such as legal and accounting fees and consulting costs.
In the year ending September 30, 2007 and in subsequent periods, we anticipate that our general and administrative expenses will increase, among others, for the following reasons:
| | |
| • | we expect to incur increased general and administrative expenses to support our research and development activities, which we expect to expand as we continue the development of our product candidates; |
|
| • | we expect to incur additional expenses as we advance discussions and negotiations in connection with strategic collaborations for the commercialization of our product candidates; |
|
| • | we may also begin to incur expenses related to the sales and marketing of our product candidates as we approach the commercial launch of any product candidates that receive regulatory approval; and |
|
| • | we expect our general and administrative expenses to increase as a result of increased payroll, expanded infrastructure and higher consulting, legal, accounting and investor relations fees associated with being a public company. |
Interest Income and Interest Expense
Interest income consists of interest earned on our cash and cash equivalents. In November 2006, our board of directors approved investment policy guidelines, the primary objectives of which are the preservation of capital, the maintenance of liquidity, maintenance of appropriate fiduciary control and maximum return, subject to our business objectives and tax situation.
Our interest expense consists of interest incurred on promissory notes that we issued in 2006 as part of our mezzanine financing. In July 2006, in connection with our Series B convertible preferred stock financing, all of these promissory notes were repaid with shares of our Series B convertible preferred stock and warrants. As of September 30, 2006, we had no interest-bearing indebtedness outstanding.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our financial statements appearing at the end of this prospectus, we believe that the following accounting policies, which we have discussed
35
with our audit committee, are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.
Preclinical Study and Clinical Trial Accruals
In preparing our financial statements, we must estimate accrued expenses pursuant to contracts with multiple research institutions, clinical research organizations and contract manufacturers that conduct and manage preclinical studies, clinical trials and manufacture product for these trials on our behalf. This process involves communicating with relevant personnel to identify services that have been performed on our behalf and estimating the level of services performed and the associated costs incurred for services when we have not yet been invoiced for or otherwise notified of the actual cost. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us. The financial terms of these agreements vary and may result in uneven payment flows. To date, we have not adjusted our estimates at any balance sheet date in any material amount. Examples of preclinical study, clinical trial and manufacturing expenses include the following:
| | |
| • | fees paid to contract research organizations in connection with preclinical and toxicology studies and clinical trials; |
|
| • | fees paid to investigative sites in connection with clinical trials; |
|
| • | fees paid to contract manufacturers in connection with the production of clinical trial materials; and |
|
| • | professional service fees. |
Stock-Based Compensation and Valuation of Equity
Effective October 1, 2005, we adopted Statement of Financial Accounting Standards No. 123(R),Share-Based Payment, or SFAS No. 123(R), which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. We adopted SFAS No. 123(R) using the retrospective method. Under this method, compensation cost is measured and recognized for all share-based payments granted subsequent to October 1, 2004. We issued no options prior to that date. The fair value of the stock underlying the options is a significant factor in determining credits or charges to operations appropriate for the stock-based payments to both employees and non-employees. Between December 23, 2004 and May 27, 2005, we granted options to purchase an aggregate of 385,432 shares of our common stock at an exercise price of $1.41 per share. Between November 1, 2005 and November 1, 2006, we granted options to purchase an aggregate of 603,302 shares of our common stock at an exercise price of $5.65 per share. In December 2006, we granted options to purchase an aggregate of 235,375 shares of our common stock at an exercise price of $12.63 per share. In January 2007, we granted options to purchase an aggregate of 63,765 shares of our common stock at an exercise price of $12.63 per share.
Our board of directors determined the exercise price for the shares of common stock underlying options granted between December 2004 and May 2005 based upon the price per share at which we intended to offer and which we subsequently offered and sold our Series A convertible preferred stock to outside investors. That offering commenced in February 2005. For the options granted between December 2004 and May 2005, our board of directors also considered that VIAtabtm had just entered into Phase I clinical trials in March 2005 and VIAjecttm had just entered into Phase I clinical trials in May 2005. We had achieved no significant clinical development or regulatory milestones with respect to these two product candidates. We had not sufficiently developed our product candidates to be able to reasonably evaluate the probability of commercial success. Our board of directors recognized that significant additional funding would be required to continue our product development efforts and our corporate operations. Our board of directors did not know if those funds would be available to us. Given our stage of development, our board of directors could not reasonably contemplate a corporate collaboration, the sale of our company or an initial public offering. Our board of directors considered the high degree of uncertainty considering our future prospects and relevant economic and market conditions both generally and based on their experience in the biopharmaceutical industry.
Our board of directors determined the exercise price for the shares of common stock underlying options granted between November 2005 and 2006 based upon the price per share at which we intended to offer and at which we subsequently offered and sold our Series B convertible preferred stock price to outside investors in an offering that was consummated in July 2006. Our board of directors also considered: (1) the commencement of our Phase II
36
VIAjecttm clinical trial in September 2005 and (2) our end of Phase II meeting with the FDA for VIAjecttm, which was a prerequisite to beginning our Phase III clinical trials for VIAjecttm. Offsetting these positive factors was an unsuccessful attempted initial public offering due primarily to adverse market conditions. While our product candidates were somewhat further developed, a great amount of uncertainty remained as to our prospects for commercial success. Our board of directors recognized that significant additional funding would be required to continue our product development efforts and our corporate operations. Our board of directors did not know if those funds would be available to us. Given our stage of development, a corporate collaboration, the sale of our company or an initial public offering would have been difficult to achieve. Our board of directors considered the uncertainty of our future prospects and relevant economic and market conditions both generally and based on their experience in the biopharmaceutical industry.
In connection with the preparation of our financial statements for this offering, we engaged, for the first time, American Appraisal Associates, Inc., or American Appraisal, an unrelated valuation specialist, to perform both a retrospective valuation of our common stock prior to December 2006 and a contemporaneous valuation with respect to the options granted in December 2006 and January 2007.
American Appraisal utilized two primary valuation methodologies to determine our enterprise value — the market valuation approach and the discounted cash flow valuation approach. American Appraisal determined the fair value of each type of equity instrument we had issued using the probability-weighted expected return method, or PWERM, as recommended by the American Institute of Certified Public Accountants in its practice aid entitledValuation of Privately Held Company Equity Securities Issued as Compensation, or the Practice Aid.
Probability of Occurrence of Various Liquidity Events. At each valuation date, American Appraisal considered the probabilities of four possible liquidity events for our company — remaining private, conducting an initial public offering, being sold or dissolution. The table below demonstrates that American Appraisal’s estimates of the probabilities of each liquidity event occurring changed over time, as it evaluated the significant valuation drivers noted above. The table summarizes the specific probabilities assigned to each liquidity event using the PWERM based on assessments of an analysis of specific risks and the timing and probability of anticipated future outcomes as outlined in the Practice Aid. American Appraisal, in applying its valuation methodology, probability-weighted each of the four liquidity events as described below.
| | | | | | | | | | | | | | | | |
| | Liquidity Event | |
| | | | | | | | Sale/
| | | | |
Valuation Date | | Private Company | | | IPO | | | Merger | | | Dissolution | |
|
July 14, 2005 | | | 35 | % | | | 0 | % | | | 0 | % | | | 65 | % |
July 19, 2006 | | | 55 | % | | | 10 | % | | | 5 | % | | | 30 | % |
December 19, 2006 | | | 45 | % | | | 35 | % | | | 15 | % | | | 5 | % |
These probabilities were used in both the market valuation and discounted cash flow methodologies discussed below.
Contemporaneous Valuation Methodology. American Appraisal, in performing its contemporaneous valuation, considered, among other factors, our initiation of Phase III clinical trials of VIAjecttm and the commencement of manufacturing commercial batches of VIAjecttm.
The market valuation approach utilized two valuation methodologies — the public guideline company method and the pre-IPO step-up method. The public guideline company valuation approach identifies publicly-traded companies whose business and financial risks are comparable to ours. This approach, which involves the correlation of the guideline companies’ operations, market prices and valuation ratios to our operations, provides an indication of our marketable common stock value.
American Appraisal analyzed a summary of operating and market capitalization data of several public biotechnology companies engaged in the development and commercialization of insulin drug programs with some similarity to ours. While some of these companies are already commercially successful, the public guideline company valuation approach was applied because these firms provided market valuation measurements of insulin drug development companies. However, because their market valuations and valuation ratios provided measurement of our potential future values, indications of value for us from this analysis were discounted to present value at discount rates that generally represent Phase II clinical trial success risk. The indicated value utilizing the public
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guideline company approach was weighted with the value derived from the application of a second market approach, the pre-IPO step-up method.
The pre-IPO step-up method is based on an analysis of the initial public offering market prices of companies and their most recent private placement valuations prior to their respective initial public offerings. The ratios of initial public offering market capitalization to the post-money capitalizations of private placements provide general indications of the common stock “step-up” in value achieved by technology-based companies upon receiving funding from an initial public offering. Correlation of the median of these ratios to our most recent private placement post-money valuation resulted in an indication of business enterprise value.
American Appraisal’s valuations were also based, in part, on the income approach adapted for privately held businesses. American Appraisal applied the discounted cash flow method of the income approach to determine our value. The discounted cash flow method is most commonly applied to value a biotechnology company’s product lines when that company is able to reasonably project the commercialization of its product lines over a multi-year period.
American Appraisal, in applying the discounted cash flow valuation, discounted to present value our management’s projections of future operating cash flow at rates of returns that reflected the business and financial risk of achieving such cash flow. The discounted cash flow analysis incorporated estimates of the time and the cost required to develop and commercialize the potential of VIAjecttm as of the valuation date. These projections were based on certain underlying assumptions regarding development costs, market size and penetration, including the following:
| | |
| • | the remaining development costs and time required for each existing product to complete each remaining phase in the clinical trial and regulatory approval process; |
| | |
| • | the breadth and depth of the expected commercial market for each of the products as of the valuation date and the estimated market share penetration based on estimates supported by prior experience and industry data, statistics and intelligence; and |
| | |
| • | the costs required to achieve that product commercialization. |
Retrospective Valuation Methodology. American Appraisal, in performing its retrospective valuations, for the July 19, 2006 valuation date only, considered a combination of market valuation approach and discounted cash flow valuation approach and a PWERM that is consistent with the practices recommended by the Practice Aid. In applying these valuation methodologies, American Appraisal considered the following factors:
| | |
| • | our actual operating performance; |
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| • | a review of our progress in our product research and development and clinical trial activities and of other events that may or may not lead to the commercialization of our products; |
|
| • | our projected operating performance and the risks inherent in our business including the risks related to receiving FDA approvals for our product candidates; |
|
| • | issuances of preferred stock, common stock and warrants, including the prices paid and the rights and preferences thereof; and |
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| • | the likelihood of achieving liquidity through an initial public offering or a sale of our business and the proceeds that would be allocated to holders of our common stock and the amounts contractually due to holders of our preferred stock. |
American Appraisal also utilized the market valuation approach and the discounted cash flow valuation approach as described under contemporaneous valuation methodology. However, American Appraisal applied the market valuation approach retrospectively only for the July 19, 2006 valuation date because reasonably comparable companies with similar risk and prospects were available to develop a reliable indication of value. The market approach was not considered for the July 14, 2005 valuation because of the significantly greater uncertainty associated with the commercialization success of our product candidates in earlier stages of development and the lack of comparable publicly-traded companies at that stage of development.
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American Appraisal’s Conclusions. American Appraisal, for both the retrospective and contemporaneous valuations, selected the probabilities of the four potential liquidity events described above based on:
| | |
| • | the potential of an initial public offering at various stages of our product development and the stages of our clinical trials; |
| | |
| • | the potential for collaboration with pharmaceutical or biotechnology companies or our sale as part of the process of commercializing our product candidates; and |
| | |
| • | the need for the probability of and the method of securing the funding required to complete our clinical trials and achieve commercialization. |
Our projected net operating cash flow provided the basis for discounting, or capitalizing, to present value at a rate of return that reflects the business risk of achieving the projected cash flow for each product candidate. This risk-adjusted rate of return reflects the risk associated with us, the risk and uncertainty regarding the achievement of potential liquidity events and consideration of observed rates of return on comparable investments. In the application of the discounted cash flow analyses for the three commercial outcomes of VIAjecttm, the cash flows were discounted at a discount rate of 30% for the December 19, 2006 contemporaneous valuation, 60% for the July 19, 2006 retrospective valuation and 70% for the July 14, 2005 retrospective valuation. The selected discount rates decreased to reflect changes in the risks and uncertainties related to advancing VIAjecttm through the FDA regulatory review process and our ability to access the public markets. We believe that American Appraisal’s selected discount rates are consistent with required rates of return as outlined in the Practice Aid. The Practice Aid indicates ranges of discount rates forstart-up development firms to be between 50% and 70%. Early development firms would fall within a range of 40% to 60% and firms in the bridge and/or IPO development stage would be in the range of 25% to 35%.
Among other factors, the assessment of probabilities at each valuation date also considered the probability of successfully completing an initial public offering, taking into account that:
| | |
| • | in 2005 and 2006, 24% of proposed initial public offerings have been withdrawn after filing; |
| | |
| • | in 2005 and 2006, initial public offerings that were not withdrawn were priced at approximately a 25% discount from the mid-point of the initial filing range; and |
| | |
| • | of the 21 initial public offerings completed in 2006 for biotechnology and pharmaceutical companies that may be considered comparable to us, 17 of those offerings were priced below the bottom of the initial filing range. |
Additionally, American Appraisal adjusted the indicated market approach value of our common stock to reflect reductions for anticipated dilution related to ongoing financing requirements and for lack of liquidity given that no trading market for our common stock existed at each valuation date. The weighted average reduction that reflects these factors decreased from 50% in July 2006 to 15% in December 2006, as we progressed towards events that improved the prospects of liquidity for our stockholders in the public markets. American Appraisal, in determining the appropriate adjustment to the discount factor to be utilized to adjust the discounted cash flow analysis for the lack of marketability of our common stock, considered the following factors as outlined in the Practice Aid:
| | |
| • | prospects for liquidity, including the expectation of an initial public offering; |
| | |
| • | restrictions on the transferability of our common and preferred stock; |
| | |
| • | risk and volatility associated with us, our industry and our peers; |
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| • | uncertainty of our value; and |
| | |
| • | concentration in control of our ownership. |
The lack of marketability discount is based on qualitative and quantitative analysis, as well as subjective judgment of these factors. Published restricted stock studies indicate these discounts may fall within the range of 3% to 58%. American Appraisal utilized a discount rate of 15% for the valuation performed for the December 19, 2006 valuation date. American Appraisal utilized a discount rate of 50% to reflect the impact of all these factors on the value of our common stock for the valuations performed for the July 19, 2006 valuation date.
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American Appraisal determined the fair value of our equity instruments based upon the factors listed above and other information available on the measurement dates. Specifically, American Appraisal determined that the fair market value of our common stock was $0.83 per share as of July 14, 2005, $4.69 per share as of July 19, 2006 and $12.63 per share as of December 19, 2006.
We believe that American Appraisal applied reasonable valuation methodologies, including the application of the discounts cited above, to properly reflect the risks and uncertainties in our common stock as of each valuation date. The assumptions underlying the estimates used by American Appraisal are consistent with our business plan.
Accounting Treatment. We selected the Black-Scholes valuation model as the most appropriate valuation method for stock option grants to employees and members of our board of directors. The fair value of these stock option grants is estimated as of their date of grant using the Black-Scholes valuation method. Our compensation committee adopted the valuations of American Appraisal in determining the fair market value of our common stock for the Black-Scholes model. For all options granted prior to July 14, 2005, we used a fair market value of $0.83 per share; for options granted between July 15, 2005 and July 19, 2006, we used a fair market value of $4.69 per share; and for options granted after July 19, 2006, we used a fair market value of $12.63 per share.
Because we are a private company and therefore lack company-specific historical and implied volatility information, we based our estimate of expected volatility on the median historical volatility of a group of publicly traded companies that we believe are comparable to us based on the criteria set forth in SFAS No. 123(R), particularly line of business, stage of development, size and financial leverage. We intend to continue to consistently apply this process using the same comparable companies until a sufficient amount of historical information regarding the volatility of our share price becomes available. However, we will regularly review these comparable companies, and may substitute more appropriate companies if facts and circumstances warrant a change. We use the average of (1) the weighted average vesting period and (2) the contractual life of the option, eight years, as the estimated term of the option. The risk free rate of interest for periods within the contractual life of the stock option award is based on the yield of a U.S. Treasury strip on the date the award is granted with a maturity equal to the expected term of the award. We estimate forfeitures based on actual forfeitures during our limited history. Additionally, we have assumed that dividends will not be paid.
For stock warrants or options granted to non-employees andnon-directors, primarily consultants serving on our Scientific Advisory Board, we measure fair value of the equity instruments utilizing the Black-Scholes method, if that value is more reliably measurable than the fair value of the consideration or service received. The fair value of these equity investments are periodically revalued as the options vest and are recognized as expense over the related period of service or the vesting period, whichever is longer. As of December 31, 2006, we had issued to these non-employees options to purchase an aggregate of 267,105 shares of our common stock. Because we must revalue these options for accounting purposes each reporting period, the amount of stock-based compensation expense related to these non-employee options will increase or decrease, based on changes in the price of our common stock. For the three months ended December 31, 2006, the stock-based compensation expense related to these options was $444,000, of which $39,000 is reflected in research and development expenses and $405,000 is reflected in general and administrative expenses. For the year ended September 30, 2006, the stock-based compensation expense related to these options was $1.1 million, of which $187,000 is reflected in research and development expenses and $944,000 is reflected in general and administrative expenses.
Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. As of September 30, 2006, we had federal net operating loss carryforwards of $10.9 million, Connecticut state net operating loss carryforwards of $10.9 million and federal research and development tax credit carryovers of approximately $0.3 million, all of which expire starting in 2024.
The Internal Revenue Code contains provisions that may limit the net operating loss and credit carryforwards available to be used in any given year as a result of certain historical changes in the ownership interests of significant stockholders. As a result of the cumulative impact of our equity issuances over the past two years, a change of
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ownership, as defined in the Internal Revenue Code occurred upon our issuance of Series B convertible preferred stock in July 2006. As a result, our total net operating losses will be subject to an annual base limitation.
At September 30, 2006, we recorded a 100% valuation allowance against our net deferred tax asset of approximately $5.3 million, as our management believes it is uncertain that it will be fully realized. If we determine in the future that we will be able to realize all or a portion of our net deferred tax asset, an adjustment to the deferred tax valuation allowance would increase net income in the period in which we make such a determination.
Exercise of Warrants
In March 2007, we offered the holders of warrants to purchase an aggregate of 149,125 shares of our Series B convertible preferred stock and an aggregate of 3,417,255 shares of our common stock with an exercise price of $5.56 per share the opportunity to exercise such warrants at an exercise price of $3.67, representing a 34% discount in the exercise price. Such holders exercised all of such warrants on a combination of cashless and cash exercise basis. We issued an aggregate of 2,636,907 shares of common stock and received aggregate cash proceeds of approximately $0.4 million in connection with such exercises.
As a result of the discounted exercise price, in the fiscal quarter ended March 31, 2007, we will record a deemed dividend charge of approximately $4.5 million for the warrants that were so exercised.
Results of Operations
Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005
Revenue. We did not recognize any revenue during the three months ended December 31, 2006 or 2005.
Research and Development Expenses. Research and development expenses were $2.5 million for the three months ended December 31, 2006, an increase of $1.6 million, or 190.8%, from $0.9 million for the three months ended December 31, 2005. This increase was primarily related to increased research and development costs related to our continued development of VIAjecttm, for which we began to incur significant expenses relating to our two pivotal Phase III clinical trials that we commenced in September 2006. Specific increases in research and development expenses included $1.0 million related to increased clinical trial expenses during the three months ended December 31, 2006 and $0.5 million related to increased manufacturing expenses incurred in the three months ended December 31, 2006 for the process development,scale-up and manufacture of commercial batches of VIAjecttm to support our clinical trials and regulatory submissions. Research and development expenses for the three months ended December 31, 2006 include $43,000 in stock-based compensation expense related to options granted to employees and $39,000 in stock-based compensation expense related to options granted to non-employees.
We expect our research and development expenses to increase in the future as a result of increased development costs related to our clinical VIAjecttm and VIAtabtm product candidates and as we seek to advance our preclinical VIAmasstm and VIAcaltm product candidates into clinical development. The timing and amount of these expenses will depend upon the outcome of our ongoing clinical trials, particularly the costs associated with our ongoing Phase III clinical trials of VIAjecttm and our Phase I and planned Phase II clinical trials of VIAtabtm. The timing and amount of these expenses will also depend on the potential advancement of our preclinical programs into clinical development and the related expansion of our clinical development and regulatory organization, regulatory requirements and manufacturing costs.
General and Administrative Expenses. General and administrative expenses were $1.3 million for the three months ended December 31, 2006, an increase of $1.0 million from $0.3 million for the three months ended December 31, 2005. An increase in compensation-related expenses accounted for $0.7 million of this increase. Of this amount, $0.4 million was attributable to stock-based compensation expenses and $0.1 million was related to increased bonus payments. The balance of the increase was primarily attributable to higher levels of legal and accounting fees.
We expect our general and administrative expenses to continue to increase in the future as a result of an increased payroll as we add personnel necessary for the management of the anticipated growth of our business, expanded infrastructure and higher consulting, legal, accounting, investor relations and other expenses associated with being a public company.
Interest Income. Interest income increased to $190,000 for the three months ended December 31, 2006 from $1,000 for the three months ended December 31, 2005. The increase was due to our higher balances of cash and cash
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equivalents in 2006, resulting from the $21.2 million in net cash proceeds that we received from our Series B convertible preferred stock and warrant financing in July 2006.
Net Loss Applicable to Common Stockholders and Net Loss per Share. Net loss applicable to common stockholders was $3.7 million, or $(0.68) per share, for the three months ended December 31, 2006 compared to a net loss of $1.2 million, or $(0.21) per share, for the three months ended December 31, 2005. The increase in net loss was primarily attributable to the increased expenses described above. We expect our losses to increase in the future as we incur increased clinical development costs to advance our VIAjecttm and VIAtabtm product candidates through the clinical development process and as our general and administrative costs rise as our organization grows to support this higher level of clinical activity.
Year Ended September 30, 2006 Compared to Year Ended September 30, 2005
Revenue. We did not recognize any revenue during the years ended September 30, 2006 or 2005.
Research and Development Expenses. Research and development expenses were $6.0 million for the year ended September 30, 2006, an increase of $3.3 million, or 124.6%, from $2.7 million for the year ended September 30, 2005. This increase was primarily attributable to increased research and development costs related to our continued development of VIAjecttm, for which we conducted two Phase II clinical trials during the year ended September 30, 2006. We also commenced our two pivotal Phase III clinical trials for VIAjecttm in September 2006, for which we incurred trialstart-up costs during the fiscal year. Specific increases in research and development expenses included $1.5 million related to increased clinical trial expenses in 2006; $1.1 million related to increased manufacturing expenses in 2006 for the process development,scale-up and manufacture of commercial batches of VIAjecttm to support our clinical trials and regulatory submissions; and $0.5 million related to increased personnel costs and consulting fees. Research and development expenses for the year ended September 30, 2006 include $36,000 in stock-based compensation expense related to options granted to employees and $187,000 in stock-based compensation expense related to options granted to non-employees.
General and Administrative Expenses. General and administrative expenses were $1.5 million for the year ended September 30, 2006, an increase of $0.8 million, or 113.8%, from $0.7 million for the year ended September 30, 2005. Our initiation of performance-based bonuses accounted for approximately $0.3 million of that increase. The balance of the increase was primarily attributable to higher levels of legal and consulting fees. General and administrative expenses for the year ended September 30, 2006 include $177,000 in stock-based compensation expense related to options granted to employees and $731,000 in stock-based compensation expense related to options granted to non-employees.
Interest and Other Income. Interest and other income increased to $182,000 for the year ended September 30, 2006 from $9,000 for the year ended September 30, 2005. The increase was due to our higher balances of cash and cash equivalents in 2006, resulting from the $21.2 million in cash proceeds that we received from our Series B convertible preferred stock and warrant financing in July 2006.
Interest Expense. Interest expense of approximately $78,000 for the year ended September 30, 2006 consisted of interest incurred on the promissory notes issued in our mezzanine financing. In July 2006, all of the promissory notes were repaid using shares of our Series B convertible preferred stock and warrants in connection with our Series B convertible preferred stock financing. As of September 30, 2006, we had no interest-bearing indebtedness outstanding.
Loss on Settlement of Debt. In July 2006, we completed our Series B convertible preferred stock financing. In connection with that transaction, we exercised our option to repay the promissory notes that we had issued in our mezzanine financing with shares of Series B convertible preferred stock and warrants. Due to the contractual terms of our mezzanine financing, these investors effectively received a 25% premium on the principal amount of the promissory notes that were a part of the mezzanine financing units. As a result of this 25% premium, we recorded a loss on settlement of debt of $0.6 million. No equivalent expense was incurred in the prior year.
Charge for Accretion of Beneficial Conversion Rights. We recorded a beneficial conversion charge related to the issuance of our Series B convertible preferred stock and the conversion option embedded therein. In accordance with EITFNo. 98-5,Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, we accreted the charge immediately and have shown a $603,000 charge for accretion of beneficial conversion rights in the year ended September 30, 2006.
Net Loss Applicable to Common Stockholders and Net Loss per Share. Net loss applicable to common stockholders was $8.7 million, or $(1.62) per share, for the year ended September 30, 2006 compared to
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$3.4 million, or $(0.64) per share, for the year ended September 30, 2005. The increase in net loss was primarily attributable to the increased expenses described above.
Year Ended September 30, 2005 Compared to Period Ended September 30, 2004
We were incorporated in December 2003 and commenced active operations in January 2004. Accordingly, the following comparison of our results of operations for the year ended September 30, 2005 to the period ended September 30, 2004 is a comparison of a full year of operations to our initial ten months of operations.
Revenue. We did not recognize any revenue during the year ended September 30, 2005 or the period from December 3, 2003 to September 30, 2004.
Research and Development Expenses. Research and development expenses were $2.7 million for the year ended September 30, 2005 compared to $0.6 million for the period ended September 30, 2004. The largest component of the $2.1 million increase was an increase of $0.8 million from 2004 to 2005 in preclinical and clinical development expenses, including costs related to the initiation of Phase I clinical trials for VIAjecttm and VIAtabtm as well as the process development andscale-up of clinical supplies to support those trials. An additional $0.9 million of this increase was attributable to increased personnel costs as six new members joined our research staff and clinical development group. The remainder of the increase was primarily attributable to additional expenses for consulting, overhead and research supplies.
General and Administrative Expenses. General and administrative expenses were $0.7 million for the year ended September 30, 2005 compared to $0.2 million for the period ended September 30, 2004. This $0.5 million increase was almost exclusively attributable to increased personnel costs, including an increase in compensation expense and the costs associated with the initiation of a health plan for our employees.
Interest and Other Income. As a result of our low balances of cash and cash equivalents prior to our June 2006 Series B convertible preferred stock financing, no meaningful interest and other income was earned in either the year ended September 30, 2005 or the period ended September 30, 2004.
Net Loss Applicable to Common Stockholders and Net Loss per Share. Net loss applicable to common stockholders was $3.4 million, or $(0.64) per share, for the year ended September 30, 2005 compared to $0.8 million, or $(0.15) per share, for the period ended September 30, 2004. The increase in net loss is primarily attributable to the increased expenses described above.
Liquidity and Capital Resources
Sources of Liquidity and Cash Flows
As a result of our significant research and development expenditures and the lack of any approved products or other sources of revenue, we have not been profitable and have generated significant operating losses since we were incorporated in 2003. We have funded our research and development operations primarily through proceeds from our Series A convertible preferred stock financing in 2005 and our mezzanine and Series B convertible preferred stock financings in 2006. Through December 31, 2006, we had received aggregate gross proceeds of $26.6 million from these sales.
At December 31, 2006, we had cash and cash equivalents totaling approximately $14.6 million. To date, we have invested our excess funds in a bank-managed money market fund. We plan to continue to invest our cash and equivalents in accordance with our approved investment policy guidelines.
Net cash used in operating activities was $2.7 million for the three months ended December 31, 2006, $3.9 million for the year ended September 30, 2006, $2.4 million for the year ended September 30, 2005 and $0.5 million for the period ended September 30, 2004. Net cash used in operating activities for the three months ended December 31, 2006 primarily reflects the net loss for the period, offset in part by depreciation and changes in accounts payable, deferred compensation and other accrued expenses. Net cash used in operating activities for the year ended September 30, 2006 primarily reflects the net loss for the period, offset in part by depreciation and changes in accounts payable, the loss on settlement of debt, other accrued expenses and deferred compensation.
Net cash used in investing activities was $0.3 million for the three months ended December 31, 2006, $0.3 million for the year ended September 30, 2006, $0.6 million for the year ended September 30, 2005 and $0.4 million for the period ended September 30, 2004. Net cash used in investing activities in each period primarily
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reflects purchases of property and equipment. The decrease from 2005 to 2006 was primarily related to reduced purchases of property and equipment. The increase from 2004 to 2005 was primarily attributable to increased purchases of property and equipment.
Net cash provided by financing activities was $52,000 for the three months ended December 31, 2006, $21.4 million for the year ended September 30, 2006, $3.1 million for the year ended September 30, 2005 and $1.1 million for the period ended September 30, 2004. Net cash provided by financing activities in 2006 primarily reflects the proceeds from our mezzanine and Series B convertible preferred stock financings. Net cash provided by financing activities in 2005 primarily reflects the proceeds from our Series A convertible preferred stock financing.
Funding Requirements
We believe that our existing cash and cash equivalents, along with the net proceeds of this offering, will be sufficient to fund our anticipated operating expenses and capital expenditures for the next 24 months. We have based this estimate upon assumptions that may prove to be wrong and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and to the extent that we may or may not enter into collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current anticipated clinical trials.
Our future capital requirements will depend on many factors, including:
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| • | the progress and results of our clinical trials of VIAjecttm and VIAtabtm; |
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| • | the scope, progress, results and costs of preclinical development and laboratory testing and clinical trials for VIAmasstm, VIAcaltm and other potential product candidates; |
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| • | the costs, timing and outcome of regulatory reviews of our product candidates; |
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| • | the costs of commercialization activities, including product marketing, sales and distribution; |
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| • | the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; |
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| • | the emergence of competing technologies and products and other adverse market developments; |
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| • | the effect on our product development activities of actions taken by the FDA or other regulatory authorities; |
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| • | our degree of success in commercializing VIAjecttm and our other product candidates; and |
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| • | our ability to establish and maintain collaborations and the terms and success of those collaborations, including the timing and amount of payments that we might receive from potential strategic partners. |
We do not anticipate generating product revenue for the next few years. In the absence of additional funding, we expect our continuing operating losses to result in increases in our cash used in operations over the next several quarters and years. To the extent our capital resources are insufficient to meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. We do not currently have any commitments for future external funding.
Additional equity or debt financing or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our planned commercialization efforts or obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain drug candidates that we might otherwise seek to develop or commercialize independently or enter into corporate collaborations at a later stage of development. In addition, any future equity funding will dilute the ownership of our equity investors.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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Contractual Obligations
The following table summarizes our significant contractual obligations and commercial commitments as of September 30, 2006 (in thousands).
| | | | | | | | | | | | | | | | | | | | |
| | | | | Less than
| | | | | | | | | More than
| |
| | Total | | | 1 Year | | | 1-3 Years | | | 4-5 Years | | | 5 Years | |
|
Operating lease obligations | | $ | 266 | | | $ | 76 | | | $ | 190 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
Total fixed contractual obligations | | $ | 266 | | | $ | 76 | | | $ | 190 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
In October 2006, we entered into a lease for a second facility for a term of 38 months. The lease provides for annual basic lease payments of $27,000, plus operating expenses. There were no other significant changes to our contractual obligations and commitments between September 30, 2006 and December 31, 2006.
Quantitative and Qualitative Disclosures about Market Risks
Our exposure to market risk is limited to our cash, cash equivalents and marketable securities. We invest in high-quality financial instruments, as permitted by the terms of our investment policy guidelines. Currently, our investments are limited to money market funds. In the future, we may add high-quality federal agency notes, corporate debt securities, United States treasury notes and other securities, including long-term debt securities, to our investment portfolio. A portion of our investments may be subject to interest rate risk and could fall in value if interest rates were to increase. Our current intention is to hold longer term investments to maturity. The effective duration of our portfolio is currently less than one year, which we believe limits interest rate and credit risk. We do not hedge interest rate exposure.
Because most of our transactions are denominated in United States dollars, we do not have any material exposure to fluctuations in currency exchange rates.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Earlier application is encouraged. We anticipate that the adoption of this accounting pronouncement will not have a material effect on our financial statements.
In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes, or FIN 48. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are in the process of evaluating the effect that FIN 48 will have on our financial statements.
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155,Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140. This statement permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that would otherwise have to be accounted for separately. The new statement also requires companies to identify interest in securitized financial assets that are freestanding derivatives or contain embedded derivatives that would have to be accounted for separately, clarifies whichinterest-and-principal-only strips are subject to Statement 133 and amends Statement 140 to revise the conditions of a qualifying special purpose entity due to the new requirement to identify whether interests in securitized financial assets are freestanding derivatives or contain embedded derivatives. We have chosen to adopt this pronouncement on October 1, 2006 and it did not have a material effect on our financial statements.
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In December 2006, the FASB issued FASB Staff PositionNo. 00-19-2,Accounting for Registration Payment Arrangements. This Staff Position specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with Statement of Financial Accounting Standards No. 5,Accounting for Contingencies. This Staff Position further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. This Staff Position shall be effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance of this Staff Position. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of this Staff Position, this guidance shall be effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. We have adopted the Staff Position as of October 1, 2006, and it did not have any affect on our financial statements.
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BUSINESS
Overview
We are a specialty pharmaceutical company focused on the development and commercialization of innovative treatments for endocrine disorders such as diabetes and osteoporosis, which may be safer, more effective and convenient. We develop our product candidates by applying our proprietary formulation technologies to existing drugs in order to improve their therapeutic results. Our initial development efforts are focused on peptide hormones. We have two insulin product candidates currently in clinical trials for the treatment of diabetes. Additionally, we have two preclinical product candidates for the treatment of osteoporosis, one with parathyroid hormone 1-34 and the other with salmon calcitonin. Our most advanced product candidate is VIAjecttm, a proprietary injectable formulation of recombinant human insulin designed to be absorbed into the blood faster than currently marketed rapid-acting insulin products. We believe VIAjecttm can improve the management of blood glucose levels in patients with diabetes by more closely mimicking the natural first-phase insulin release that healthy individuals experience at meal-time. We are currently conducting two pivotal Phase III clinical trials of VIAjecttm, one in patients with Type 1 diabetes and the other in patients with Type 2 diabetes. We expect to complete these two trials and intend to submit an NDA under Section 505(b)(2) of the FFDCA to the U.S. Food and Drug Administration in 2008.
Diabetes is a disease characterized by abnormally high levels of blood glucose and inadequate levels of insulin. Glucose is a simple sugar used by all the cells of the body to produce energy and support life. Humans need a minimum level of glucose in their blood at all times to stay alive. Insulin is a peptide hormone naturally secreted by the pancreas to regulate the body’s management of glucose. When a healthy individual begins a meal, the pancreas releases a natural spike of insulin called the first-phase insulin release, which is critical to the body’s overall control of glucose. Virtually all patients with diabetes lack the first-phase insulin release. All patients with Type 1 diabetes must treat themselves with meal-time insulin injections. As the disease progresses, patients with Type 2 diabetes also require meal-time insulin. However, none of the currently marketed meal-time insulin products adequately mimics the first-phase insulin release. As a result, patients using insulin typically have inadequate levels of insulin in their systems at the start of a meal and too much insulin in their systems between meals. This, in turn, results in the lack of adequate glucose control associated with diabetes. The long-term adverse effects of this lack of adequate glucose control include blindness, loss of kidney function, nerve damage and loss of sensation and poor circulation in the periphery, which in some severe cases, may lead to amputations.
Advances in insulin technology in the 1990s led to the development of new molecules, referred to as rapid-acting insulin analogs, which are similar to insulin, but are absorbed into the blood more rapidly. These rapid-acting insulin analogs had sales in excess of 2.3 billion in 2005 according to IMS Health, a leading provider of pharmaceutical market data.
We have conducted Phase I and Phase II clinical trials comparing the performance of VIAjecttm to Humalog®, the largest selling rapid-acting insulin analog in the United States, and Humulin® R, a form of recombinant human insulin. In these trials, we observed that VIAjecttm produced a release profile into the blood that more closely approximates the natural first-phase insulin release seen in healthy individuals following a meal. In September 2006, we initiated two pivotal Phase III clinical trials for VIAjecttm, which will treat 400 patients with Type 1 diabetes and 400 patients with Type 2 diabetes over a six-month period.
In addition to VIAjecttm, we are developing VIAtabtm, a sublingual, or below the tongue, tablet formulation of insulin. We are currently conducting a Phase I clinical trial of VIAtabtm in patients with diabetes. We believe that VIAtabtm has the potential to rapidly deliver insulin, while sparing patients from the unpleasant aspects of injection therapy. We are developing VIAtabtm as a potential treatment for patients with Type 2 diabetes who are in the early stages of their disease. In addition to our clinical-stage insulin programs, our preclinical product candidates for the treatment of osteoporosis are VIAmasstm and VIAcaltm. VIAmasstm is a sublingual rapid-acting formulation of parathyroid hormone 1-34, or PTH 1-34. VIAcaltm is a sublingual rapid-acting formulation of salmon calcitonin. We expect to submit investigational new drug applications, or INDs, for these product candidates to the FDA in 2008.
We have developed all of our product candidates utilizing our proprietary VIAdeltm technology which allows us to study the interaction between peptide hormones and small molecules. We use our technology to reformulate
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existing peptide drugs with small molecule ingredients that are generally regarded as safe by the FDA so as to improve their therapeutic effect by entering the blood rapidly and in greater quantities. We believe that this approach to drug development will allow us to utilize Section 505(b)(2) of the FFDCA for FDA approval of our product candidates. Section 505(b)(2) provides for a type of NDA that allows expedited development of new formulations of chemical entities and biological compounds that have already undergone extensive clinical trials and been approved by the FDA. Both the time and cost of development of a new product can be substantially less under a Section 505(b)(2) NDA than under a full NDA.
Our Strategy
Our goal is to build a leading specialty pharmaceutical company focused on the development and commercialization of innovative treatments for endocrine disorders, which may be safer, more effective and convenient. To achieve our goal, we are pursuing the following strategies:
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| • | Obtain Regulatory Approval for VIAjecttm. Our current focus is to complete the clinical development of VIAjecttm and seek regulatory approval for this product candidate in the major world markets. If our current Phase III trials for VIAjecttm are successful, we expect to submit our NDA to the FDA in 2008. |
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| • | Commercialize our Product Candidates Through Strategic Collaborations. Our product candidates target large primary care markets. To maximize the commercial potential of our product candidates, we intend to: |
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| • | Self-fund Clinical Trial Programs. We intend to fund our clinical trial programs into late stage or through completion of clinical development by ourselves. By retaining the rights to our product candidates through most or all of the clinical development process, we believe that we will be able to secure more favorable economic terms when we do seek a commercialization partner. |
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| • | Partner Late-stage Programs with Major Pharmaceutical Companies. We intend to selectively enter into strategic arrangements with leading pharmaceutical or biotechnology companies for the commercialization of our product candidates late in or upon completion of clinical development. Because we are focusing on therapeutic indications in large markets, we believe that these larger companies have the marketing, sales and financial resources to maximize the commercial potential of our products. |
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| • | Retain Co-commercialization Rights. In entering into collaborative relationships, our goal will be to retain co-promotion or co-commercialization rights in the United States and potentially other markets. This will allow us to begin to develop our own specialized sales and marketing organization. |
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| • | Employ our Proprietary VIAdeltmTechnology to Reformulate Approved Peptide Hormone Drugs that Address Large Markets. Our VIAdeltm technology consists of techniques that we have developed to study the interaction between peptide hormones and small molecules. We use these techniques to reformulate existing peptide drugs with small molecule ingredients so as to improve their therapeutic effect and their method of administration. To date, we have developed all of our product candidates utilizing our proprietary VIAdeltm technology. We are focused on diabetes and osteoporosis, both of which are indications that represent large markets with significant unmet medical needs. We intend to continue to employ our proprietary VIAdeltm technology to develop additional peptide hormone product candidates that address large markets. |
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| • | Focus on the Section 505(b)(2) Regulatory Approval Pathway. Using our VIAdeltm technology, we seek to reformulate existing drugs with ingredients that are generally regarded as safe by the FDA. We believe that this approach to drug development will allow us to use the abbreviated development pathway of Section 505(b)(2) of the FFDCA, which can result in substantially less time and cost in bringing a new drug to market. We intend to continue to focus our efforts on reformulating new product candidates for which we will be able to seek regulatory approval pursuant to Section 505(b)(2) NDAs. |
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| • | Aggressively Continue the Development of our Pipeline of Product Candidates. In addition to our Phase III clinical trials for VIAjecttm, we are currently conducting a Phase I clinical trial of VIAtabtm, our oral insulin product candidate. We are also conducting preclinical studies on VIAmasstm and VIAcaltm, our osteoporosis product candidates. Our goal is to submit INDs and commence Phase I clinical trials for these preclinical product candidates in 2008. |
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Diabetes and the Insulin Market
Diabetes Overview
Glucose is a simple sugar used by all the cells of the body to produce energy and support life. Humans need a minimum level of glucose in their blood at all times to stay alive. The primary manner in which the body produces blood glucose is through the digestion of food. When a person is not getting this glucose from food digestion, glucose is produced from stores and released by the liver. The body’s glucose levels are regulated by insulin. Insulin is a peptide hormone that is naturally secreted by the pancreas. Insulin helps glucose enter the body’s cells to provide a vital source of energy.
When a healthy individual begins a meal, the pancreas releases a natural spike of insulin called the first-phase insulin release. In addition to providing sufficient insulin to process the glucose coming into the blood from digestion of the meal, the first-phase insulin release acts as a signal to the liver to stop making glucose while digestion of the meal is taking place. Because the liver is not producing glucose and there is sufficient additional insulin to process the glucose from digestion, the blood glucose levels of healthy individuals remain relatively constant and their blood glucose levels do not become too high.
Diabetes is a disease characterized by abnormally high levels of blood glucose and inadequate levels of insulin. There are two major types of diabetes — Type 1 and Type 2. In Type 1 diabetes, the body produces no insulin. In the early stages of Type 2 diabetes, although the pancreas does produce insulin, either the body does not produce the insulin at the right time or the body’s cells ignore the insulin, a condition known as insulin resistance. According to the Centers for Disease Control and Prevention, or CDC, Type 2 diabetes is the more prevalent form of the disease, affecting approximately 90% to 95% of all people diagnosed with diabetes.
Even before any other symptoms are present, one of the first effects of Type 2 diabetes is the loss of the meal-induced first-phase insulin release. In the absence of the first-phase insulin release, the liver will not receive its signal to stop making glucose. As a result, the liver will continue to produce glucose at a time when the body begins to produce new glucose through the digestion of the meal. As a result, the blood glucose level of patients with diabetes goes too high after eating, a condition known as hyperglycemia. Hyperglycemia causes glucose to attach unnaturally to certain proteins in the blood, interfering with the proteins’ ability to perform their normal function of maintaining the integrity of the small blood vessels. With hyperglycemia occurring after each meal, the tiny blood vessels eventually break down and leak. The long-term adverse effects of hyperglycemia include blindness, loss of kidney function, nerve damage and loss of sensation and poor circulation in the periphery, potentially requiring amputation of the extremities.
Between two and three hours after a meal, an untreated diabetic’s blood glucose becomes so elevated that the pancreas receives a signal to secrete an inordinately large amount of insulin. In a patient with early Type 2 diabetes, the pancreas can still respond and secretes this large amount of insulin. However, this occurs at the time when digestion is almost over and blood glucose levels should begin to fall. This inordinately large amount of insulin has two detrimental effects. First, it puts an undue extreme demand on an already compromised pancreas, which may lead to its more rapid deterioration and eventually render the pancreas unable to produce insulin. Second, too much insulin after digestion leads to weight gain, which may further exacerbate the disease condition.
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The figure below, which is derived from an article in theNew England Journal of Medicine, illustrates the differences in the insulin release profiles of a healthy individual and a person in the early stages of Type 2 diabetes. In response to an intravenous glucose injection, which simulates eating a meal, the healthy individual produces the first-phase insulin release. In contrast, the Type 2 diabetic lacks the first-phase insulin release and releases the insulin more slowly and over time. As a result, in the early stages of the disease, the Type 2 diabetic’s insulin level is too low at the initiation of a meal and too high after meal digestion.
First Phase Insulin Release
Current Treatments for Diabetes and their Limitations
Because patients with Type 1 diabetes produce no insulin, the primary treatment for Type 1 diabetes is daily intensive insulin therapy. The treatment of Type 2 diabetes typically starts with management of diet and exercise. Although helpful in the short-run, treatment through diet and exercise alone is not an effective long-term solution for the vast majority of patients with Type 2 diabetes. When diet and exercise are no longer sufficient, treatment commences with various non-insulin oral medications. These oral medications act by increasing the amount of insulin produced by the pancreas, by increasing the sensitivity of insulin-sensitive cells, by reducing the glucose output of the liver or by some combination of these mechanisms. These treatments are limited in their ability to manage the disease effectively and generally have significant side effects, such as weight gain and hypertension. Because of the limitations of non-insulin treatments, many patients with Type 2 diabetes deteriorate over time and eventually require insulin therapy to support their metabolism.
Insulin therapy has been used for more than 80 years to treat diabetes. This therapy usually involves administering several injections of insulin each day. These injections consist of administering a long-acting basal injection one or two times per day and an injection of a fast acting insulin at meal-time. Although this treatment regimen is accepted as effective, it has limitations. First, patients generally dislike injecting themselves with insulin due to the inconvenience and pain of needles. As a result, patients tend not to comply adequately with the prescribed treatment regimens and are often improperly medicated.
More importantly, even when properly administered, insulin injections do not replicate the natural time-action profile of insulin. In particular, the natural spike of the first-phase insulin release in a person without diabetes results in blood insulin levels rising within several minutes of the entry into the blood of glucose from a meal. By contrast, injected insulin enters the blood slowly, with peak insulin levels occurring within 80 to 100 minutes following the injection of regular human insulin.
A potential solution is the injection of insulin directly into the vein of diabetic patients immediately before eating a meal. In studies of intravenous injections of insulin, patients exhibited better control of their blood glucose
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for 3 to 6 hours following the meal. However, for a variety of medical reasons, intravenous injection of insulin before each meal is not a practical therapy.
One of the key improvements in insulin treatments was the introduction in the 1990s of rapid-acting insulin analogs, such as Humalog®, Novolog® and Apidra®. However, even with the rapid-acting insulin analogs, peak insulin levels typically occur within 50 to 70 minutes following the injection. Because the rapid-acting insulin analogs do not adequately mimic the first-phase insulin release, diabetics using insulin therapy continue to have inadequate levels of insulin present at the initiation of a meal and too much insulin present between meals. This lag in insulin delivery can result in hyperglycemia early after meal onset. Furthermore, the excessive insulin between meals may result in an abnormally low level of blood glucose known as hypoglycemia. Hypoglycemia can result in loss of mental acuity, confusion, increased heart rate, hunger, sweating and faintness. At very low glucose levels, hypoglycemia can result in loss of consciousness, coma and even death. According to the American Diabetes Association, or ADA, insulin-using diabetic patients have on average 1.2 serious hypoglycemic events per year, many of which events require hospital emergency room visits by the patients.
Market Opportunity
The World Health Organization estimates that more than 180 million people worldwide have diabetes and that this number is likely to more than double by 2030. The CDC estimates that approximately 20.8 million people in the United States, or 7.0% of the overall population, suffer from diabetes, with 1.5 million new cases diagnosed in 2005. Diabetes is currently the sixth leading cause of death by disease and is the leading cause of new cases of kidney disease and non-traumatic lower limb amputations and blindness among young adults.
Despite the limitations of currently available insulin therapies, the ADA estimates that approximately $12 billion was spent on insulin and related delivery supplies in 2002. The rapid-acting insulin analogs have come to dominate the market for meal-time insulin. According to IMS Health, sales of rapid-acting insulin analogs were in excess of $2.3 billion in 2005.
Because the time-course of insulin delivery to the blood plays such an important role in overall glucose control, we believe that there is significant market potential for insulin products that reach the blood more rapidly than the insulin analogs. In addition, because of the pain and inconvenience of insulin injection, we believe that there is significant market potential for rapid-acting insulin products that are delivered by means other than injection.
The Biodel Solution
Our two most advanced clinical programs are VIAjecttm, an injectable formulation of insulin, and VIAtabtm, a sublingual formulation of insulin. We believe these product candidates may change the way Type 1 and Type 2 diabetic patients are treated by improving the efficacy, safety andease-of-use of insulin. Based upon our preclinical and clinical data, if approved, VIAjecttm may be the first commercially available drug to produce a profile of insulin levels in the blood that approximates the natural first-phase insulin release normally seen in persons without diabetes following a meal.
VIAjecttm
VIAjecttm is our proprietary formulation of injectable human insulin to be taken immediately prior to a meal or at the end of a meal. We formulated VIAjecttm using our VIAdeltm technology to combine recombinant human insulin with specific ingredients generally regarded as safe by the FDA. VIAjecttm is designed to be absorbed into the blood faster than the currently marketed rapid-acting insulin analogs. One of the key features of our formulation of insulin is that it allows the insulin to disassociate, or separate, from the six molecule, or hexameric, form to the single molecule, or monomeric, form and prevents re-association to the hexameric form. We believe that by favoring the monomeric form, VIAjecttm allows for more rapid delivery of insulin into the blood as the human body requires insulin to be in the form of a single molecule before it can be absorbed into the body to produce its desired biological effects. Because most human insulin that is sold for injection is in the hexameric form, the injected insulin appears to the body to be six times its actual size. This makes it more difficult for the body to absorb, as the insulin hexamer must first disassociate to form double insulin molecules and then single insulin molecules.
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Potential Advantages of VIAjecttm over Existing Insulin Treatments
We believe VIAjecttm offers a number of potential advantages over currently available injectable insulin products.
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| • | Better Management of Blood Glucose Levels. Based on our clinical trials to date, we believe that VIAjecttm can improve the management of blood glucose levels in patients with diabetes. Specific observations include the following: |
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| • | In our Phase I clinical trial in volunteers without diabetes, and in our Phase II clinical trial in patients with Type 1 diabetes, VIAjecttm reached the blood and exerted blood glucose lowering activity more rapidly than the rapid-acting insulin analog, Humalog®, and the regular human recombinant insulin, Humulin® R. Accordingly, we believe VIAjecttm more closely mimics the first-phase insulin release of healthy individuals at the beginning of a meal, which reduces the risk of hyperglycemia. |
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| • | Our clinical trials also indicate that VIAjecttm may allow for a lower dose of insulin to adequately cover a meal than Humulin® R and Humalog®. As a result, we believe the use of VIAjecttm may reduce the amount of insulin that remains in the blood several hours after a meal. This may, in turn, reduce the risk of hypoglycemia. Consequently, we believe that VIAjecttm may be safer than any other meal-time insulin products, and patients using VIAjecttm may have fewer hypoglycemic episodes resulting in fewer emergency room visits. |
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| • | Commercialization of VIAjecttm. Our VIAjecttm technology’s ability to stabilize delicate peptides to yield a longer shelf life may provide a commercialization advantage. Unlike currently approved injectable insulin products, VIAjecttm does not require a refrigerated supply line. As a result, we believe this will increase our market reach and collaboration opportunities with pharmaceutical partners who lack refrigerated supply lines. |
Clinical Trials of VIAjecttm
Phase I. In 2005, we completed a Phase I clinical trial of VIAjecttm. This was a single center, open label, five-way crossover study in which each of the ten healthy volunteers in the trial was exposed to the following five separate treatment conditions: three separate doses of VIAjecttm, one dose of Humulin® R, a regular human insulin, and one dose of Humalog®, a rapid-acting insulin analog. Volunteers received three separate injections of VIAjecttm at dose levels of 12 international units, or IU, 6 IU and 3 IU. Volunteers also received one 12 IU injection for each of Humulin® R and Humalog®. International units are a standardized measure of the potency of insulin. All volunteers received insulin subcutaneously. After a screening visit, insulin administration and the evaluation procedures were performed during five subsequent treatment days.
The study employed a “glucose clamp” procedure, which is the standard procedure for safely studying the effects of insulin in healthy individuals. In the “glucose clamp” procedure, glucose is automatically infused into the volunteer’s blood so that his or her blood glucose will be maintained at a healthy normal level of 90mg of glucose per deciliter of blood. The effect of insulin is to lower blood glucose, thereby requiring an infusion of glucose to maintain the normal glucose level. The rate at which glucose must be infused is called the glucose infusion rate, or GIR.
The primary objective of this trial was to estimate the pharmacodynamic activities of the applied insulins including the dose responsiveness of VIAjecttm. Pharmacodynamics refers to the time-course and ability of the insulin to lower blood glucose after administration. The primary pharmacodynamic measure in this trial was the GIR, from which we were able to derive several parameters, including the following:
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| • | maximum GIR; |
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| • | time to maximum GIR; and |
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| • | time to 50% of maximum GIR. |
The secondary objectives of this trial were to evaluate the safety and the pharmacokinetic profile after a single application of VIAjecttm in comparison to Humulin® R and Humalog®. Pharmacokinetics refers to the time-course and quantity of insulin in the serum of the blood of an individual after application of insulin.
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The table below indicates, for each treatment condition in the trial, the mean time to 50% of maximum GIR:
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| | Minutes to 50% of
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Treatment Condition
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Humulin® R 12 IU | | | 66 | | | | | |
Humalog® 12 IU | | | 51 | | | | | |
VIAjecttm 12 IU | | | 33 | | | | | |
VIAjecttm 6 IU | | | 35 | | | | | |
VIAjecttm 3 IU | | | 31 | | | | | |
All three VIAjecttm dose levels were faster than both Humulin® R and Humalog® in the time to reach 50% of the maximum GIR, which provides evidence of the insulin in VIAjecttm reaching the blood faster than that of Humulin® R and Humalog®. This faster action for each dose of VIAjecttm was statistically significant as compared to both Humilin® R and Humalog®.
The pharmacokinetic analysis showed a faster onset, peak and decline in plasma insulin concentrations for all three VIAjecttm doses as compared to both Humulin® R and Humalog®, mimicking first phase insulin release.
In 2006, we analyzed the data from the Phase I clinical trial, utilizing a pharmacokinetic modeling program known as WinNonLin®. In this analysis, we measured the absorption half life of insulin, which is a pharmacokinetic measure of the speed at which insulin is absorbed into the blood. The absorption half life for a 12 IU dose was 22 minutes for VIAjecttm, 37 minutes for Humalog® and 71 minutes for Humulin® R. This faster action of VIAjecttm was statistically significant as compared to both Humulin® R and Humalog®.
All treatments were well tolerated. No serious adverse events were reported in this trial.
Phase I/II Variability Study. Repeated administration of the same dose of both regular human insulin and rapid-acting insulin analogs are known to produce variable blood insulin level results in the same patients. This is known as the within-subject or intra-subject variability of insulin. In 2006, we completed a Phase I/II clinical trial of VIAjecttm to compare the intra-subject variability of the timing and effect of repeated doses of VIAjecttm to that of Humulin® R. This was a single-center, randomized, double blind, crossover, repeated measures study in fourteen patients with Type 1 diabetes. In the trial, each patient received subcutaneous injections of VIAjecttm and Humulin® R at a dose level of 0.1 IU/Kg body weight on three separate occasions. After a screening visit, insulin administration and evaluation procedures were performed during six subsequent treatment days. GIR was measured for each patient utilizing the glucose clamp procedure.
The primary objectives of this trial were (i) to compare the intra-subject variability of blood insulin concentration over time as measured by the standard deviation of the time to reach 50% of the maximum serum insulin concentration, (ii) to compare the intra-subject variability of insulin effect over time as measured by the standard deviation of the time to reach 50% of the maximum GIR. The secondary objectives of this trial were to evaluate the safety and the pharmacokinetic profile after multiple applications of VIAjecttm in comparison to Humulin® R.
In the trial, the within-subject variability of VIAjecttm was less than that of Humulin® R. The standard deviation of the time to reach 50% of the maximum serum insulin concentration was 6 for VIAjecttm, as compared to 20 for Humulin® R, and for maximal concentrations, 16 for VIAjecttm, as compared to 39 for Humulin® R. In addition, the variability of the time to maximal pharmacodynamic effect was less for VIAjecttm than for Humulin® R (74 vs. 36). These results were statistically significant. The standard deviation of the time to reach 50% of the maximum GIR was 17 for VIAjecttm, as compared to 32 for Humulin® R. However, this result was not statistically significant.
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In the trial, we observed the following pharmacokinetic and pharmacodynamic results, which provide further evidence that VIAjecttm reaches the blood faster than Humulin® R in patients with diabetes:
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Pharmacokinetic and
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Pharmacodynamic Measures | | VIAjectTM | | | Humulin® R | | | p-Value | |
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Minutes to maximum GIR | | | 99 | | | | 154 | | | | <0.0015 | |
Minutes to maximum serum insulin concentration | | | 33 | | | | 97 | | | | <0.0001 | |
Minutes to 50% of maximum serum insulin concentration | | | 8 | | | | 32 | | | | <0.0001 | |
All treatments were well tolerated. No serious adverse events were reported in this trial.
Phase II Meal Study. In 2006 we began a Phase II clinical trial to examine VIAjecttm’s ability to control blood glucose after Type 1 diabetic patients received a standardized meal. This is a single-center, randomized, open-label, crossover study. To date, we have performed a planned interim analysis on ten patients with Type I diabetes who have completed the study. The final results of the trial may be different than those suggested by our interim analysis. The study is still ongoing and we expect to enroll an additional 8 to 10 patients for a final total of 18 to 20 patients. In the trial, we are comparing the pharmacodynamic properties of VIAjecttm, Humulin® R and Humalog®, relative to a standardized meal.
Patients receive four treatments based on the experimental conditions listed below on four separate days separated by about a week between each experimental day. In all conditions there is a three hour baseline period, which means that we measure the patients’ blood glucose levels for three hours before administering the test medication. On the first treatment day, the patients calculate the amount of insulin they use to cover a standardized meal. All patients receive insulin subcutaneously. The experimental conditions, in randomized order, are as follows:
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| • | patients receive injections of Humulin® R prior to a standardized meal at the dose that the patient determines on the first treatment day is the insulin requirement to cover the standard meal; |
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| • | patients receive injections of VIAjecttm prior to a standardized meal at the dose that the patient determines on the first treatment day is the insulin requirement to cover the standard meal; |
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| • | patients receive injections of Humalog® prior to a standardized meal at the dose that the patient determines on the first treatment day is the insulin requirement to cover the standard meal; and |
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| • | patients receive injections of VIAjecttm prior to a standardized meal at 50% of the dose that the patient determines on the first treatment day is the insulin requirement to cover the standard meal. |
The patients’ blood glucose was continuously monitored over the next eight hours in order to determine whether patients experienced hyperglycemic or hypoglycemic events. If the patient’s blood glucose went below 60 mg/dl, a glucose infusion was initiated to keep the blood glucose above 60 mg/dl.
We compared the area under the curve, or AUC, of blood glucose at specified periods of time after a meal between the different treatments. The AUC of blood glucose concentrations for specified time intervals is a measure of the total amount of glucose in the blood over that specified time interval. The AUC for the first three hours after injection is taken is a measure of the degree of hyperglycemia experienced by the patient. The results of this interim analysis are reported below.
VIAjecttm statistically significantly reduced hyperglycemia after a standardized meal when compared to Humulin® R. Humalog® did not significantly reduce hyperglycemia after a standardized meal when compared to Humulin® R. No statistically significant reduction was observed when comparing VIAjecttm to Humalog® with respect to hyperglycemia. VIAjecttm statistically significantly reduced hypoglycemia after a standardized meal when compared to Humulin® R. While the number of hypoglycemic events was fewer for VIAjecttm compared to Humalog®, it did not reach statistical significance.
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We also compared the AUC for blood glucose above and below the normal range of 80-140 mg/dl for the eight hours after the ingestion of the meal, which is a measure of glycemic variability. Humulin® R was 81,849 mg/dl* min. Humalog® was 57,423 mg/dl*min. less than Humulin® R. VIAjecttm was 38,740, less than both Humulin® R and Humalog®.
The hypoglycemic events data from the meal study is summarized in the table below:
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| | Hypoglycemic Events per Treatment | |
Hours Past Dose | | Humulin® R | | | Humalog® | | | VIAjecttm | |
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0-3 hours | | | 0 | | | | 7 | | | | 4 | |
3-8 hours | | | 13 | | | | 11 | | | | 4 | |
0-8 hours | | | 13 | | | | 18 | | | | 8 | |
Current Pivotal Phase III Clinical Trials. We held a meeting with the FDA on February 28, 2006 to discuss the results of our Phase II clinical studies and the design of our pivotal Phase III clinical trials for VIAjecttm. Based on that meeting, we commenced our two pivotal Phase III clinical trials of VIAjecttm in September 2006. The trials are open-label, multi-center trials designed to compare the efficacy and safety of VIAjecttm as compared to Humulin® R. One of the trials is testing VIAjecttm in patients with Type 1 diabetes and the other in patients with Type 2 diabetes. We expect to enroll approximately 400 patients in each trial. Patients will undergo a six-month treatment regimen. Approximately one-half of the patients in each trial will be treated with VIAjecttm and the remainder with Humulin® R as their meal-time injection insulins.
The primary objective of the trials is to determine if VIAjecttm is not inferior to Humulin® R in the management of blood glucose levels. The primary endpoint in the trials is the mean change in patients’ glycosolated hemoglobin, or HbA1c, levels from baseline to the end of the study. Changes in HbA1c levels are a measure of patients’ average blood glucose levels over the treatment period and an indication of how well the patients are controlling blood glucose levels. HbA1c is the FDA’s preferred endpoint for diabetes trials.
Secondary endpoints in the trials include additional blood glucose measures, total daily insulin doses and changes in body weight. We are also assessing the safety of VIAjecttm as compared to Humulin® R in these trials.
On March 25, 2007, we performed a preliminary analysis of the data relating to changes in body weight for a total of 51 patients with Type 1 diabetes who had received at least of six weeks of treatment in the Phase III clinical trial. Of these 51 patients, 27 were in the Viajecttm treatment group and 24 were in the Humulin® R treatment group. The patients in the VIAjecttm group lost on average 0.79 pounds while the patients in the Humulin® R treatment group gained on average 2.28 pounds over the six weeks of treatment. This difference between the treatment groups of 3.07 pounds was statistically significant, with a p-value of less than 0.038. The Phase III clinical trials are ongoing. Although these preliminary findings regarding changes in body weight are encouraging, our analysis was performed on a relatively small number of patients, after only six weeks of a six-month clinical trial. With more patients and longer treatment times, the final results of the trials may be different than those suggested by the changes in body weight observed to date.
In addition, we monitor safety on a daily basis in these clinical trials. The major safety concern with patients taking insulin is the occurrence of hypoglycemic events. As of March 12, 2007, we have had a total of 113 mild and moderate hypoglycemic events in our Phase III clinical trials, 73 in patients receiving Humulin® R and 40 in patients receiving VIAjecttm. This difference between VIAjecttm and Humulin® R is statistically significant, with a p-value of less than 0.01. Also as of March 12, 2007 we have had a total of four severe hypoglycemic events in our Phase III clinical trials. Of these four events, three were in patients receiving Humulin® R and one was in a patient with Type 1 diabetes in the VIAjecttm group. It was determined that the cause of the severe hypoglycemic event was most likely not due to VIAjecttm but due to the patient’s self-prescribed dose increase in basal insulin. The Phase III clinical trials are ongoing. The final safety results of the trials may be different than those suggested by the hypoglycemic events observed to date.
We expect to complete these two trials and, if the trials are successful, we intend to submit an NDA to the FDA for approval of VIAjecttm in 2008.
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VIAtabtm
VIAtabtm is our formulation of recombinant human insulin, designed to be taken orally via sublingual administration. VIAtabtm tablets dissolve in approximately three minutes, providing the potential for rapid absorption of insulin into the blood. In addition, unlike other oral insulin products under development that must be swallowed, the sublingual delivery of VIAtabtm may avoid the destructive effects on insulin by the stomach and liver. We are developing VIAtabtm as a potential treatment for patients with Type 2 diabetes in the early stages of their disease. We believe that VIAtabtm may be a suitable treatment for these patients because of its potential rapid delivery and because it does not require injections.
In our preclinicalin vitroand animal studies, we successfully delivered insulin by sublingual administration. We are currently conducting a Phase I clinical trial of VIAtabtm in patients with Type 1 diabetes. In the trial, we are testing for changes in patients’ blood insulin levels following administration of VIAtabtm. Because Type 1 diabetics do not produce their own insulin, changes in their insulin levels provide evidence of VIAtabtm’s delivery of insulin to their blood. If the trial is successful, we plan to initiate later stage clinical trials of VIAtabtm in 2008.
Additional Pipeline Opportunities
In addition to our clinical insulin product candidates, we have used our VIAdeltm technology to develop two preclinical product candidates for the treatment of osteoporosis.
VIAmasstm
VIAmasstm is a sublingual, rapid-acting formulation of PTH 1-34. PTH 1-34 is the active portion of the human parathyroid hormone and is used to treat and reverse osteoporosis. It is currently delivered by injection and manufactured by Eli Lilly under the trade name Forteo®. Parathyroid hormone is normally released by the body in a spike-like fashion. This rapid release profile is particularly important to achieving its desired clinical effect of bone strengthening and growth. In animal studies, when administered continuously as opposed to rapidly, PTH 1-34 caused bone loss, just the opposite of its desired clinical effect. Because PTH 1-34 requires rapid entry into the blood in order to provide effective treatment and because we believe that we can administer it in a sublingual fashion, we believe it is a good candidate for our VIAdeltm technology. We believe that a non-invasive formulation is preferred by most of the patients using this product who are older women with osteoporosis. To date, we have made formulations of PTH 1-34, characterized them, studied their stability and tested them in human sublingual cell culture models.
VIAcaltm
VIAcaltm is a sublingual, rapid acting formulation of recombinant salmon calcitonin. Salmon calcitonin is another peptide hormone used to treat osteoporosis. It is administered by injection and as a nasal spray and is sold by various companies, including Novartis. The pharmacologic activity of salmon calcitonin is the same as that of the naturally produced human hormone, but salmon calcitonin is substantially more potent on a weight basis and has a longer duration of action in humans. Salmon calcitonin acts predominantly on bone to depress bone resorption. Because salmon calcitonin requires rapid entry into the blood and because we believe that we can administer it in a sublingual fashion, we believe it is a good candidate for our VIAdeltm technology. To date, we have made formulations of salmon calcitonin, characterized them, studied their stability and tested them in human sublingual cell culture models.
Our VIAdeltm Technology
Peptide hormones, such as insulin, parathyroid hormone, calcitonin and growth hormone, are valuable drugs used to treat a variety of important human diseases. Peptide hormones are, in general, relatively unstable and poorly absorbed into the blood from the gastrointestinal tract. As a result, they are typically given by subcutaneous injection. Because peptide hormones are charged molecules, their absorption from injection sites is inhibited and slowed. This is in contrast to their natural release into the blood, which is typically in one or more very rapid, spike-like, secretions. Slowing of the rate of absorption reduces the clinical efficacy of many peptide hormones, including insulin, parathyroid hormone and calcitonin in particular.
Our VIAdeltm technology consists of several proprietary models that we have developed to study the interaction of small molecules with peptide hormones and their effects on the stability, apparent molecular size,
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complexed state, surface charge distribution and rate of absorption and mechanisms of absorption of peptide hormones. These models have allowed us to develop proprietary formulations designed to increase the rate of absorption and stability of these peptide hormones, potentially allowing for improved efficacy by injection and for administration by non-invasive routes, such as sublingual administration.
We use our VIAdeltm technology to develop proprietary formulations of small molecules which form weak and reversible hydrogen bonds with their molecular cargo. By doing so, we believe that our formulations mask the charge on peptides. As a consequence, the peptides in our formulations face less resistance from cell membranes, which would generally repel them, thus allowing them to pass through cell membranes into the blood more rapidly and in greater quantities than other currently approved formulations of the same peptides. Our VIAdeltm technology is designed to allow us to develop formulations that stabilize delicate peptides which can result in longer shelf lives for our formulations. Furthermore, because we use our VIAdeltm technology to reformulate existing peptide drugs with ingredients that are generally regarded as safe by the FDA and because our reformulations do not drastically alter the structure of these peptides, we believe that our VIAdeltm technology allows us to develop product candidates for which the Section 505(b)(2) approval pathway is available.
Government Regulation
The FDA and other federal, state, local and foreign regulatory agencies impose substantial requirements upon the clinical development, approval, labeling, manufacture, marketing and distribution of drug products. These agencies regulate research and development activities and the testing, approval, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, advertising and promotion of our product candidates. The regulatory approval process is generally lengthy and expensive, with no guarantee of a positive result. Moreover, failure to comply with applicable FDA or other requirements may result in civil or criminal penalties, recall or seizure of products, injunctive relief including partial or total suspension of production, or withdrawal of a product from the market.
United States Government Regulation
The FDA regulates the research, manufacture, promotion and distribution of drugs in the United States under the FFDCA and other statutes and implementing regulations. The process required by the FDA before prescription drug product candidates may be marketed in the United States generally involves the following:
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| • | completion of extensive nonclinical laboratory tests, animal studies and formulation studies, all performed in accordance with the FDA’s Good Laboratory Practice, or GLP, regulations; |
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| • | submission to the FDA of an IND which must become effective before human clinical trials may begin; |
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| • | for some products, performance of adequate and well-controlled human clinical trials in accordance with the FDA’s regulations, to establish the safety and efficacy of the product candidate for each proposed indication; |
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| • | satisfactory completion of an FDA preapproval inspection of the manufacturing facilities at which the product is produced to assess compliance with cGMP regulations; and |
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| • | FDA review and approval of the NDA prior to any commercial marketing, sale or shipment of the drug. |
The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all.
Nonclinical tests include laboratory evaluations of product chemistry, formulation and stability, as well as studies to evaluate toxicity in animals and other animal studies. The results of nonclinical tests, together with manufacturing information and analytical data, are submitted as part of an IND to the FDA. Some nonclinical testing may continue even after an IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the30-day time period, specifically places the clinical trial on a clinical hold. In such case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Clinical holds also may be imposed at any time before or during studies due to safety concerns or non-compliance. An independent institutional review board, or IRB, at each of the clinical centers proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that center. An IRB considers, among other things, whether the risks to individuals participating in the trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the consent form signed by the trial participants and must
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monitor the study until completed. We submitted our first IND to the FDA in February 2005, and our second IND in March 2005. We have commenced clinical trials under both INDs.
Clinical Trials. Clinical trials involve the administration of the product candidate to human subjects under the supervision of qualified medical investigators according to approved protocols that detail the objectives of the study, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor participant safety. Each protocol is submitted to the FDA as part of the IND.
Clinical trials are typically conducted in three sequential phases, but the phases may overlap, or be combined.
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| • | Phase I clinical trials typically involve the initial introduction of the product candidate into healthy human volunteers. In Phase I clinical trials, the product candidate is typically tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and pharmacodynamics. |
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| • | Phase II clinical trials are conducted in a limited patient population to gather evidence about the efficacy of the product candidate for specific, targeted indications; to determine dosage tolerance and optimal dosage; and to identify possible adverse effects and safety risks. |
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| • | Phase III clinical trials are undertaken to evaluate clinical efficacy and to test for safety in an expanded patient population at geographically dispersed clinical trial sites. The size of Phase III clinical trials depends upon clinical and statistical considerations for the product candidate and disease, but sometimes can include several thousand patients. Phase III clinical trials are intended to establish the overall risk-benefit ratio of the product candidate and provide an adequate basis for physician labeling. |
Clinical testing must satisfy extensive FDA regulations. Reports detailing the results of the clinical trials must be submitted at least annually to the FDA and safety reports must be submitted for serious and unexpected adverse events. We cannot at this time predict when the clinical testing process will be completed, if at all. Success in early stage clinical trials does not assure success in later stage clinical trials. The FDA or an IRB or we may suspend a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk.
New Drug Applications. The results of product development, nonclinical studies and clinical trials are submitted to the FDA as part of an NDA. An NDA also must contain extensive manufacturing information, as well as proposed labeling for the finished product. An NDA applicant must develop information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in accordance with cGMP. The manufacturing process must be capable of consistently producing quality product within specifications approved by the FDA. The manufacturer must develop methods for testing the quality, purity and potency of the final product. In addition, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product does not undergo unacceptable deterioration over its shelf life. Prior to approval, the FDA will conduct an inspection of the manufacturing facilities to assess compliance with cGMP. The submission of an NDA also is subject to the payment of user fees, but a waiver of the fees may be obtained under specified circumstances.
The FDA reviews all NDAs submitted before it accepts them for filing. The FDA may request additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted with the additional information and is subject to review before the FDA accepts it for filing. After an application is filed, the FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. The FDA may deny approval of an NDA if the applicable regulatory criteria are not satisfied. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data. The FDA may issue an approvable letter, which may require additional clinical or other data or impose other conditions that must be met in order to secure final approval of the NDA. If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. In addition, the FDA may require us to conduct Phase IV testing which involves clinical trials designed to further assess a drug’s safety and effectiveness after NDA approval, and may require surveillance programs to monitor the safety of approved products which have been commercialized. Once issued, the FDA may
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withdraw product approval if ongoing regulatory requirements are not met or if safety or efficacy questions are raised after the product reaches the market.
Section 505(b)(2) NDAs. There are two types of NDAs: the full NDA and the Section 505(b)(2) NDA. We intend to file Section 505(b)(2) NDAs that might, if accepted by the FDA, save time and expense in the development and testing of our product candidates. A full NDA is submitted under Section 505(b)(1) of the FFDCA, and must contain full reports of investigations conducted by the applicant to demonstrate the safety and effectiveness of the drug. A Section 505(b)(2) NDA may be submitted for a drug for which one or more of the investigations relied upon by the applicant was not conducted by or for the applicant and for which the applicant has no right of reference from the person by or for whom the investigations were conducted. A Section 505(b)(2) NDA may be submitted based in whole or in part on published literature or on the FDA’s finding of safety and efficacy of one or more previously approved drugs, which are known as reference drugs. Thus, the filing of a Section 505(b)(2) NDA may result in approval of a drug based on fewer clinical or nonclinical studies than would be required under a full NDA. The degree to which an applicant may avoid conducting such studies varies depending on the drug, and the amount and quality of data publicly available for the applicant to rely on, and the similarity of and differences between the applicant’s drug and the reference drug. In some cases, extensive, time-consuming, and costly clinical and nonclinical studies may still be required for approval of a Section 505(b)(2) NDA.
Because we are developing improved formulations of previously approved chemical entities, such as insulin,glucagon, our drug approval strategy is to submit Section 505(b)(2) NDAs to the FDA. We plan to pursue similar routes for submitting applications for our product candidates in foreign jurisdictions if available. The FDA may not agree that our product candidates are approvable aspursuant to Section 505(b)(2) NDAs. Insulin is a unique and complex drug in that it is a complex hormone molecule, which makes it more difficult to demonstrate that two insulin substances are highly similar than would be the case with many small molecule drugs. The availability of the Section 505(b)(2) pathway for insulin is even more controversial than for small molecule drugs, and the FDA may not accept this pathway for our insulin drug candidates. There is no specific guidance available for insulin Section 505(b)(2) NDAs and nofor insulin or glucagon. In addition, while there is precedent for a glucagon product being approved under a Section 505(b)(2) NDA, we are not aware of any insulin product that has been approved under a Section 505(b)(2) NDA. If the FDA determines that Section 505(b)(2) NDAs are not appropriate and that full NDAs are required for our product candidates, the time and financial resources required to obtain FDA approval for our product candidates could substantially and materially increase, and our productsproduct candidates might be less likely to be approved. If the FDA requires full NDAs for our product candidates, or requires more extensive testing and development for some other reason, our ability to compete with alternative products that arrive on the market more quickly than our product candidates would be adversely impacted.
Patent Protections. An applicant submitting a Section 505(b)(2) NDA must certify to the FDA with respect to the patent status of the reference drug upon which the applicant relies in support of approval of its drug. With respect to every patent listed in FDA’s Orange Book, which is the FDA’s list of approved drug products, as claiming the reference drug or an approved method of use of the reference drug, the Section 505(b)(2) applicant must certify that: (1) there is no patent information listed by the FDA for the reference drug; (2) the listed patent has expired; (3) the listed patent has not expired, but will expire on a particular date; (4) the listed patent is invalid, unenforceable, or will not be infringed by the manufacture, use, or sale of the product in the Section 505(b)(2) NDA; or (5) if the patent is a use patent, that the applicant does not seek approval for a use claimed by the patent. If the applicant files a certification to the effect of clause (1), (2) or (5), FDA approval of the Section 505(b)(2) NDA may be made effective immediately upon successful FDA review of the application, in the absence of marketing exclusivity delays, which are discussed below. If the applicant files a certification to the effect of clause (3), the Section 505(b)(2) NDA approval may not be made effective until the expiration of the relevant patent and the expiration of any marketing exclusivity delays.
If the Section 505(b)(2) NDA applicant provides a certification to the effect of clause (4), the applicant also must send notice of the certification to the patent owner and the holder of the NDA for the reference drug. The filing of a patent infringement lawsuit within 45 days of the receipt of the notification may prevent the FDA from approving the Section 505(b)(2) NDA for 30 months from the date of the receipt of the notification unless the court determines that a longer or shorter period is appropriate because either party to the action failed to reasonably cooperate in expediting the action. However, the FDA may approve the Section 505(b)(2) NDA before the 30 months have expired if a court decides that the patent is invalid, unenforceable, or not infringed, or if a court enters a settlement order or consent decree stating the patent is invalid or not infringed.
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Notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), over the last few years certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged in court, the FDA may be required to change its interpretation of Section 505(b)(2) which could delay or even prevent the FDA from approving any Section 505(b)(2) NDA that we submit. The pharmaceutical industry is highly competitive, and it is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. Moreover, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition.
Marketing Exclusivity. Market exclusivity provisionsEven if one of our product candidates is approved under the FFDCA can delay the submission orSection 505(b)(2), the approval of Section 505(b)(2) NDAs, thereby delaying a Section 505(b)(2) product from enteringmay be subject to limitations on the market. The FFDCA provides five-year marketing exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, or NCE, meaning that the FDA has not previously approved any other drug containing the same active moiety. This exclusivity prohibits the submission of a Section 505(b)(2) NDA for any drug product containing the active moiety during the five-year exclusive period. However, submission of a Section 505(b)(2) NDA that certifies that a listed patent is invalid, unenforceable, or will not be infringed, as discussed above, is permitted after four years, but if a patent infringement lawsuit is brought within 45 days after such certification, FDA approval of the Section 505(b)(2) NDA may automatically be stayed until 71/2 years after the NCE approval date. The FFDCA also provides three years of marketing exclusivity for the approval of new and supplemental NDAs for product changes, including new indications, dosages or strengths of an existing drug, if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by FDA to be essential to the approval of the product change. Five-year and three-year exclusivity will not delay the submission or approval of another full NDA; however, as discussed above, an applicant submitting a full NDA under Section 505(b)(1) would be required to conduct or obtain a right of reference to all of the preclinical and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.
Other types of exclusivity in the United States include orphan drug exclusivity and pediatric exclusivity. The FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for this type of disease or condition will be recovered from sales in the United States for that drug. Seven-year orphan drug exclusivity is available to a product that has orphan drug designation and that receives the first FDA approval for the diseaseindicated uses for which the drug has such designation. Orphan drug exclusivity preventsproduct may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of another applicationthe product.
Any product for the same drug for the same orphan indication regardless of whether the application is a full NDAwhich we obtain marketing approval could be subject to restrictions or a Section 505(b)(2) NDA. Pediatric exclusivity, if granted, provides an additional six months to an existing exclusivity or statutory delay in approval resulting from a patent certification. This six-month exclusivity, which runswithdrawal from the end of other exclusivity protection or patent delay,market and we may be granted based onsubject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and if any of them are approved.
Any product for which we obtain marketing approval, along with the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request”manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such a study. The current pediatric exclusivity provision is scheduledproduct, will be subject to end on October 1, 2007, but it may be reauthorized.
Section 505(b)(2) NDAs are similar to full NDAs filed under Section 505(b)(1) in that they are entitled to anycontinual requirements of these forms of exclusivity if they meet the qualifying criteria. They also are entitled to the patent protections described above, based on patents that are listed in the FDA’s Orange Book in the same manner as patents claiming drugs and uses approved for NDAs submitted as full NDAs.
Other Regulatory Requirements. Maintaining substantial compliance with appropriate federal, state and local statutes and regulations requires the expenditure of substantial time and financial resources. Drug manufacturers are required to register their establishments withreview by the FDA and certainother state agencies, and after approval,federal regulatory authorities. These requirements include, in the case of the FDA, submissions of safety and these state agencies conduct periodic inspectionsother post-marketing information and reports, registration requirements, cGMP requirements relating to ensure continued compliance with ongoingquality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if regulatory requirements, including cGMPs. In addition, after approval some types of changes toa product is granted, the approved product, such as adding new indications, manufacturing changes and additional labeling claims, areapproval may be subject to further FDA review and approval. The FDAlimitations on the indicated uses for which the product may requirebe marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance programs to monitor the effectsafety or efficacy of the product. In addition, if any of our product
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