SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 000-50405
ACUSPHERE, INC.
(Exact name of registrant as specified in its charter)
Delaware | | 04-3208947 |
(State or other jurisdiction of incorporation | | (IRS Employer Identification No.) |
or organization) | | |
| | |
500 Arsenal Street | | |
Watertown, Massachusetts | | 02472 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (617) 648-8800
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of class)
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act. Yes o No x
The aggregate market value of Common Stock as of the last business day of the registrant’s most recently completed second fiscal quarter (based on the last reported sale price on The NASDAQ National Market as of such date) held by non-affiliates of the registrant as of such date was approximately $65.1 million. As of March 16, 2006 there were 22,901,720 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates information by reference from the Company’s definitive proxy statement, which proxy statement is due to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2005.
INTRODUCTORY NOTE
This report, including the documents incorporated by reference in this report, includes forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Forward-looking statements involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In this Annual Report on Form 10-K, words such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential,” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements. Forward-looking statements in these documents include, but are not limited to, those relating to:
· the timing of our clinical trials and regulatory milestones for AI-700, including the timing of enrollment, the public announcement of clinical data, the qualification of our manufacturing facility and the filing of our NDA with the FDA;
· our estimates regarding our capital requirements and our needs for additional financing;
· our plans to develop and market new product candidates and the timing of these development programs;
· our clinical development of product candidates, clinical trials and our ability to obtain and maintain regulatory approval for our product candidates;
· our estimates of expenses and future revenues and profitability;
· our estimates of the size of the potential markets for our product candidates;
· our selection and licensing of product candidates;
· our ability to attract collaborators with acceptable development, regulatory and commercialization expertise;
· the benefits to be derived from corporate collaborations, license agreements and other collaborative efforts, including those relating to the development and commercialization of our product candidates;
· sources of revenues and anticipated revenues, including contributions from corporate collaborations, license agreements and other collaborative efforts for the development and commercialization of products;
· our ability to create an effective direct sales and marketing infrastructure for products we elect to market and sell directly;
· the rate and degree of market acceptance of our product candidates;
· the timing and amount of reimbursement for our product candidates;
· the success of other competing therapies that may become available; and
· the manufacturing capacity for our product candidates, including our plans to start-up and qualify a commercial manufacturing facility for AI-700.
Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking statements. Any forward-looking statement should be considered in light of factors discussed in Item 7 under “Certain Factors Which May Affect Future Results” and elsewhere in this Annual Report on Form 10-K. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission, to publicly update or revise any such statements to reflect any change in company expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.
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TABLE OF CONTENTS
EXHIBIT 14.01 | | Code of Business Conduct and Ethics | |
EXHIBIT 21.01 | | List of Subsidiaries | |
EXHIBIT 23.01 | | Consent of Deloitte & Touche LLP | |
EXHIBIT 31.1 | | Rule 13a-14(a)/15d-14(a) Certification | |
EXHIBIT 31.2 | | Rule 13a-14(a)/15d-14(a) Certification | |
EXHIBIT 32.1 | | Section 1350 Certifications | |
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PART I
ITEM 1. BUSINESS
Overview
We are a specialty pharmaceutical company that develops new drugs and improved formulations of existing drugs using our proprietary porous microparticle technology. We are focused on developing proprietary drugs that can offer significant benefits over existing drugs, including improved safety and efficacy, increased patient compliance, greater ease of use, expanded indications or reduced cost. Our three product candidates for which we have clinical data are designed to address large unmet clinical needs in the areas of cardiology, oncology and asthma. Our lead product candidate is an ultrasound contrast agent in Phase 3 clinical development for the detection of coronary heart disease, the leading cause of death in the United States.
Our proprietary technology enables us to control the size and porosity of particles, including nanoparticles and microparticles, in a versatile manner, so that we can customize the particles to address the delivery needs of a variety of drugs. We have initially applied this technology in our research and development efforts in the following areas:
· AI-700, Intravenous Delivery of Gas for Ultrasound Contrast. We specifically designed AI-700 to assess myocardial perfusion, or blood flow in the heart muscle, a sensitive marker for coronary heart disease. AI-700 is an ultrasound contrast agent that enables stress echocardiography, or ultrasound of the heart, to obtain information on myocardial perfusion. Currently, there is no ultrasound contrast agent that is approved by the U.S. Food and Drug Administration, or FDA, to assess myocardial perfusion. AI-700 is in Phase 3 clinical development.
· AI-850, First Clinical-Stage Product Candidate from our Hydrophobic Drug Delivery System, HDDS. Hydrophobic drugs, which are drugs that do not dissolve well in water, are often difficult to formulate, especially for intravenous delivery. We have demonstrated that our Hydrophobic Drug Delivery System, or HDDS, improves the dissolution rate of a variety of hydrophobic drugs. We have completed a Phase 1 clinical trial for AI-850, which utilizes our HDDS technology and is designed to improve the dissolution rate of a leading cancer drug.
· AI-128, First Clinical-Stage Product Candidate from our Pulmonary Drug Delivery System, PDDS. Most asthma drugs delivered via inhalation are immediate release formulations that must be inhaled multiple times per day, reducing patient compliance. We have completed a Phase 1 study for AI-128, a sustained release formulation of an FDA-approved asthma drug.
Our Porous Microparticle Technology
Microparticles are useful in the delivery of a wide range of drugs. The suitability of microparticles for use in drug delivery depends on a variety of characteristics, including size and porosity. Our technology enables us to control the size and porosity of microparticles and nanoparticles in a versatile manner so that we can customize the particles to address the delivery needs of a variety of drugs. We are focused on creating porous particles that are smaller than red blood cells. Microparticles, or drugs embedded in these particles, when less than one micron in size are nanoparticles. These microparticles and nanoparticles can be used to deliver gases or to deliver drugs to patients through various routes of delivery. Small microparticles are important for delivering drugs intravenously so that they can pass safely through the body’s smallest blood vessels, for increasing the surface area of a drug so that it will dissolve more rapidly, and for delivering drugs via inhalation. Porosity is important for a variety of applications, including entrapping gases in microparticles, controlling the release rate of the drug from a microparticle, and targeting inhaled drugs to specific regions of the lung. We have developed proprietary spray drying
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equipment and pore forming processes that enable us to produce these porous microparticles in a versatile manner.
Using our proprietary technology:
· We have produced small, porous microparticles containing gas, which are analogous in structure to honeycombs. Using these microparticles, we are developing AI-700, an ultrasound contrast agent for detection of coronary heart disease through the assessment of myocardial perfusion.
· We have produced small microparticles with tiny pores throughout, which are analogous in structure to sponges. Using these microparticles, we are developing our HDDS technology, which may enable improved dissolution of hydrophobic drugs in water.
· We have produced small microparticles with large pores throughout, which are analogous in structure to whiffle balls. Using these microparticles, we are developing our PDDS technology, which may enable improved delivery of drugs via the pulmonary route.
Our Strategy
In the last thirty years, a large worldwide market has emerged based on technologies that improve the delivery of established drugs in novel, cost-effective ways by providing significant benefits, such as improved safety and efficacy, increased patient compliance, greater ease of use, expanded indications or reduced cost. Drug delivery technologies can improve the commercial prospects for existing drugs by introducing new formulations that offer new delivery methods that may be patented and thereby protected. Traditionally, drug delivery companies have earned royalties by applying their delivery technologies to create new formulations of existing drugs owned by others. Recently, some companies have begun developing new drugs by using their proprietary drug delivery technologies in combination with off-patent drugs. These companies are often referred to as specialty pharmaceutical companies.
Our goal is to become a leading specialty pharmaceutical company that develops and commercializes new drugs and improved formulations of existing drugs using our porous microparticle technology. Our strategy to accomplish that goal includes the following:
Advance Development of Our Lead Product Candidate, AI-700. We are currently enrolling patients in a Phase 3 clinical trial program for our lead product candidate, AI-700, a cardiovascular drug for the detection of coronary heart disease. Data from this program is intended to be used to seek approval for AI-700 in the United States, Europe and other markets.
Focus on Proprietary Product Opportunities. We intend to focus on proprietary product opportunities, where we own broad patent rights to the products. Due to our ownership interest in these product candidates and technology, we believe we would be able to negotiate corporate collaborations from a stronger position than service-oriented companies that develop drug delivery technologies for patented drugs owned by pharmaceutical or biotechnology companies. We may retain the sales and marketing rights to our proprietary products in specialty markets that we can readily address. For instance, our lead product candidate, AI-700, will initially be used by a subset of cardiologists, called echocardiologists, who are generally hospital-based. We believe echocardiologists can be reached by a relatively small sales force of approximately 60 to 100 people in the United States. Therefore, we believe AI-700 may be an attractive candidate for us to market and sell directly in the United States. In Europe, AI-700 will be marketed through Nycomed Danmark ApS (Nycomed), a company with which we entered into a strategic collaboration in 2004. We intend to pursue other strategic partnering opportunities to market and sell AI-700 outside of the United States and Europe. We may also in-license products or technologies which we believe are complementary or synergistic with our internally-developed product candidates or technologies.
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Apply Our Proprietary Technology as Delivery Systems for Patented Drugs. We believe that our porous microparticle technology can be applied to a wide variety of marketed as well as development stage drugs, including patented and off-patent drugs. Many patented drugs owned by large pharmaceutical companies are hydrophobic or delivered by inhalation. These drugs could benefit from our HDDS and PDDS technologies. We plan to seek collaborations with companies that have patented drugs that could benefit from the most compelling capabilities of our technologies. By focusing on drugs where the advantages of our technologies are most compelling, we believe we will be in an attractive position when negotiating the terms of these collaborations.
Focus on Large Markets Where Our Product Candidates Can Address Significant Unmet Clinical Needs. We are focused on developing proprietary drugs for large markets within cardiology, oncology and asthma where we believe our porous microparticle technology can provide compelling clinical advantages over current approaches. For example, we believe our lead product candidate, AI-700, will provide a low cost and convenient alternative for the detection of coronary heart disease with respect to this initially targeted indication. We believe the potential market opportunity for AI-700 is over $2.0 billion in the United States and even larger worldwide.
Product Development Programs
Our proprietary porous microparticle technology has been used to create product candidates that may address large unmet clinical needs within cardiology, oncology and asthma.
AI-700, Intravenous Delivery of Gas for Ultrasound Contrast
Broad Applications for Ultrasound Contrast. We have developed an intravenous delivery system for gas that has the potential to expand the usefulness of ultrasound in the detection of coronary heart disease. Ultrasound is one of the least expensive and most frequently used imaging techniques that permit physicians to view the inside of the body. However, ultrasound is the only frequently used imaging technique without a commercially significant contrast agent. As a result, the clarity of ultrasound is often inadequate for a definitive assessment of medical conditions. A contrast agent that could provide more detail and clarity and thereby improve the diagnostic image produced could expand the usefulness of ultrasound. Gases are attractive contrast agents for ultrasound because they reflect ultrasound waves more efficiently than blood or body tissues, enabling their detection by the ultrasound machine. Gas injected intravenously can potentially act as a tracer of abnormal blood flow, which is associated with many life-threatening diseases such as coronary heart disease. However, gas rapidly dissolves in blood thereby losing its effectiveness. As a result, microparticles that can entrap the gas and be administered intravenously are necessary in order to develop an ultrasound contrast agent with broad applications.
Coronary Heart Disease Market. According to the American Heart Association, or AHA, over 13.0 million people in the United States suffer from coronary heart disease, the leading cause of death in the United States. Coronary heart disease is characterized by the accumulation of plaque, which narrows coronary arteries and reduces blood flow in the heart muscle. The AHA projects that in 2006, approximately $75.2 billion will be spent on direct medical expenses for coronary heart disease in the United States. Early detection of coronary heart disease can reduce treatment costs, increase patient survival and improve quality of life.
The definitive method for the detection of coronary heart disease is coronary angiography, an expensive and invasive procedure impractical for use as a routine screening tool. Two of the most common methods for coronary heart disease screening are nuclear stress imaging and stress echocardiography, which is ultrasound of the heart. We estimate that 11.9 million of these screening procedures were performed collectively in the United States in 2005. We believe that a contrast agent that enables the assessment of blood flow in the heart muscle, or myocardial perfusion, with ultrasound could replace many
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of these screening procedures. We believe that an ultrasound contrast agent capable of myocardial perfusion assessment could be priced at $200 or higher per procedure, including both rest and stress evaluations. Assuming all of these procedures were performed using ultrasound with an effective contrast agent at this price, we estimate the potential U.S. ultrasound contrast market for the cardiac indication of A1-700 to be over $2.0 billion.
Current Practice for Coronary Heart Disease Screening. Nuclear stress tests assess myocardial perfusion, or blood flow in the heart muscle. Nuclear stress tests involve the intravenous injection of a radioactive compound, followed by scans of the heart using a special camera while the patient is at rest and under stressed conditions. These tests typically take about five hours to complete, the results are not available immediately as post-processing is required, do not provide real-time results, cost approximately $770 per procedure, and, due to significant capital equipment costs and complex regulatory requirements associated with the use of radioactive materials and are not available in many hospital or physician office settings. We estimate that 8.9 million nuclear stress tests were conducted in the United States in 2005.
Stress echocardiography, or stress echo, assesses the motion of the heart wall. Advanced coronary heart disease typically results in abnormal blood flow in the heart muscle, which in turn causes abnormal wall motion that can be detected by the ultrasound machine used in stress echo. Although myocardial perfusion information from nuclear stress tests provides the most direct information about blood flow in the heart muscle, stress echo provides dynamic, real-time information about regional heart function. This additional information, along with the greater availability of ultrasound over nuclear equipment, results in the use of stress echo as a screening method in many hospital and physician office settings. Stress echo involves the use of high-frequency sound waves that are bounced off of the heart wall while the patient is at rest and under stressed conditions. We estimate that 3.0 million stress echo procedures were conducted in the United States in 2005. However, stress echo is often inadequate for a definitive assessment of coronary heart disease. For instance, the motion of the heart wall can be difficult to see under stress conditions, particularly in obese patients. In addition, the detection of defects in myocardial perfusion using stress echo is not possible without use of a contrast agent.
There is no ultrasound contrast agent approved by the FDA for use in stress echo or myocardial perfusion imaging. Ultrasound contrast agents have been approved by the FDA for left ventricular opacification (“LVO”) and endocardial border delineation (“EBD”) in patients with suboptimal images. LVO is image enhancement of blood volume in the left ventricular chamber of the heart. EBD is image enhancement of the borders of the ventricular chambers.
Our Solution, AI-700, a Synthetic Polymer Microparticle. Using our porous microparticle technology, we specifically designed AI-700 for myocardial perfusion assessment. Currently in Phase 3 clinical trials, AI-700 is an ultrasound contrast agent that is being developed to enable stress echo to provide information on myocardial perfusion in addition to wall motion. Based on the results of our Phase 2 clinical trials, we believe that stress echo with AI-700 has the potential to provide information comparable to the nuclear stress tests, while retaining the advantages of ultrasound.
We believe we have overcome many of the limitations of other ultrasound contrast agents by developing an intravenous gas delivery system made from a synthetic polymer. All of the ultrasound contrast agents currently approved by the FDA for LVO and EBD in patients with suboptimal images deliver gas intravenously in fragile systems made from natural materials. When exposed to the power of the ultrasound beam during the imaging procedure, these natural materials are so fragile they often rupture and release the gas into the blood, where it dissolves, thereafter rendering these contrast agents ineffective. Moreover, some ultrasound contrast agents encapsulate nitrogen, which dissolves quickly in water. Such contrast agents have a very short duration of enhancement because the nitrogen is quickly pushed out of the microbubble and displaced with water. Ultrasound contrast agents made from natural materials or containing nitrogen have only been approved by the FDA for LVO and EBD in patients with
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suboptimal images and we believe they are difficult to use in myocardial perfusion imaging, which is more technically demanding. Unlike the natural materials used in FDA-approved ultrasound contrast agents, the synthetic polymers used in AI-700 do not break during the imaging procedure. In addition, perfluorocarbon gases are less soluble in water and therefore have the propensity to stay inside the microparticle. As a result, we can deliver a higher concentration of gas to the myocardium over a longer period of time, thereby enabling AI-700 to target the broader application of myocardial perfusion assessment. AI-700 is a dry powder consisting of small, porous microparticles filled with a perfluorocarbon gas. These microparticles are made of a synthetic biodegradable polymer, called poly (D, L-lactide co-glycolide), or PLGA, that has been used in other drug delivery systems approved by the FDA. The composition and structure of the microparticles, which also contain a phospholipid, and the properties of the perfluorocarbon gas slow the rate at which the gas dissolves and prevent the microparticles from being quickly broken down inside the body. These microparticles are suspended in sterile water and injected into the body by intravenous injection. AI-700 was designed to be easy to use with commercially available ultrasound equipment and established imaging techniques.
Potential Benefits of Stress Echo with AI-700 vs. Nuclear Stress Tests
Stress echo with AI-700 has the potential to significantly reduce the time, cost and resources needed in the assessment of myocardial perfusion.
· Less Expensive. We estimate that the cost of performing an ultrasound imaging procedure using our AI-700 contrast agent will be approximately $400 per procedure, representing costs of $200 for the contrast agent and $200 for administering the procedure. Nuclear stress tests typically cost approximately $770 per procedure. Nuclear stress tests are relatively more expensive because the equipment is large and costly and patient throughput is low. Ultrasound equipment is much smaller and generally half the cost of nuclear equipment used for the detection of coronary heart disease.
· Less Time Consuming. Nuclear stress tests typically take five hours, while ultrasound procedures typically take 30 minutes.
· Greater Availability. Due to the technical complexity, high cost and the regulatory requirements associated with the use of radioactive materials, nuclear stress tests are not available in all hospitals, cardiology practices and emergency departments. In the United States, ultrasound equipment is widely available in all of these settings.
· More Information. Stress echo with AI-700 has the potential to provide information on both myocardial perfusion and wall motion, whereas nuclear stress tests typically provide good information on myocardial perfusion, but little information on wall motion. Stress echo has the potential to provide this information immediately whereas images from nuclear stress tests require post-processing and analysis.
· No Radioactivity. AI-700 is made from a synthetic polymer that does not require special licensing, has the potential of at least a two-year shelf life, and is convenient to use and store. Nuclear stress tests use radioactive materials that create additional costs due to preparation, storage and disposal requirements.
· Expanded Opportunity for Cardiologists. We believe that many cardiologists will prefer ultrasound with AI-700 over nuclear stress tests because it may allow them to remain in closer contact with their patients. To assess myocardial perfusion with nuclear stress tests, many patients are referred by cardiologists to the radiology department, which is usually a different profit and care center within the hospital.
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Potential Benefits of Stress Echo with AI-700 vs. Stress Echo without Contrast
Stress echo with AI-700 has the potential to provide broader information for cardiac evaluation.
· More Information. Stress echo with AI-700 has the potential to provide information on both myocardial perfusion and wall motion, whereas stress echo without contrast provides information only on wall motion.
· Potential for Increased Sensitivity with Perfusion. Cardiologists seek to identify coronary heart disease early in the disease progression in order to minimize the risk of heart attack. In early coronary heart disease, the coronary artery is only partially blocked, so there may be little or no wall motion abnormality, but there could be a perfusion abnormality. The potential for increased sensitivity has contributed to the popularity of nuclear stress tests. We estimate that in 2005, 8.9 million nuclear stress tests were performed versus 3.0 million stress echo tests. We believe that an ultrasound contrast agent capable of myocardial perfusion imaging would enable stress echo to compete more effectively with nuclear stress testing.
Clinical Results. Prior to commencing our Phase 3 clinical program, we enrolled over 200 human subjects in our Phase 1 and Phase 2 clinical trials for AI-700. Our Phase 1 clinical trials evaluated the safety and feasibility of myocardial perfusion imaging with AI-700. Our Phase 2 clinical trials evaluated the preliminary safety and efficacy of AI-700 enhanced ultrasound imaging. In our Phase 2 clinical trials, efficacy was measured by comparing the results obtained from myocardial perfusion assessment using AI-700 enhanced ultrasound with those obtained using nuclear stress tests. Our Phase 1 and Phase 2 clinical trials were conducted in the U.S. under an Investigational New Drug Application, or IND. The results of our Phase 2 trials are summarized below. We have filed these results and our protocols for our Phase 3 trials with the FDA. We initiated the pilot phase of our Phase 3 clinical program in December 2003. We completed the pilot phase of our Phase 3 clinical program in 2005. We are intentionally blinded to efficacy data from our ongoing Phase 3 pivotal trials.
The “20” Trial. Our objectives in our first Phase 2 clinical trial, the “20” trial, were to evaluate the safety of AI-700 in subjects with known coronary heart disease as well as in healthy subjects and to determine the optimal imaging procedures for myocardial perfusion assessment using AI-700 enhanced echocardiography. The study included 53 subjects, was conducted by echocardiologists and utilized a variety of commercially available equipment platforms. Subjects enrolled in the “20” trial received a single injection of AI-700 at a variety of doses and were imaged under resting conditions only. The primary efficacy endpoint was agreement between echocardiography with AI-700 and nuclear stress tests. Agreement was defined as the percentage of subjects who received the same diagnosis using AI-700 enhanced echocardiography as with nuclear stress. At the optimal imaging conditions identified during the trial, we met the primary endpoint of this trial.
The “21” Trial. Our objectives in our second Phase 2 clinical trial, the “21” trial, were to evaluate the safety and diagnostic efficacy of AI-700 in patients with suspected or confirmed coronary heart disease as well as in healthy subjects. The study included 122 subjects, was conducted by echocardiologists and utilized a variety of commercially available ultrasound equipment platforms and imaging techniques. A variety of doses of AI-700 were evaluated in the trial. Patients enrolled in the “21” trial received two injections of AI-700, one under resting conditions and the other under stressed conditions. All patients received a nuclear stress test and either a stress echo with AI-700 or a stress echo without contrast. The primary efficacy analysis was based on the ability of independent echocardiologists, blinded to all other information, to detect myocardial defects when comparing stress echo images to nuclear stress. In the “21” trial we met the primary efficacy endpoints, which were sensitivity, or the ability to detect the presence of disease, and specificity, or the ability to determine the absence of disease.
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Efficacy data. Comparison of stress echo with AI-700 and nuclear stress for subjects in our Phase 2 trials indicated the following:
· Stress echo with AI-700 versus stress echo without contrast. Stress echo with both low and high doses of AI-700 resulted in a greater than 30% increase in sensitivity compared to stress echo without contrast, and demonstrated a higher level of agreement with nuclear stress tests versus stress echo without contrast.
· Stress echo with AI-700 versus the nuclear stress test. Stress echo with both low and high doses of AI-700 agreed with nuclear stress tests in more than three-quarters of all patients.
· Stress echo with AI-700 versus coronary angiography. Nuclear imaging does not always result in a correct diagnosis of coronary heart disease. The generally agreed gold standard for the diagnosis of coronary heart disease is coronary angiography. In a retrospective exploratory analysis of those patients that underwent coronary angiography, stress echo with AI-700 had the same sensitivity as nuclear stress tests when compared to coronary angiography.
The Phase 3 Program: Detection of Coronary Heart Disease in Patients Being Evaluated for Ischemic Heart Disease. Our Phase 3 program for AI-700 commenced in 2003 under a U.S. Investigational New Drug application and in compliance with applicable European regulatory requirements. The Phase 3 clinical plan provides for a two-part program consisting of a pilot phase (the “pilot study”), under which new investigators and blinded readers have been qualified and trained, and two independent multi-center pivotal trials (the “32” and “33” trials). Clinical investigators were qualified in the pilot phase on a rolling basis. The pilot phase was completed in 2005, after which more than 20 clinical investigators were qualified to enroll patients in the pivotal studies. Clinical investigators in the Phase 3 pivotal studies are located at clinical sites in North America, Europe and Australia. Data from the Phase 3 pivotal studies are intended for submission to U.S., European, and potentially other regulatory authorities.
The Pilot Study. Our objectives in the pilot study were to train and qualify a sufficient number of clinical sites, investigators and blinded readers for transition into one of the two pivotal trials. These objectives have been accomplished and enrollment in this trial is completed. Clinical sites that were trained in the pilot study transitioned into a pivotal trial when, in our judgment, the clinical site demonstrated that it was prepared to meet the requirements of the clinical trial protocol. Because the pilot study has been conducted for training purposes, there are no defined clinical efficacy endpoints in this study.
The Pivotal Trials. As part of the Phase 3 pivotal study design, the evaluation of AI-700 enhanced stress echo and nuclear stress images from the pivotal trials is performed by blinded readers who receive no information about the patient being evaluated other than the images. We have completed blinded reads on more than half the currently enrolled patients in each of the 32 and 33 trials. During the pivotal trials, we intentionally have no access to efficacy data. We do not expect to publicly disclose results from either pivotal trial until after the trial is closed, quality control checks are completed, the database is locked, the data are revealed to us and we have had an opportunity to review and understand the data, including data regarding clinical outcomes and safety results. As of the date of this annual report, over 700 patients with known or suspected coronary heart disease have been enrolled in the Phase 3 pivotal trials, including over 300 patients in each of the two concurrently run pivotal studies. We use statistical models to predict the number of patients we need in each trial to be able to reach statistical significance. The estimates and assumptions that we are using in our statistical models are primarily derived from our prior clinical studies. Based upon these estimates and assumptions and our statistical analysis plan, we believe that the number of patients that we have enrolled in each of the pivotal studies may be sufficient to achieve statistical significance in these trials.
The “32” Trial. All of the patients enrolled in this trial receive a stress echo study with AI-700 and a nuclear stress test. Patients in this pivotal trial generally undergo coronary angiography only if they have a
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positive nuclear stress test result. Patients in this pivotal trial who have a negative nuclear stress test result will be evaluated for ninety days thereafter for cardiac events. The primary endpoints of the 32 trial are sensitivity and specificity relative to a truth standard, in comparison to the performance of nuclear stress testing relative to the same truth standard. The truth standard for both modalities is determined with angiography, whenever available, or coronary heart disease status with nuclear stress if angiographic data are unavailable. In December 2005, we ceased enrollment of patients in the 32 trial. In March 2006, we announced to the clinical sites that we have completed enrollment in this trial. We have now completed the 90-day follow up period on patients enrolled in this trial. We anticipate making a public announcement regarding the 32 trial results before the end of the second quarter of 2006.
The “33” Trial. All of the patients enrolled in this trial receive a stress echo study with AI-700 and undergo coronary angiography. The majority of patients, but not all, will have a nuclear stress test. All patients in this trial will be evaluated for up to thirty days following the stress echo study. The primary endpoints of the 33 trial are sensitivity and specificity, relative to a truth standard, in comparison to nuclear stress testing, with angiography as the truth standard for both modalities. As of the date of this annual report, and in accordance with the flexibility permitted by our study plan, we are continuing to enroll patients in the 33 trial and anticipate continuing to enroll patients until the end of Q2 2006. We believe that we can continue to enroll patients in the 33 trial through Q2 2006 without delaying our NDA filing date as we project that qualification of our commercial manufacturing facility is the rate-limiting factor to our NDA filing. Our clinical plan, unless otherwise amended, permits us to enroll approximately 450 patients in this study. Once enrollment is closed in this trial and all angiography procedures and the 30-day patient follow-up period are completed, we will conduct quality control checks to ensure that all of the required information has been fully gathered and filed and then lock the database. At that time, the data may be unblinded and available to Acusphere for analysis. We anticipate that this quality control period should be completed within three months of completing the angiography procedures and the post-enrollment follow-up period and that we will have unblinded data from this trial during the fourth quarter of 2006. We anticipate making a public announcement regarding the trial results during the fourth quarter of 2006.
Trial Design and Purpose. We believe that stress echo with AI-700 has the potential to significantly reduce the time, cost and resources needed in the assessment of myocardial perfusion, compared to nuclear stress testing. Myocardial perfusion is blood flow to the heart muscle, a sensitive marker for coronary heart disease. There is no ultrasound contrast agent approved by FDA for use in stress echo or myocardial perfusion imaging. Based upon the end points described above, our 32 and 33 trials are designed to demonstrate non-inferiority of stress echo with AI-700 relative to nuclear stress testing. In April 2005, based in part upon feedback from FDA, we revised the statistical analysis plan on which we base our patient enrollment estimates for the AI-700 Phase 3 clinical trials. Since that time we have continued discussions with the FDA regarding trial design and our statistical analysis plan. As a result of our ongoing discussions with FDA, we may make further revisions. These discussions could lead to delays in the public announcement of the results from our Phase 3 clinical trials, change our sample size estimates and affect whether AI-700 is approved for the indication that we are seeking, the timing of such approval or whether AI-700 is approved at all.
The estimates of, patient enrollment requirements and timing of clinical enrollment, blinded reads, data lock, data release and NDA filing in our Phase 3 trials described above reflect our current assumptions, based on our knowledge and experience and the guidance of our advisors. We cannot assure you that these timelines will be met, nor can we assure you that our estimates and assumptions will not change based upon ongoing regulatory feedback or that, when the trials are completed, we will successfully achieve results that meet or exceed the clinical endpoints of these Phase 3 trials.
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Safety Data. During our AI-700 clinical studies we have intentionally sought to identify and evaluate all adverse experiences. Any change in how the patient feels after injection of AI-700 is considered an adverse event. Adverse events are recorded in these studies whether or not attributable to AI-700. The adverse experiences observed in our trials have been typically mild in intensity and of short duration. The vast majority of people exposed to AI-700 are cardiac patients who are undergoing a stress study and have a pre-study history of chest pain. Stress echo procedures require stressing the heart through exercise or pharmacologically induced stress. For purposes of control and consistency of data between studies, pharmacologically induced stress was used with all patients enrolled in the pilot study.
Many of the adverse events observed in our clinical studies have been consistent with the type of adverse events associated with the pharmacological stressor. While certain of these adverse events appear to be attributable to causes other than AI-700 and some to AI-700, the attribution of many of these events is not definitive. The most prevalent of these observations have been headache, facial flushing and nausea. We have enrolled 393 subjects in the Phase 1, Phase 2 and pilot studies. In these studies, one of the observed adverse events was characterized as a serious adverse event (“SAE”), which definition includes any adverse event that results in a patient remaining in the hospital overnight for observation. There was no residual effect from this event.
The safety of our clinical studies is monitored by an independent third party advisor and all adverse events are reported to investigators, institutional review boards and regulatory agencies on a periodic basis. We intend to continue to study the safety profile of AI-700. While we do not comment on data from ongoing clinical trials, based upon observations to date, we believe that AI-700 is generally well tolerated. However, there can be no assurance that we will not experience other adverse events in our clinical trials or that regulatory authorities will conclude that AI-700 is safe for approval and broader use.
Future Indications. Since AI-700 circulates in the blood and acts as a tracer of blood flow, we believe it has the potential to assist in the assessment of a wide variety of diseases in addition to coronary heart disease. Abnormal blood flow is associated with several life threatening diseases including various forms of cancer, renal artery stenosis and deep vein thrombosis. These diseases often cannot be adequately assessed with ultrasound imaging without contrast, and as a result radiologists currently detect these diseases with more expensive imaging techniques, such as computerized tomography, angiography, nuclear medicine and venography. Ultrasound imaging using AI-700 may offer a cost-effective alternative to these expensive techniques.
Products from Our Hydrophobic Drug Delivery System, or HDDS
Broad Applications for the Delivery of Hydrophobic Drugs. We have developed a proprietary formulation technology called HDDS that converts drugs that do not dissolve well in water, or hydrophobic drugs, into microparticles or nanoparticles of the drugs embedded in small microparticles, such that the drugs can rapidly dissolve in water. Formulation of hydrophobic drugs is often challenging. Since the human body is primarily composed of water, hydrophobic drugs do not dissolve well in the body, which can limit the effectiveness of these drugs. Many promising drugs never make it to market because they are difficult to dissolve. Drug programs are often abandoned after significant investment because suitable formulations for these insoluble drugs are elusive. Many hydrophobic drugs that do make it to market have less than ideal formulations. Developing intravenous formulations of hydrophobic drugs is particularly challenging. Intravenous formulations of drugs can open new markets for drugs like antibiotics that could often be initially prescribed in a hospital setting. In addition, intravenous formulations can expand the market for the oral dosage formulation because physicians typically prefer to discharge patients on the oral formulation of the intravenous formulation administered to the patient in the hospital.
Market for Hydrophobic Drug Delivery. We believe that FDA-approved hydrophobic pharmaceuticals generated $176 billion in revenues in 2004 and that other potential drugs have not achieved FDA approval due to issues associated with effectively dissolving these drug candidates.
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Current Practice. Many hydrophobic drugs are comprised of particles that are relatively large and therefore have a limited surface area available for interaction with water. These hydrophobic drugs are often formulated in less than ideal ways in order to make them dissolve. It is possible to increase the dissolution rate of some hydrophobic drugs by increasing their aggregate surface area. To accomplish this, many pharmaceutical companies use a process called micronization, which entails grinding hydrophobic drugs into smaller microparticles. However, the drug particles produced by micronization are often still not small enough to adequately improve dissolution, or to be administered intravenously. Alternatively, oils like Cremophor® are used to dissolve the drugs. However, these oils are often not well tolerated and can require prolonged infusion rather than rapid injections to minimize potential side effects. In addition, some hydrophobic drugs can be formulated into soft gelatin capsules, but these are only suitable for oral administration and encapsulate only a small volume of drug, requiring the administration of many capsules. Sometimes development of these drugs must be terminated because no suitable formulation can be found.
Our Solution: Rapidly Dissolving Sponge-Like Particles. We have demonstrated that our HDDS technology improves the dissolution rate of a variety of hydrophobic drugs. HDDS has achieved up to 30-fold increases in the dissolution rate of a variety of hydrophobic drugs. HDDS has produced drug formulations that are well-tolerated in pre-clinical studies and we believe would be suitable for all routes of administration, without resorting to the use of unsafe or unproven additives to formulate the drug.
AI-850, Human Proof of HDDS Concept. AI-850, our initial product candidate utilizing our HDDS technology, is a readily dissolving formulation of the hydrophobic drug, paclitaxel, the active ingredient in the cancer drug, Taxol®. To dissolve paclitaxel, Taxol® contains Cremophor®, which is believed to cause severe hypersensitivity reactions, including an extreme allergic reaction called anaphylaxis. Therefore, Taxol® is typically administered using pre-medications and by long infusions to patients with cancer. By putting paclitaxel into our sponge-like microparticles, we have created a paclitaxel formulation that is free of Cremophor®. Despite what we believe is a less than ideal formulation, Taxol® had worldwide revenues of $747 million in 2005 and represents an example of a hydrophobic drug which we believe our HDDS technology can improve.
Product Development Status. Our Phase 1 human safety study of AI-850 was completed during 2004. The primary goal of the study was to provide human proof-of-concept that our Hydrophobic Drug Delivery System (HDDS™) is capable of intravenously delivering hydrophobic drugs without the need for co-solvents that are inconvenient to administer and are associated with undesirable side effects. The primary objective of this trial was to determine the maximum tolerated dose (“MTD”) of AI-850. In the dose escalation study, 22 patients with solid tumors (taxane naïve patients and patients who previously had received taxane therapy) were treated with AI-850 without standard taxane pre-medications in doses up to 250 mg/m2. Infusions of AI-850 were delivered in less than 30 minutes at all doses, which is significantly shorter that the three-hour infusion typically required by Taxol®. The MTD of AI-850 for patients with extensive prior taxane therapy was 205 mg/m2, which is higher than the Taxol® dose of 175 mg/m2 typically used to treat taxane naïve patients with metastatic breast cancer. It is our current plan to seek strategic collaborators for AI-850 before commencing additional clinical testing of this product candidate.
Future Hydrophobic Drug Delivery Product Candidates. In addition to the human data generated in the AI-850 Phase 1 trial, we have demonstrated that our HDDS technology improves the dissolution rate of a variety of orally administered, intravenously administered and inhaled hydrophobic drugs, including COX-2 inhibitors, taxanes, calcium channel blockers and anti-fungals. We will seek opportunities to work with other companies on improving their patented hydrophobic drugs and product candidates and we will evaluate the feasibility of developing, on our own or in collaboration with others, improved formulations of off-patent hydrophobic drugs.
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Products from Our Pulmonary Drug Delivery System, or PDDS
Broad Applications for Sustained Release in the Lung. A sustained release delivery system for drugs delivered locally to the lung would be desirable for the treatment of respiratory disease. Relative to systemic drug delivery by the oral or injectable routes, local delivery of respiratory drugs by the pulmonary route allows smaller doses of the drug and minimizes systemic toxicity because the drug can be delivered directly to the site of the disease. Moreover, sustained release of respiratory drugs may offer significant clinical benefit to millions of respiratory patients, including a growing percentage of pediatric patients, by allowing them to take treatments for such diseases as asthma less frequently, and to receive more prolonged and steadier relief. We believe sustained delivery of drugs to the lung also offers the potential for improved safety, by moderating the drug peaks and troughs of immediate release drugs, which can cause added toxicity or reduced efficacy. Our initial development efforts have focused on developing sustained release formulations of asthma drugs. The worldwide asthma therapeutics market is estimated at over $12.0 billion in 2005. We believe the delivery of long-acting drugs to the lungs represents a significant medical opportunity.
Current Practice. Current pulmonary delivery systems are not ideal, delivering inaccurate doses, requiring frequent dosing and losing significant amounts of drug in the delivery process. Most asthma drugs delivered by inhalation are immediate release formulations that must be inhaled multiple times per day, which discourages patient compliance. When patients forget to take their medicine during the day, they may experience complications which may result in increased emergency room visits and hospitalizations. In a recent study, two thirds of all asthma patients did not take their medications as directed. In addition, immediate release formulations often deliver drug levels that peak and trough, causing undesirable toxicity or inadequate efficacy.
Our Solution: Slowly Dissolving Whiffle Ball-Like Microparticles. By controlling particle size, particle porosity and thus density, and particle composition, and therefore the aerodynamic properties of a particle, our PDDS technology controls where drug particles go in the lung and how quickly they release their drug. This tight control of release rate, and targeting within the lungs, may enable our PDDS technology to address many of the hurdles of sustained release pulmonary delivery.
AI-128, Our Improved Formulation of an Asthma Drug. AI-128 is our initial product candidate utilizing our PDDS technology. AI-128 is a sustained release, dry powder formulation of a widely used asthma drug. We believe that AI-128 is the first human demonstration of sustained release drug administration in the lung.
Potential Benefits over Approved Formulations. With once-a-day dosing, we believe AI-128 would be more convenient for the patient, reducing non-compliance related complications and costs. By controlling the release rate of the drug to the lung, AI-128 offers the potential for improved safety. Slowing drug release in the lung offers the potential for a lower peak concentration of drug in the systemic circulation.
Clinical Results. We completed a European Phase 1 clinical trial with AI-128. The study was conducted in accordance with applicable local regulatory requirements. In this trial, we demonstrated that approximately 80% of inhaled AI-128 was delivered to the intended target, the upper lung. These trials also demonstrated that the microparticles remained in the lung for up to 24 hours, the period of time that we believe is required for once-daily dosing, and that the drug was released from the microparticles in the lung over a 12 to 24-hour period.
Future Applications. We believe our PDDS technology may enable improved formulations of other locally acting asthma drugs as well as allow drugs that must be delivered into the bloodstream for systemic therapy to be administered by inhalation through the lung. We have demonstrated in pre-clinical studies that we can create sustained release, dry-powder reformulations of drugs currently used to treat respiratory disease. We believe that one or more of such reformulations could have many of the benefits AI-128 potentially offers. Moreover, many large molecule drugs, such as proteins, cannot be delivered orally because they are destroyed by enzymes in the gastrointestinal system. As a result, they often must be
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injected subcutaneously or intramuscularly several times per week in order to get an adequate amount of the drug into the body’s general circulation. Since the lung does not contain these destructive enzymes, systemic delivery of these drugs via the pulmonary route could be more convenient and require less dosing. We plan to seek both proprietary and collaborative opportunities for these drug formulations.
Research and Development
Over the past three fiscal years, we have made material expenditures on research and development. In the fiscal years ending December 31, 2003, 2004, and 2005, research and development expenses were approximately $14.8 million, $26.0 million and $42.2 million, respectively.
Our Proprietary Microparticle Technology
Microparticles are useful in the delivery of a wide range of drugs. Suitability of microparticles for use in pharmaceuticals depends on a variety of factors, including size and porosity. Smaller microparticles have a broader range of utility, such as intravenous and pulmonary delivery applications. Depending on the targeted site and desired route of delivery, drug delivery technologies utilize microparticles of various sizes. Our porous microparticle technology enables us to produce very small microparticles that are smaller than a red blood cell and with a wide range of porosities.
Microparticle Size
Large microparticles are microparticles over 100 microns in size. Large microparticles are used to deliver drugs through relatively large orifices, like the mouth (oral delivery). Large microparticles have been used in the delivery of both immediate and controlled release oral drug formulations. However, these particles cannot be delivered by injection, because they are too large to fit through a needle. In addition, they are unsuitable for delivery via the pulmonary route, because larger particles tend to get caught in the back of the throat when inhaled. For these reasons, the use of large microparticles is generally limited to oral administration.
Medium microparticles are microparticles between 10 and 100 microns in size. These particles are small enough to fit through a needle, and therefore are suitable for injection subcutaneously, which is under the skin, or intramuscularly, which is into the muscle. These microparticles have been used primarily to deliver drugs, which cannot be delivered orally because they are destroyed in the gastrointestinal system. However, medium microparticles cannot be injected intravenously because they are too large to fit through the body’s smallest blood vessels, or capillaries, and like large microparticles, are unsuitable for delivery via the pulmonary route.
Small microparticles are microparticles smaller than 10 microns, which is approximately the size of a human red blood cell. Small microparticles include nanoparticles, which are particles smaller than 1 micron. Small microparticles are small enough to pass through the capillaries for intravenous delivery; are small enough to be readily inhaled for pulmonary delivery; and have more total surface area per unit of weight relative to larger microparticles, making them a particularly efficient method for delivering hydrophobic drugs. Intravenous delivery is desirable in a hospital setting to ensure that the drug is fully bioavailable, or that the entire drug dose is absorbed by the body. Intravenous delivery is also used for drugs that must be injected but with a dose too high for intramuscular or subcutaneous delivery. Drugs are also administered intravenously, or directly into the blood, to act as tracers of blood flow, since abnormal blood flow is associated with many life threatening diseases. Therefore, small particles have many potential applications, including use as ultrasound contrast agents, as delivery systems for hydrophobic drugs, and as delivery vehicles for asthma drugs.
Microparticle Porosity
The ability to vary the porosity of microparticles on a consistent basis can be critical to the successful use of microparticles in pharmaceutical products. For instance, in ultrasound contrast imaging, we believe it is advantageous to use microparticles that are highly porous on the inside but with limited porosity in the
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shell. Porosity on the inside of microparticles enables them to contain more of the active ingredient, which is gas, than particles that are dense. Limiting porosity in the shell prevents gas leakage and enables the retention of the gas inside the particle. Furthermore, pores can facilitate absorption of water into a microparticle, which is useful in getting hydrophobic drugs to dissolve more quickly, and useful for controlling the release of a drug from a sustained release system. Finally, in drug delivery to the lung, it is advantageous to use microparticles of various porosities, which controls density, because the size and density of the microparticles dictates where in the lung they will be delivered.
Microparticle Production Using Spray Drying
We believe the use of small, porous microparticles has not reached its full potential in the delivery of drugs. We believe that current manufacturing processes for creating small microparticles have low yields, have not been adapted for use with encapsulating materials like synthetic polymers, have low encapsulation efficiency and are difficult to combine with other technologies, such as coating technologies. We believe that the use of porosity to improve drug formulations has been underutilized because an efficient process for creating porous microparticles at commercial scale did not exist. Our porous microparticle technology was designed to address the limitations of existing manufacturing processes.
Spray drying is a production technique widely used in the pharmaceutical industry because it is a single-step, continuous process. However, standard spray drying:
· Produces solid microparticles rather than the porous microparticles, which are required for ultrasound contrast imaging and may be beneficial for hydrophobic and pulmonary drug delivery.
· Does not completely remove moisture from the microparticles, contributing to low yields and making standard spray drying uneconomic for the production of drugs made from expensive raw materials.
· Results in relatively high levels of residual solvents, which can be problematic for the stability and safety of the drug.
· Often operates at high temperatures, making it difficult to use with drugs that are unstable at higher temperatures.
· Is not well-suited to sterile, or aseptic, processing, which is required for most intravenously administered drugs and is beneficial for pulmonary-delivered drugs.
Our proprietary porous microparticle technology platform consists of two key components—a multi-chamber spray dryer and pore-forming agents.
Our Patented Spray Dryers
We believe we have overcome the limitations of standard spray drying in producing small microparticles and nanoparticles through patented equipment innovations that:
· Remove nearly all residual solvents such as moisture from the microparticles because our patented spray dryer increases the length of time the microparticles are dried.
· Can be operated at low or high temperatures, due to increasing the drying time used for microparticles produced at lower temperatures, and reducing the drying time for microparticles produced at higher temperatures.
· Are well suited to aseptic processing by using steam sterilization techniques and a positive pressure system, thereby minimizing the contaminants pulled into the spray dryer from the surrounding environment.
We have improved the drying capability of standard spray dryers by adding additional drying chambers through which the microparticles travel. The additional drying chamber consists of a large, narrow coil through which the particles can be dried at multiple temperatures and at high linear gas velocities. As a result, our spray dryers allow high throughput drying, higher yield and lower residual solvent than conventional spray dryers do. The additional drying chamber allows the microparticles to
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remain in the drying phase for a longer period of time, thereby increasing the amount of moisture and residual solvents that are removed during the drying phase. This innovation, which is the subject of six of our issued patents, improves yield by reducing the amount of microparticles that cling to the surfaces of the spray dryer due to inefficient drying. Accordingly, we believe that this technology is appropriate for the encapsulation of drugs using expensive raw materials. This innovation enables us to increase the drying time and lower the drying temperature for drugs. Accordingly, we believe this technology is appropriate for the encapsulation of drugs, like proteins, which are unstable at higher temperatures.
In order to produce microparticles and nanoparticles to be used in drugs delivered intravenously, the particles must be produced aseptically. We have improved standard spray dryers by making them suitable for aseptic processing. Our spray dryers operate under positive pressure, minimizing the risk of pulling contaminants into the process from the surrounding environment. In addition, our spray dryers are composed of stainless steel and Teflon components to mitigate against shedding into the product during processing, and can be sterilized using steam sterilization techniques.
We have made these improvements to standard spray drying processes and equipment without altering the fundamental advantages of standard spray drying. Like standard spray dryers, our spray dryers enable a single-step, continuous process that is efficient in encapsulating up to 100% of the active ingredient, and can be used with either synthetic or natural materials.
Our Patented Pore-Forming Agents
We have developed a patented process technology for creating porous microparticles. To create pores in our microparticles we add pore-forming agents to the solution before we put it through the spray dryer. These pore-forming agents create bubbles, similar to the bubbles in carbonated beverages. These bubbles are formed while the solution is being converted into a microparticle in the spray dryer. The bubbles create pores in the microparticle and the pore-forming agents are removed during the drying process. We can vary the number and size of the pores by varying the amount of pore-forming agents we add to the process. In this way we can design microparticles that are porous or sponge-like.
Reimbursement
We intend to focus on obtaining coverage and reimbursement from Medicare, Medicaid and private insurers for our product candidates. Although there can be no assurance that we will be successful in obtaining third-party reimbursement, we believe we will be successful in obtaining this reimbursement for our lead product candidate, AI-700.
Effective January 2001, the Centers for Medicare and Medicaid Services, formerly known as the Health Care Financing Administration, implemented a reimbursement code that provides for reimbursement for the use of injectable contrast material in echocardiography in a physician’s office and hospital outpatient setting. Currently, the reimbursed rate for each of the three ultrasound contrast agents FDA-approved for use in LVO and EBD in patients with suboptimal images is over $100 per vial. Although private insurers make their own decisions on reimbursement, they typically follow the lead of the Centers for Medicare and Medicaid Services, which manage reimbursement for Medicare and Medicaid.
We plan to apply for a new reimbursement code at a higher rate. We believe ultrasound imaging using AI-700 for myocardial perfusion assessment, which involves dosing of patients for a resting echo study followed by a second dose for a stress echo study, will provide at least the same clinical information as nuclear stress tests (which also requires dosing for a rest study followed by dosing for a stress study), but at much lower total study cost, due in part to higher capital equipment costs, longer procedure times and radioactive material handling issues associated with nuclear stress tests. Given these expected cost advantages, we believe that AI-700 will ultimately obtain adequate reimbursement in this era of managed care, where the federal government and private insurers are striving to lower the total cost of delivering state-of-the-art healthcare. Further, in the treatment of hospital inpatients, who are usually subject to a fixed total reimbursement based solely on their diagnosis and not on the test used, we expect that hospital staffs will be encouraged to use the much lower cost ultrasound test with AI-700, if and when it is approved
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by FDA, rather than the more expensive nuclear test. Our efforts to obtain a higher reimbursement rate can begin prior to our product’s approval and will probably require about two years for completion. The current reimbursement codes cover hospital outpatient and physician offices, which are the locations where almost all stress echoes are performed. In the period immediately following the potential launch of our product, we believe that the current reimbursement rates for ultrasound contrast agents should enable us to sell our product at attractive margins.
Manufacturing
In July 2004, we entered into a lease agreement for 58,000 square feet of commercial manufacturing and office space in Tewksbury, Massachusetts. In September 2004, we began to build-out the manufacturing space of this facility for commercial manufacturing of AI-700. We intend to demonstrate that we can produce AI-700 at a commercial manufacturing scale prior to our filing of a NDA for AI-700 and, subject to required regulatory approvals, we intend to manufacture AI-700 in this facility for commercial use. This commercial manufacturing facility must comply with current good manufacturing practices, or cGMPs, enforced by the FDA and overseas regulatory agencies. We have identified potential primary and secondary suppliers of the raw materials used in the production of AI-700.
In October 2005, we received an occupancy permit for this commercial manufacturing facility upon which operations commenced on site. By the end of October 2005, most of the procured manufacturing equipment had been subject to start-up activities and were placed in service. The build-out of the facility is substantially complete, with minor items remaining to be addressed by the contractor. Our primary efforts at this facility are currently directed at the substantial work required to qualify equipment and operations in compliance with cGMP’s. Completion of such qualification includes significant testing and documentation, including product storage stability studies. It also requires that we successfully demonstrate that we can produce AI-700 product within specifications which are consistent with the clinical trial material used in our Phase 3 clinical program. We have demonstrated previously that we can produce AI-700 in a qualified manner. We need to repeat this demonstration in our commercial manufacturing facility prior to filing our NDA. Based upon our current plans, we expect to complete this qualification phase before the end of Q2 2007, after which we will believe that we will have all of the manufacturing related data necessary to file our NDA.
Although the build-out of the facility is substantially complete, we cannot assure you that we will not encounter complications in the qualification of operations in this facility which complications could add additional costs or delay our filing of a NDA for AI-700.
In support of our efforts to qualify our commercial manufacturing facility for AI-700, in February 2006, the Company and Nycomed agreed to amend the 2004 strategic collaboration agreement resulting in commitment by Nycomed to accelerate $1.85 million in payments to the Company in order to fund certain activities associated with the qualification of our manufacturing. Beginning with costs incurred in February 2006, we may begin to draw down on this $1.85 million non-refundable commitment at a rate of up to $370,000 per month.
Patents and Proprietary Rights
Our success depends in part on our ability to obtain patents, to protect trade secrets, to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business.
Our patents include internally developed patents as well as patents acquired from third parties. As of March 16, 2006, we owned twenty-nine issued U.S. patents, one allowed U.S. patent and seventeen U.S. patent applications. We charge all patent-related expenses to operations as incurred. Six of our issued U.S. patents are directed to aspects of the spray drying method for manufacturing microparticles. Four issued U.S. patents and eight U.S. patent applications are related to various aspects of our porous microparticle
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delivery technology. Five issued U.S. patents relate to aspects of the AI-850 product and the delivery of hydrophobic drugs. We also own a number of pending international and foreign patent applications corresponding to these U.S. patents and applications. Our issued U.S. patents include the following:
| U.S. Patent No. | | | Date Issued | | Expiration Date | | Subject |
5,425,366 | | June 20, 1995 | | June 20, 2012 | | Ultrasonic Contrast Agents for Color Doppler Imaging |
5,611,344 | | March 18, 1997 | | March 05, 2016 | | Microencapsulated fluorinated gases for use as imaging agents. |
5,837,221 | | November 17, 1998 | | July 29, 2016 | | Polymer-lipid microencapsulated gases for use as imaging agents. |
5,853,698 | | December 29, 1998 | | March 05, 2016 | | Method for making porous microparticles by spray drying. |
6,045,777 | | April 04, 2000 | | June 30, 2017 | | Method for enhancing the echogenicity and decreasing the attenuation of microencapsulated gases. |
6,068,857 | | May 30, 2000 | | August 25, 2014 | | Microparticles Containing Active Ingredients, Agents Containing these Microparticles, their use for Ultrasound-Controlled Release of Active Ingredients, as well as a Process for their Production |
6,071,496 | | June 06, 2000 | | June 06, 2017 | | Polyalkylcyanoacrylate Agents and Methods for Enhancing Contrast in Ultrasound Imaging |
6,132,699 | | October 17, 2000 | | March 05, 2016 | | Microencapsulated fluorinated gases for use as imaging agents. |
6,177,062 | | January 23, 2001 | | June 6, 2017 | | Agents and Methods for Enhancing Contrast in Ultrasound Imaging |
6,223,455 | | May 01, 2001 | | May 03, 2019 | | Spray drying apparatus and methods of use. |
6,284,280 | | September 04, 2001 | | August 25, 2014 | | Microparticles Containing Active Ingredients, Agents Containing these Microparticles, their use for Ultrasound-Controlled Release of Active Ingredients, as well as a Process for their Production |
6,306,366 | | October 23, 2001 | | February 10, 2015 | | Microparticles that Contain Gas, Galactose and a Saturated Fatty Acid |
6,308,434 | | October 30, 2001 | | May 03, 2019 | | Spray dry method. |
6,383,470 | | May 07, 2002 | | November 11, 2013 | | Microparticle Preparations Made of Biodegradable Copolymers |
6,395,300 | | May 28, 2002 | | November 04, 2019 | | Porous drug matrices and method of manufacture. |
6,423,345 | | July 23, 2002 | | February 22, 2019 | | Lipid polymer compositions for enhanced drug delivery. |
6,560,897 | | May 13, 2003 | | June 15, 2019 | | Spray drying apparatus and methods of use. |
6,589,557 | | July 08, 2003 | | November 04, 2019 | | Porous celecoxib matrices and methods of manufacture. |
6,610,317 | | August 26, 2003 | | May 25, 2020 | | Porous paclitaxel matrices and methods of manufacture thereof. |
6,645,528 | | November 11, 2003 | | November 11, 2019 | | Porous drug matrices and methods of manufacture thereof. |
6,689,390 | | February 10, 2004 | | February 22, 2019 | | Matrices Formed of Polymer and Hydrophobic Compounds for Use in Drug Delivery. |
6,730,322 | | May 04, 2004 | | February 22, 2019 | | Matrices Formed of Polymer and Hydrophobic Compounds for Use in Drug Delivery. |
6,800,297 | | October 05, 2004 | | November 04, 2019 | | Porous COX-2 Matrices and Methods of Manufacture Thereof |
6,918,991 | | July 19, 2005 | | December 19, 2022 | | Methods and Apparatus for Making Particles Using Spray Dryer and In-Line Jet Mill |
6,921,458 | | July 26, 2005 | | December 19, 2022 | | Methods and Apparatus for Making Particles Using Spray Dryer and In-Line Jet Mill |
6,932,983 | | August 23, 2005 | | July 9, 2021 | | Porous Drug Matrices and Methods of Manufacture Thereof |
6,962,006 | | November 08, 2005 | | December 19, 2022 | | Methods and Apparatus for Making Particles Using Spray Dryer and In-Line Jet Mill |
In May 2005, pursuant to a Patent Transfer Agreement with Schering, we acquired from Schering rights, title and interest in nine patent families, including U.S. and international ultra-sound related patents, and licenses to two other patent families. In consideration of the transfer and assignment of these patents, we agreed to pay Schering a total of $7.0 million of which $1.0 million was paid in May 2005, $3.0 million is due in May 2006, and $3.0 million is due in May 2007.
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Our planned and potential products should be protected from unauthorized use by third parties to the extent that they are covered by valid and enforceable patents or are effectively maintained as trade secrets. Patents owned by or licensed to us may not afford protection against competition, and our pending patent applications now or hereafter filed by or licensed to us may not result in patents being issued. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States.
The patent positions of companies like ours involve complex legal and factual questions and, therefore, their enforceability cannot be predicted with certainty. Our patent applications may not issue as patents. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, and the rights granted thereunder may not provide us proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies or duplicate any technology developed by us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization. Patent expiration could adversely affect our ability to protect future product development and, consequently, our operating results and financial position.
Because patent applications in the United States and many foreign jurisdictions are typically held in secret and not published until eighteen months after filing, we cannot be certain that we were the first to file for protection of the inventions set forth in these patent applications. Because publications of discoveries in the scientific literature often lag behind actual discoveries, we cannot be certain that we were the first to make the inventions claimed in each of our issued or pending patent applications.
Our planned or potential products may be covered by third-party patents or other intellectual property rights, in which case we may need to obtain a license or sublicense to these rights to continue developing or marketing these products. Although from time to time we receive correspondence from and have discussions with third-parties concerning the patent position of such third-parties, as of the date of this prospectus we have not received correspondence from any third-party alleging infringement. Any required licenses or sublicenses may not be available to us on acceptable terms, if at all. If we do not obtain any required licenses or sublicense, we could encounter delays in product introductions while we attempt to design around these patents, or could find that the development, manufacture or sale of products requiring these licenses is foreclosed.
We know of U.S. and foreign patents issued to third parties that relate to aspects of our product candidates. There may also be patent applications filed by these or other parties in the United States and various foreign jurisdictions that relate to some aspects of our product candidates, which, if issued, could subject us to infringement actions. In particular, we are aware of U.S. and foreign patents owned by third parties, including potential competitors, that arguably cover aspects of our AI-700 contrast agent. Based on advice from our patent counsel, we believe that these claims are not infringed and/or invalid. Absent a license or other business arrangement, there is a significant possibility that one or more of these third parties will use litigation to assert their patents in the United States or Europe.
The owners or licensees of these and other patents may file one or more infringement actions against us. Any such infringement or misappropriation action could cause us to incur substantial costs defending the lawsuit and could distract our management from our business, even if the allegations of infringement or misappropriation are unwarranted. The defense of multiple claims could have a disproportionately greater impact. In addition, either in response to or in anticipation of any such infringement or misappropriation claim, we may enter into commercial agreements with the owners or licensees of these rights. The terms of these commercial agreements may include substantial payments, including substantial royalty payments on revenues received by us in connection with the commercialization of our products. These payments could increase our operating losses and reduce our resources available for development
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activities. Furthermore, a party making this type of claim could secure a judgment that requires us to pay substantial damages, which would increase our operating losses and reduce our resources available for development activities. A judgment could also include an injunction or other court order that could prevent us from making, using, selling, offering for sale or importing our products or prevent our customers from using our products.
Litigation may be necessary to defend against or assert claims of infringement, to enforce patents issued to us, to protect trade secrets or know-how owned by us, or to determine the scope and validity of the proprietary rights of others. In addition, interference proceedings declared by the U.S. Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications. Litigation or interference proceedings could result in substantial costs to and diversion of effort by us, and could have a material adverse effect on our business, financial condition and results of operations. These efforts by us may not be successful.
We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees and contractors. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may also arise as to the rights in related or resulting know-how and inventions.
Government Regulation
U.S. Regulatory Approval
The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries regulate and impose substantial requirements upon the research, development, pre-clinical and clinical testing, manufacture, distribution, record keeping, reporting, storage, approval, advertising, promotion, sale and export of pharmaceutical products. We believe that our products will be regulated as drugs by the FDA.
The process required by the FDA under the new drug provisions of the Federal Food, Drug and Cosmetic Act before our products may be marketed in the United States generally involves the following:
· pre-clinical laboratory and animal tests performed under the FDA’s Good Laboratory Practices regulation;
· development of manufacturing processes which conform to FDA-mandated cGMPs;
· submission and acceptance of an Investigational New Drug application, or IND, which must become effective before clinical trials may begin in the United States;
· adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate in our intended use; and
· FDA review and approval of an NDA, prior to any commercial sale or shipment of a product.
The testing and approval process requires substantial time, effort, and financial resources and we cannot be certain that any approval will be granted on a timely basis, if at all.
Pre-clinical tests include laboratory evaluation of the product candidate, its chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of the product candidate. The results of the pre-clinical tests, together with manufacturing information and analytical data, are then submitted to the FDA as part of an IND, which must become effective before we may begin human clinical trials. Pre-clinical tests and studies can take several years to complete, and there is no guarantee that an IND based on those tests and studies will become effective to permit clinical testing to begin. An IND
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becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the trials as outlined in the IND and imposes a clinical hold. In this case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. Prior to initiation of clinical studies, an independent Institutional Review Board at each medical site proposing to conduct the clinical trials must review and approve each study protocol. Similar requirements exist in other countries where we may choose to perform clinical trials.
Human clinical trials are typically conducted in three sequential phases that may overlap:
· Phase 1: The drug is initially introduced into healthy human subjects or patients and tested for safety and dosage tolerance. Absorption, metabolism, distribution and excretion studies are generally performed at this stage.
· Phase 2: The drug is studied in exploratory therapeutic trials in a limited number of subjects with the disease or medical condition for which the new drug is intended to be used in order to identify possible adverse effects and safety risks, to determine the preliminary or potential efficacy of the product for specific targeted diseases or medical condition and to determine dosage tolerance and the optimal effective dose.
· Phase 3: When Phase 2 evaluations demonstrate that a specific dosage range of the drug is likely to be effective and has an acceptable safety profile, Phase 3 trials are undertaken to demonstrate clinical efficacy and to further test for safety in an expanded patient population, often at geographically dispersed clinical study sites.
We cannot be certain that we will successfully complete Phase 1, Phase 2 or Phase 3 testing of our product candidates within any specific time period, if at all. Furthermore, the FDA, the Institutional Review Board or the sponsor may suspend or terminate clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.
A description of the manufacturing process and quality control methods, including data to support the successful qualified manufacturing of product within the designated manufacturing facility, as well as results of pre-clinical studies, toxicology studies and clinical trials, among other things, are submitted to the FDA as part of an NDA for approval prior to the marketing and commercial shipment of the product. The FDA may deny a new drug application if all applicable regulatory criteria are not satisfied or may require additional data including clinical, toxicology or manufacturing data. Even after a new drug application is issued, the FDA may withdraw product approval if compliance with regulatory standards is not maintained or if safety problems occur after the product reaches the market. In addition, the FDA requires surveillance programs to monitor the consistency of manufacturing and the safety of approved products that have been commercialized. The agency has the power to require changes in labeling or to prevent further marketing of a product based on new data that may arise after commercialization. Similar requirements exist in other countries where we may choose to seek marketing approval.
Satisfaction of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially, based upon the type, complexity and novelty of the pharmaceutical product. Government regulation may delay or prevent marketing of potential products altogether or for a considerable period of time and imposes costly and time-consuming requirements. We cannot be certain that the FDA or any other regulatory agency will agree with our judgment and interpretations or will grant approval for any of our products under development on a timely basis, if at all. Success in pre-clinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from pre-clinical and clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, the approval is typically limited to specific clinical indications. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the
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product from the market. Delays in obtaining, or failures to obtain regulatory approvals would have a material adverse effect on our business. Marketing our products abroad will require similar regulatory approvals and is subject to similar risks. In addition, we cannot predict what adverse governmental regulations may arise from future U.S. or foreign governmental action.
Any products manufactured or distributed by us pursuant to FDA clearances or approvals are subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and state agencies for compliance with cGMPs, which impose procedural and documentation requirements upon us and our third party manufacturers. We cannot be certain that we, or our present or future suppliers, will be able to comply with the cGMP regulations and other FDA regulatory requirements. Failure to comply with these requirements can result in, among other things, total or partial suspension of production, failure of the government to grant approval for marketing, and withdrawal, suspension, or revocation of marketing approvals.
Once the FDA approves a product, a manufacturer must provide certain updated safety and efficacy information. Product changes, as well as certain changes in a manufacturing process or facility or other post-approval changes may necessitate additional FDA review and approval.
The FDA regulates drug labeling and promotion activities. The FDA has actively enforced regulations prohibiting the marketing of products for unapproved uses. Violations of the Federal Food, Drug, and Cosmetic Act or regulatory requirements may result in agency enforcement action, including voluntary or mandatory recall, suspension or revocation of product approval, product seizure, fines, injunctions or civil or criminal penalties. Our product development and testing activities are also subject to a variety of state laws and regulations. Any applicable state or local regulations may hinder our ability to manufacture or test our products in those states or localities. We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or in the future.
The FDA’s policies may change and additional government regulations may be enacted which could prevent or delay regulatory approval of our potential products. Moreover, increased attention to the containment of health care costs in the United States and in foreign markets could result in new government regulations that could have a material adverse effect on our business. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.
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We have had ongoing discussions with the FDA concerning the statistical analysis plan used in connection with our Phase 3 clinical trials of AI-700. In April 2005, based in part upon feedback from FDA, we revised the statistical analysis plan on which we base our patient enrollment estimates for the AI-700 Phase 3 clinical trials. Since that time we have continued discussions with the FDA. Continued discussions with the FDA could lead to other changes relating to our statistical analysis plans. How, when or if the matters being discussed are resolved may affect whether AI-700 is approved for the indication that we are seeking, the timing of such approval or whether AI-700 is approved at all. Such timing could also lead to delays in the timing of the unblinding of the data from our Phase 3 clinical trials, and therefore public announcement of results from those trials.
Foreign Regulatory Approval
Outside the United States, our ability to market our products will also be contingent upon receiving marketing and pricing authorizations from the appropriate regulatory authorities. The foreign regulatory approval process includes all the risks associated with FDA approval described above. The requirements governing conduct of clinical trials and marketing authorization vary widely from country to country.
Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized or decentralized procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval.
We, or a partner to whom we have assigned the right, will choose the appropriate route of European regulatory filing. In 2004, we entered into a strategic partnership with Nycomed under which they are primarily responsible for regulatory strategy and approval in Europe for our lead product candidate, AI-700. However, the chosen regulatory strategy for our product candidates may not secure regulatory approvals or approvals of the chosen product indications. These approvals, if obtained, may take longer than anticipated. We cannot assure you that any of our product candidates will prove to be safe or effective, will receive regulatory approvals, or will be successfully commercialized.
Competition
The pharmaceutical and biotechnology industries in which we operate are characterized by rapidly advancing technologies, intense competition and an emphasis on proprietary products. Our competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions. All of these competitors currently engage in, have engaged in or may engage in the future in the development, manufacturing, marketing and commercialization of new pharmaceuticals and pharmaceuticals, some of which may compete with our present or future product candidates.
We expect that our product candidates, if approved for marketing, will compete with existing drugs, therapies, drug delivery systems and technological approaches, as well as new drugs, therapies, drug delivery systems or technological approaches that may be developed or commercialized in the future. Any of these drugs, therapies, systems or approaches may receive government approval or gain market acceptance more rapidly than our product candidates, may offer therapeutic or cost advantages over our product candidates or may cure our targeted diseases or their underlying causes completely. As a result, our product candidates may become noncompetitive or obsolete.
AI-700, our ultrasound contrast agent for the assessment of myocardial perfusion, if approved for marketing and sale, will face intense competition. We believe that ultrasound with AI-700 can be a cost-effective and convenient substitute for nuclear stress tests, the current standard of care in myocardial
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perfusion assessment. In addition, we believe AI-700 will add useful myocardial perfusion information that stress echo cannot provide without a contrast agent. AI-700 is designed for use with widely available ultrasound equipment and techniques currently used for wall motion studies using stress echo. We expect to face intense competition from companies that market products related to these existing imaging techniques, as well as other companies that are developing ultrasound contrast agents for use in stress echo.
Nuclear stress testing is an established technique for assessing myocardial perfusion. Radioactive contrast agents that are approved by the FDA for use in nuclear stress tests include Cardiolite®, which is marketed by Bristol-Myers Squibb Company; Myoview®, which is marketed by GE Healthcare; and thallium, which is marketed by GE Healthcare, Bristol-Myers Squibb and Tyco International.
Stress echo without ultrasound contrast is an established technique for detecting abnormal wall motion, which some cardiologists may find satisfactory for the detection of coronary heart disease. However, stress echo without contrast is incapable of assessing myocardial perfusion. We believe that ultrasound with AI-700 will enable stress echo to provide information on myocardial perfusion in addition to wall motion.
No ultrasound contrast agent has been approved by the FDA for use in myocardial perfusion imaging or stress echo. However, we are aware of other companies that are or may be developing ultrasound contrast agents for use in stress echo. CardioSphere™, which is being developed by Point Biomedical Corporation, is an ultrasound contrast agent for the assessment of myocardial perfusion. In 2006, Point announced that it had filed a NDA for CardioSphere with the FDA. In addition, some companies have ultrasound contrast agents that are FDA approved for LVO and EBD in patients with suboptimal images or are in development. In the future, these companies may seek to broaden their indications to include stress echo and myocardial perfusion assessment. These FDA-approved agents which are currently marketed include Optison®, which is marketed by GE Healthcare and Definity®, which is marketed by Bristol-Myers Squibb. SonoVue®, which is being developed by Bracco, is an ultrasound contrast agent which we believe is in late stage clinical development for LVO and EBD and for radiology applications, but as of the date of this prospectus, to our knowledge, has not received final approval from the FDA.
AI-850, our reformulation of paclitaxel, if approved for marketing and sale, will also face intense competition. We are aware of companies, such as American Pharmaceutical Partners, NeoPharm and Sonus Pharmaceuticals that are applying significant resources and expertise to developing reformulations of paclitaxel for intravenous delivery that will compete with our current product candidate. In early 2005, American Pharmaceutical Partners received FDA approval for and is marketing their product. None of these other reformulations has received approval from the FDA. Other companies, such as Cell Therapeutics, are developing new chemical entities that involve paclitaxel conjugated, or chemically bound, to another chemical. None of these new chemical entities have received final approval from the FDA. In addition, a number of companies have developed technology for delivering hydrophobic drugs. Cardinal Health, CyDex and Elan have created formulations of hydrophobic drugs that have been approved by the FDA.
AI-128, our initial sustained release formulation of an asthma drug, if approved for marketing and sale, will also face intense competition. Companies such as Alkermes possess technology that may be suitable for sustained release pulmonary drug delivery and may have competitive programs that have not been publicly announced or may decide to begin such programs in the future. We are not aware of any other company currently in human clinical development of a sustained release version of the asthma drug that is currently the subject of our research and development efforts. In addition, many asthma drugs are marketed by large pharmaceutical companies with much greater resources than us. These companies may be developing sustained release versions of their asthma drugs that would compete with our sustained release product candidate.
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Many of our competitors in these markets have greater development, financial, manufacturing, marketing, and sales experience and resources than we do and we cannot be certain that they will not succeed in developing products or technologies which will render our technologies and products obsolete or noncompetitive. We cannot assure you that our products will compete successfully with these newly emerging technologies. In addition, many of those competitors have significantly greater experience than we do in their respective fields. Many of these competitors may have greater name recognition than we do, and may offer discounts as a competitive tactic.
Employees
As of March 1, 2006, we had 110 full-time employees, including 91 in research and development and 19 in general and administrative. Eleven of our employees have M.D.s and/or Ph.D.s. From time to time, we also employ independent contractors to support our engineering and administrative organizations. None of our employees are represented by a collective bargaining unit and we have never experienced a work stoppage. We consider our relations with our employees to be good.
Organization and Trademarks
We were organized as a Delaware corporation on July 12, 1993.
We have trademarks in the United States and other countries, including “Acusphere,” “HDDS” and “PDDS” and our logo. This Annual Report on Form 10-K also contains the trademarks and trade names of other entities that are the property of their respective owners.
Financial Information
The financial information required under this Item 1 is incorporated herein by reference to Item 8 of this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
Risks Related to Our Company
We have not generated any product revenue to date, have a history of operating losses and our capital resources are limited.
We are focused on product development and we have not generated any revenue from commercial sales of our products to date. We have incurred losses each year of our operations. In 2005, we had a net loss available to holders of common stock of $47.0 million At December 31, 2005 we had an accumulated deficit of $220.1 million. We expect our research and development, general and administrative and sales and marketing expenses will increase over the next several years.
We expect to continue to incur losses and capital expenditures for the foreseeable future. We also anticipate cash out flow from debt repayment and payment of other obligations. We believe, based on our operating plans, that our existing resources, including scheduled proceeds from Nycomed, are adequate to fund our planned operations through 2006, or beyond twelve months if we elect to reduce our rate of spending. Unless we reduce our current rate of spending, we will require significant additional funds to fund our operations, including to develop products, conduct clinical trials, achieve regulatory approvals, qualify commercial manufacturing space and, subject to regulatory approval, commercially launch AI-700, our other product candidates under development and future product candidates. We may raise this additional capital through public or private sales of equity, or from borrowings, or from strategic partners.
As a result of our limited capital resources, we may elect to delay the funding of certain development activities, including the filing of our NDA for AI-700, which would result in a delay in the commercialization of AI-700. Any such delay in the filing of an NDA or commercialization of AI-700
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would have a material adverse impact on our business and would likely have a material adverse effect on the market price of our common stock. To address our capital needs, we may elect to raise funds through public or private sales of equity or from borrowings or from strategic partners. Additional equity financing, if available, may be dilutive to our stockholders; debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate our business; and strategic partnerships, if available, may result in royalties or other terms which reduce our economic potential from products under development. In addition, third parties may attempt to acquire us at valuations our board of directors or stockholders may not find attractive. If our capital resources are not sufficient to fund our planned operations for a twelve month period at the time the audit for our 2006 financial results is complete, our auditor may require a going concern qualification in its audit report be included in our audit report on Form 10-K. Any such qualification would have a material adverse effect on our ability to raise capital and would have a material adverse effect on the market price of our common stock.
We need to allocate significant amounts of our available capital resources to make payments on our outstanding indebtedness and equipment lease obligations, our patent transfer agreement with Schering Aktiengesellschaft and as dividends on our 6.5% convertible exchangeable preferred stock, which in turn could reduce our financial flexibility and ability to fund other activities.
As of December 31, 2005, we had approximately $21.3 million in aggregate principal indebtedness outstanding related to capital lease obligations, notes payable and other long-term obligations. As of December 31, 2005, we had outstanding 740,000 shares of our 6.5% convertible exchangeable preferred stock, which shares accrue cumulative cash dividends at the annual rate of $3.25 per share, payable quarterly on the first day of March, June, September, and December. These payments will:
· reduce the availability of our capital to fund our clinical trials for AI-700, the build-out and qualification of our commercial manufacturing space in Tewksbury, Massachusetts and for working capital and other general corporate purposes and may require us, in order to meet these obligations, to delay or reduce expenditures or forego business opportunities; and
· potentially impair our ability to obtain additional financing, including intended future borrowings against our equipment financing line with Oxford Finance Corporation.
To address our capital needs, we may elect to raise funds through public or private sales of equity or from borrowings or from strategic partners. Additional equity financing, if available, may be dilutive to our stockholders; debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate as a business; and strategic partnerships, if available, may result in royalties or other terms which reduce our economic potential from products under development.
Failure to obtain regulatory approvals for our product candidates under development, in particular our lead product candidate AI-700, would have a material adverse effect on our business.
We must receive regulatory approval of each of our product candidates before we can commercialize or sell that product candidate. The pre-clinical laboratory testing, formulation development, manufacturing and clinical trials of any product candidates we develop independently or in collaboration with third parties, as well as the distribution and marketing of these product candidates, are regulated by numerous federal, state and local governmental authorities in the United States, principally the FDA, and by similar agencies in other countries. The development and regulatory approval process takes many years, requires the expenditure of substantial resources, is uncertain and subject to delays, and will thus delay our receipt of revenues, if any, from any of our product candidates. We cannot assure you that our clinical trials will demonstrate the safety and efficacy of any of our product candidates or will result in marketable products.
No product can receive FDA approval unless human clinical trials show both safety and efficacy for each target indication in accordance with FDA standards. A number of companies in the pharmaceutical
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and biotechnology industries have suffered significant setbacks in late stage clinical trials even after achieving promising results in early stage development. In our Phase 3 clinical trials for AI-700, we are seeking to demonstrate non-inferiority compared to nuclear stress tests. The clinical effectiveness of nuclear stress tests may have improved since the time of our Phase 2 clinical trials. We therefore cannot assure you that the results from our Phase 2 clinical trials for AI-700 will be predictive of results obtained in our Phase 3 clinical trials.
Many of the patients in our AI-700 clinical trials have coronary heart disease. As part of our AI-700 clinical trials, patients will be exposed to potential safety risks associated with a stress test, including risks associated with a pharmacological stressor, and AI-700. Given the nature of the AI-700 clinical trials, including administering AI-700 in Phase 3 to larger numbers of at-risk patients and new clinical sites and administering AI-700 to patients with coexisting disease, adverse events are expected to be encountered during the clinical trials. Adverse events are also likely to be encountered in clinical trials for our other products, which clinical trials also include at-risk patients. When significant adverse events are detected and these events are attributable to our products, such events could delay, limit or prevent regulatory agency approval.
Further, data obtained from pre-clinical and clinical activities are subject to varying interpretations that could delay, limit or prevent regulatory agency approval. We cannot assure you that our Phase 3 plan for AI-700 will successfully address the requirements of the FDA or that the results of the Phase 3 program will establish the safety and efficacy of AI-700 sufficiently for us to obtain regulatory approval. We may also encounter delays, resulting from the need to enroll more patients than we currently estimate for in our clinical trials. This may occur due to a variety of factors including our inability to enroll sufficient proportion of patients with and without disease that is consistent with our estimated clinical trial enrollment, based on a higher than expected number of patients enrolled in the trials who are unevaluable because their nuclear stress or angiography studies are not compliant with trial protocol or based on a change in the sample size required by regulatory authorities to meet desired study endpoints. We may also encounter delays or rejections based on our inability to enroll enough patients to complete our clinical trials.
We may encounter delays or rejections based on changes in regulatory agency policies or personnel during the period in which we develop a drug or the period required for review of any application for regulatory agency approval of a particular compound. In 2004, changes went into effect in the regulation of clinical trials in Europe and are currently being implemented by the individual member states of the European Union. Our continuing efforts to comply with these changes could lead to delays or rejections of our clinical trials. We also may encounter delays in the event we are unable to produce clinical trial material in sufficient quantities and of sufficient quality to meet the schedule for our planned clinical trials. In addition, we rely on a number of third parties, such as clinical research organizations, to help support the clinical trials by performing independent clinical monitoring, data acquisition and data evaluations. Any failure on the part of these third parties could delay the regulatory approval process.
Failure to obtain regulatory approval or any delay or setback in obtaining regulatory agency approvals could:
· adversely affect our ability to market any drugs we develop independently or with collaborative partners;
· impose additional costs and diminish any competitive advantages that we may attain; or
· adversely affect our ability to generate royalties.
In particular, failure to obtain approval or substantial delays in obtaining approval for our lead product candidate, AI-700, would delay our receipt of product revenues and would have a material adverse affect our business, financial condition and results of operations. Our stock price would also be materially adversely affected.
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We cannot be certain that we will obtain any regulatory approvals in other countries and the failure to obtain these approvals would have a material adverse affect on our business, financial condition and results of operations. In order to market our products outside of the United States, we and our current, and potential future, collaborative partners must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. The approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks associated with obtaining FDA approval detailed above. Approval by the FDA does not ensure approval by the regulatory authorities of other countries. In addition, many countries outside the United States require a separate review process prior to marketing to determine whether their national health insurance scheme will pay for newly approved products, as well as the price which may be charged for a product.
We may need to enroll more patients in our AI-700 Phase 3 clinical trials, and any such additional enrollment would require additional expenditures, which may be material, and would likely result in a delay of our submitting an NDA with the FDA for AI-700.
We are intentionally blinded to efficacy data from our ongoing Phase 3 pivotal trials. Estimating the number of patients we need to enroll in our pivotal Phase 3 clinical trials in order to achieve statistical significance in these trials is difficult. We estimate the number of patients we need to enroll in our pivotal Phase 3 clinical trials based on a variety of factors, including our understanding and analysis of previous trial data for AI-700, our ongoing discussions with the FDA and our own knowledge and past experience in these and similar matters. However, these estimates are subject to risks and uncertainties, and there can be no assurance that our estimates will prove to be correct. For example, in April 2005, based in part on feedback from the FDA, we revised the statistical analysis plan from which we base our patient enrollment estimates. This revision had the effect of increasing the number of patients we estimate to be needed to complete the Phase 3 clinical trials to approximately 700 patients. Continued discussions with the FDA could lead to other changes, including changes relating to our statistical analysis plans. How, when or if the matters being discussed are resolved may affect whether AI-700 is approved for the indication that we are seeking, the timing of such approval or whether AI-700 is approved at all. These discussions could also lead to delays in the timing of the unblinding of the data from our Phase 3 clinical trials and therefore, the public announcement of results from those trials. Patient enrollment depends on many factors, including the size and disease prevalence of the patient population, the nature of the protocol, the proximity of patients to clinical sites, and the eligibility criteria for the study and the freedom to operate with respect to intellectual property.
Any such delays, or the need to enroll more patients, will likely result in increased costs, which may be material and would likely have a harmful effect on our financial position and results of operations. The market price of our common stock may also be materially adversely affected in response to any such delays.
If we cannot raise additional capital on acceptable terms, we may be unable to complete planned clinical trials, obtain regulatory approvals or commercialize our product candidates.
We will require substantial future capital in order to continue to conduct the research and development, clinical and regulatory activities necessary to bring our product candidates to market and to establish commercial manufacturing, marketing and sales capabilities. Our future capital requirements will depend on many factors, including:
· the progress of pre-clinical development and laboratory testing and clinical trials;
· the timing of construction and size to which we expand our manufacturing capabilities;
· the time and costs involved in obtaining regulatory approvals;
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· the number of product candidates we pursue;
· the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims; and
· the establishment of selected strategic alliances and activities required for product commercialization.
We intend to seek additional funding through strategic collaborations and may seek funding through private or public sales of our securities or by licensing all or a portion of our technology. This funding may significantly dilute existing stockholders or may limit our rights to our technology.
We cannot assure you that we can obtain additional funding on reasonable terms, or at all. If we raise additional funds by issuing equity securities, our stock price may decline, our existing stockholders may experience significant dilution, and the newly issued securities may have rights superior to those of our common stock. If we raise additional funds by issuing debt, we may be subject to limitations on our operations and such debt may have rights senior to the debentures, if issued. If we cannot obtain adequate funds, we may:
· terminate or delay clinical trials for one or more of our product candidates;
· delay our establishment of sales, marketing and/or manufacturing capabilities;
· curtail significant product development programs that are designed to identify new product candidates;
· relinquish rights to our technologies or product candidates; and/or
· terminate or delay build-out and commissioning of our commercial manufacturing facility.
Our products, if approved, may fail to achieve market acceptance.
There can be no assurance that any products we successfully develop, if approved for marketing, will achieve market acceptance or generate significant revenues. Each of our product candidates is intended to replace or alter existing therapies or procedures, and hospitals, physicians or patients may conclude that these products are less safe or effective or otherwise less attractive than these existing therapies or procedures. For example, our lead product candidate, AI-700, is a contrast agent for use in ultrasound imaging procedures which will compete with existing nuclear imaging and stress echocardiography. Hospitals, physicians or patients may prefer these existing procedures to AI-700 enhanced ultrasound imaging. If our products do not receive market acceptance for any reason, it would adversely affect our business, financial condition and results of operations.
Further, our competitors may develop new technologies or products that are more effective or less costly, or that seem more cost-effective, than our products. We can give no assurance that hospitals, physicians, patients or the medical community in general will accept and use any products that we may develop.
Claims by other parties that we infringe or have misappropriated their proprietary technology may result in liability for damages, royalties, or other payments, or stop our development and commercialization efforts.
Competitors and other third parties may initiate patent litigation against us in the United States or in foreign countries based on existing patents or patents that may be granted in the future. Many of our competitors have obtained patents covering products and processes generally related to our products and processes, and they may assert these patents against us. Moreover, there can be no assurance that these competitors have not sought or will not seek additional patents that may cover aspects of our technology. As a result, there is a greater likelihood of a patent dispute than would be expected if our competitors were pursuing unrelated technologies.
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While we conduct patent searches to determine whether the technologies used in our products infringe patents held by third parties, numerous patent applications are currently pending and may be filed in the future for technologies generally related to our technologies, including many patent applications that remain confidential after filing. Due to these factors and the inherent uncertainty in conducting patent searches, there can be no guarantee that we will not violate third-party patent rights that we have not yet identified.
We know of U.S. and foreign patents issued to third parties that relate to aspects of our product candidates. There may also be patent applications filed by these or other parties in the United States and various foreign jurisdictions that relate to some aspects of our product candidates, which, if issued, could subject us to infringement actions. In particular, we are aware of U.S. and foreign patents owned by third parties, including potential competitors, which arguably cover aspects of our AI-700 contrast agent. We and several of these parties have recently been actively engaged in opposing the grant of European patents with claims that arguably cover aspects of our AI-700 product. Parties may contest patents in Europe prior to contesting the counterpart patents in the United States because of procedural differences between European and U.S. patent laws as well as economic considerations. There is a significant possibility that one or more of these third parties will use litigation to assert their patents in the United States or Europe.
The owners or licensees of these and other patents may file one or more infringement actions against us. In addition, a competitor may claim misappropriation of a trade secret by an employee hired from that competitor. Any such infringement or misappropriation action could cause us to incur substantial costs defending the lawsuit and could distract our management from our business, even if the allegations of infringement or misappropriation are unwarranted. A need to defend multiple actions or claims could have a disproportionately greater impact. In addition, either in response to or in anticipation of any such infringement or misappropriation claim, we may enter into commercial agreements with the owners or licensees of these rights. The terms of these commercial agreements may include substantial payments, including substantial royalty payments on revenues received by us in connection with the commercialization of our products. We have had discussions which lead us to believe that owners or licensees with these rights are interested in out-licensing certain rights to their patents. There can be no assurance that we will enter into any such agreement or that, if we elect to enter into such agreements that we will be able to do so on terms which are acceptable. Payments under such agreements could increase our operating losses and reduce our resources available for development activities. Furthermore, a party making this type of claim could secure a judgment that requires us to pay substantial damages, which would increase our operating losses and reduce our resources available for development activities. A judgment could also include an injunction or other court order that could prevent us from making, using, selling, offering for sale or importing our products or prevent our customers from using our products. If a court determined or if we independently concluded that any of our products or manufacturing processes violated third-party proprietary rights, our clinical trials could be delayed and there can be no assurance that we would be able to reengineer the product or processes to avoid those rights, or to obtain a license under those rights on commercially reasonable terms, if at all.
If we are unable to protect our intellectual property rights, our competitors may develop and market products with similar features that may reduce demand for our products, and we may be prevented from establishing collaborative relationships on favorable terms.
The following factors are important to our success:
· receiving patent protection for our product candidates;
· maintaining our trade secrets;
· not infringing on the proprietary rights of others; and
· preventing others from infringing our proprietary rights.
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We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets.
We try to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Because the patent position of pharmaceutical companies involves complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from others may not provide any protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. The laws of many foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States.
We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as our corporate partners, collaborators, employees and consultants. Any of these parties may breach the agreements and disclose our confidential information or our competitors might learn of the information in some other way. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.
We may become involved in lawsuits and administrative proceedings to protect, defend or enforce our patents that would be expensive and time consuming.
In order to protect or enforce our patent rights, we may initiate patent litigation against third parties in the United States or in foreign countries. In addition, we have been and continue to be subject to certain opposition proceedings conducted in patent and trademark offices challenging the validity of our patents and may become involved in future opposition proceedings. The defense of intellectual property rights, including patent rights through lawsuits, interference or opposition proceedings, and other legal and administrative proceedings can be costly and can divert our technical and management personnel from their normal responsibilities. Such costs increase our operating losses and reduce our resources available for development activities. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. For example, during the course of this kind of litigation and despite protective orders entered by the court, confidential information may be inadvertently disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. This disclosure could materially adversely affect our business and financial results.
We have never manufactured any of our product candidates in commercial quantities, and if we fail to develop an effective manufacturing capability for our products, including our lead product candidate AI-700, we may be unable to commercialize these products.
We have no experience in manufacturing our products for commercial use and limited experience in designing equipment for the manufacture of our products. We are working to start-up and qualify operations at a commercial manufacturing facility in Tewksbury, Massachusetts and to demonstrate that we can produce AI-700 at a commercial manufacturing scale prior to our filing of a NDA for AI-700 and, subject to required regulatory approvals, we intend to manufacture AI-700 in this facility for commercial
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use. We can not assure you that we will be able to successfully manufacture our products in sufficient quantities for commercial sale, or obtain the necessary regulatory approvals for such commercial manufacture, at all or in a timely or economical manner. Our intention to manufacture AI-700 or other products exposes us to the following risks, any of which could delay or prevent the approval of our products by the FDA or corresponding state and foreign agencies, or the commercialization of our products, or result in higher costs or inability to meet demand for AI-700 leading to potential revenue loss, and any of which would have a material adverse impact on our business, financial condition and results of operations.
· Manufacturers often encounter difficulties in achieving volume production, quality control and quality assurance. Accordingly, we might not be able to manufacture sufficient quantities of drugs to meet our clinical schedules or to commercialize our products.
· Manufacturers are obliged to manufacture in highly controlled environments and to operate in accordance with FDA and international mandated current good manufacturing practices, or cGMPs. For our clinical trials we have relied on contract manufacturers for such facilities and cGMP compliance. In July 2004, we entered into a lease for a facility in Tewksbury, Massachusetts that we are in the process of converting into a commercial manufacturing facility for AI-700. Creation and qualification of a commercial manufacturing environment requires significant expertise and capital resources, including the development of advanced manufacturing techniques and process controls and is subject to local and state planning approvals. Manufacturers of pharmaceutical products often encounter difficulties in constructing and qualifying new manufacturing facilities and in production, especially in scaling-up initial production. A failure within this new facility to establish and follow cGMPs and to document adherence to such practices may lead to significant delays in the availability of material for our NDA filing or commercial production for AI-700 and may delay or prevent filing or approval of marketing applications for our products or the ability to continue to manufacture the products. Certain of these delays would further require us to continue to operate this facility and incur related costs.
· Manufacture of our product candidates, in preparation for filing a NDA and for commercial production, will each initially require and rely on a single commercial manufacturing site, directly or through a contract manufacturer, without the backup of a second site that is qualified for commercial manufacture of the product. Qualification of another manufacturing site can be expensive and time consuming. Prior to using product from a new manufacturing site, we must demonstrate to the FDA and corresponding state and foreign agencies that the specifications for the product are consistent with the specifications for the product as it was manufactured at a prior qualified site or we must clinically or otherwise demonstrate that the safety and efficacy of the product produced in the new manufacturing site is consistent with the product as it was manufactured at the prior site. Demonstrating such consistency may be difficult, expensive or time consuming. In addition, before we would be able to produce product for commercial use at a new facility, it will have to undergo a pre-approval inspection by the FDA and corresponding state and foreign agencies. Once approved, drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign agencies to ensure strict compliance with cGMPs, other government regulations and corresponding foreign standards. Failure to maintain compliance with cGMP or with safety or environmental regulations could result in penalties, product recalls or restrictions on the use of the manufacturing site.
Under the terms of our collaboration agreement with Nycomed, we are responsible for the commercial manufacture of AI-700 for marketing and sale by Nycomed in Europe. Failure to manufacture AI-700 in a timely manner or on an economic basis, or in sufficient quantities, could jeopardize our relationship with Nycomed. We do not currently have a European sales force, nor do we have experience with regard to the commercialization, marketing, sale or distribution of pharmaceutical products in Europe, and we rely entirely on Nycomed for this expertise. Any termination of our relationship with
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Nycomed would have a material adverse impact on our business, financial condition and results of operations.
We may not be able to manufacture our products in commercial quantities, which would prevent us from marketing our products.
To date our product candidates have been manufactured in small quantities for pre-clinical and clinical trials. If any of these product candidates are approved by the FDA or foreign regulatory authorities for commercial sale, we will need to manufacture them in larger quantities. For AI-700, it is our intention to seek regulatory approval after we have demonstrated that we can manufacture AI-700 at a larger batch scale than is being used for clinical trial materials. We cannot assure you that we will be able to successfully increase the manufacturing capacity or manufacture at a larger batch scale, whether on our own or in collaboration with third party manufacturers, for any of our product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing may require certain additional validation studies, which the FDA must review and approve. If we are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a shortage in supply of that product candidate. Our product candidates require precise, high-quality manufacturing. Our failure to achieve and maintain these high manufacturing standards, including controlling the incidence of manufacturing errors and maintaining reliable product packaging for diverse environmental conditions, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business.
The Company’s commercial manufacturing facility in Tewksbury, Massachusetts is designed to meet the Company’s estimated initial commercial demand for AI-700. The facility is being initially equipped to run one production line. In order to support greater production capacity, this production line is designed to support a larger lyophilizer (pharmaceutical freeze dryer which can be operated under sterile conditions) than has been initially installed in the facility. Space in the facility has been designated for the future addition of a larger lyophilizer. Purchasing, installing and qualifying manufacturing equipment, such as a lyophilizer, typically requires significant lead times and temporary discontinuation of production. Also in the future the Company may need to add additional production lines at the Tewksbury, Massachusetts site or elsewhere to meet potential commercial demand for AI-700. The Company has made no commitment to such additions at this time. The cost of such additions can be significant. There can be no assurance that the Company’s capacity estimates will be achieved. Any such additions would increase our operating spending, increase our capital requirements and reduce our resources available for development activities.
We have removed our AI-700 manufacturing equipment from the facilities of our third party contract manufacturer and currently have no facility within which to manufacture AI-700 until the new commercial manufacturing facility is qualified or until other arrangements are made.
We have removed our AI-700 manufacturing equipment from the facilities of a third-party contract manufacturer. We believe that we have sufficient inventory of AI-700 clinical trial material to complete our Phase 3 program. However, there can be no assurance that such inventory will prove sufficient or that the inventory will not get damaged or otherwise disqualified. Currently, we have no facility within which to manufacture AI-700 until the new commercial manufacturing facility is qualified or until other arrangements are made. If we lack sufficient inventory of AI-700 clinical trial material to complete our Phase 3 program or are unable to manufacture sufficient inventory on a timely basis, our Phase 3 program could be delayed and would consequently delay our ability to commercialize AI-700. These delays could have a material adverse effect on our business, financial condition and results of operations.
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If third-party manufacturers of our products fail to devote sufficient time and resources to our concerns, or if their performance is substandard, our clinical trials may be delayed and our costs may rise.
We may rely substantially on third-party contract manufacturers to supply, store and distribute our potential products for our clinical trials and other development needs. Our reliance on these third-party manufacturers will expose us to the following risks, any of which could delay or prevent the completion of our clinical trials, the approval of our products by the FDA, or the commercialization of our products, result in higher costs, or deprive us of additional product candidates, and any of such effects would have a material adverse impact on our business, financial condition and results of operations.
· Contract manufacturers often encounter difficulties in achieving volume production, quality control and quality assurance, as well as shortages of qualified personnel. Accordingly, a manufacturer might not be able to manufacture sufficient quantities of drugs to meet our clinical schedules.
· Contract manufacturers are obliged to operate in accordance with FDA-mandated current good manufacturing practices, or cGMPs. A failure of these contract manufacturers to establish and follow cGMPs and to document their adherence to such practices may lead to significant delays in the availability of material for clinical study and may delay or prevent filing or approval of marketing applications for our products.
· For production of clinical trial material for each of our current product candidates we will initially rely on a single manufacturer. Changing these or future manufacturers may be difficult and the number of potential manufacturers is limited. Changing manufacturers may require re-validation of the manufacturing processes and procedures in accordance with FDA-mandated cGMPs. Such re-validation may be costly and time-consuming. It may be difficult or impossible for us to find replacement manufacturers on acceptable terms quickly, or at all.
· Our contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to produce, store and distribute our products successfully. Our manufacturing levels, while important to us, can represent relatively small fractions of the overall business of most qualified contract manufacturers. As a result, the contract manufacturers may not provide us with the attention that we need or may be unwilling to adapt to necessary changes in our manufacturing requirements.
Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign agencies to ensure strict compliance with cGMPs, other government regulations and corresponding foreign standards. While we are obligated to audit the performance of third party contractors, we do not have control over our third-party manufacturers’ compliance with these regulations and standards. Failure by our third-party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of the government to grant market approval of drugs, delays, suspension or withdrawal of approvals, seizures or recalls of product, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business.
Materials necessary to manufacture our products may not be available, which may delay our development and commercialization activities.
Only a few facilities manufacture some of the raw materials necessary to manufacture our products. If we need to purchase a raw material that is in limited supply for our clinical trials, or for commercial distribution if we obtain marketing approval of a product candidate, we cannot assure you that one or more suppliers would be able to sell us that raw material at the time we need it and on commercially reasonable terms. If we change suppliers for any of these materials or any of our suppliers experiences a shutdown or disruption in the facilities used to produce these materials, due to technical, regulatory or other problems, it could harm our ability to manufacture our products. Our inability to obtain required raw materials for any reason could substantially impair our development activities or the production, marketing and distribution of our products.
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We have no experience selling, marketing or distributing our products and no internal capability to do so.
If we receive regulatory approval to commence commercial sale of any product, we will face competition with respect to commercial sales, marketing and distribution. These are areas in which we have no experience. To market any of our products directly, we must develop a direct marketing and sales force with technical expertise and supporting distribution capability. Alternatively, we may engage a pharmaceutical or other healthcare company with an existing distribution system and direct sales force to assist us. There can be no assurance that we will successfully establish sales and distribution capabilities either on our own or in collaboration with third parties or gain market acceptance for our products. To the extent we have or will enter co-promotion or other licensing arrangements, any revenues we receive will depend on the efforts of third parties and there can be no assurance that our efforts will succeed.
If we are unable to retain key personnel and hire additional qualified scientific, manufacturing, sales and marketing, and other personnel, we may not be able to successfully achieve our goals.
We depend on the principal members of our scientific and management staff. The loss of these principal members’ services might significantly delay or prevent the achievement of research, development or business objectives and could materially adversely affect our business, financial condition and results of operations. We do not maintain key person life insurance on any of these principal members. On February 1, 2006, we entered into executive employment agreements with key members of the management team that provide for compensation and other benefits in the event these persons are terminated other than for cause, including in connection with a “change of control” of Acusphere.
Our success depends, in large part, on our ability to attract and retain qualified scientific and management personnel such as these individuals. We face intense competition for such personnel and consultants. We cannot assure you that we will attract and retain qualified management and scientific personnel in the future.
Further, we expect that our potential expansion into areas and activities requiring additional expertise, such as further clinical trials, governmental approvals, commercial manufacturing and marketing, will place additional requirements on our management, operational and financial resources. We expect these demands will require an increase in management and scientific personnel and the development of additional expertise by existing management personnel. The failure to attract and retain such personnel or to develop such expertise could materially adversely affect prospects for our success.
We will establish collaborative relationships, and those relationships may expose us to a number of risks.
We will rely on a number of significant collaborative relationships with pharmaceutical or other healthcare companies for our manufacturing, research funding, clinical development and/or sales and marketing performance. Reliance on collaborative relationships poses a number of risks, including the following:
· we cannot effectively control whether our corporate partners will devote sufficient resources to our programs or product candidates;
· disputes may arise in the future with respect to the ownership of rights to technology developed with collaborators;
· disagreements with collaborators could delay or terminate the research and development, regulatory approval or commercialization of product candidates, or result in litigation or arbitration;
· corporate partners may have considerable discretion in electing whether to pursue the development of any additional product candidates and may pursue technologies or products either on their own or in collaboration with our competitors; and
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· collaborators with marketing rights may choose to devote fewer resources to the marketing of our product candidates than they do to product candidates of their own development.
In July 2004, we entered into a collaboration, license and supply agreement with Nycomed in which we granted Nycomed rights to develop and market AI-700 in Europe. There can be no assurance that the regulatory goals, sales targets and other objectives of this agreement will be achieved. Failure to achieve these goals, targets and objectives would result in our inability to receive license, milestone, royalty and other payments under this agreement, which would have a material adverse impact on our business, financial condition and results of operations including, under certain conditions, reduction of royalty rates, delays in regulatory approvals and product sales, penalties and termination of the agreement. Under certain provisions of this collaboration agreement, if we fail in any material respect to use all commercially reasonable efforts to carry out referenced obligations under the agreement, we would be obligated to pay Nycomed liquidated damages of up to $12 million. Although we plan to carry out all of these obligations, which we believe are in our control, there can be no assurance that termination of this agreement will not occur or that such termination would not result in us incurring liquidated damages of up to $12 million.
Given these risks, our current and future collaborative efforts may not be successful. Failure of these efforts could delay our product development or impair commercialization of our products, and could have a material adverse effect on our business, financial condition and results of operations.
Competition in the pharmaceutical industry is intense, and if we fail to compete effectively our financial results will suffer.
We engage in a business characterized by extensive research efforts, rapid developments and intense competition. We cannot assure you that our products will compete successfully or that research and development by others will not render our products obsolete or uneconomical. Our failure to compete effectively would materially adversely affect our business, financial condition and results of operations. We expect that successful competition will depend, among other things, on product efficacy, safety, reliability, availability, timing and scope of regulatory approval and price. Specifically, we expect important factors will include the relative speed with which we can develop products, complete the clinical, development and laboratory testing and regulatory approval processes and supply commercial quantities of the product to the market.
We expect competition to increase as technological advances are made and commercial applications broaden. In commercializing our initial product candidates and any additional products we develop using our HDDS and PDDS technologies, we will face substantial competition from large pharmaceutical, biotechnology and other companies, universities and research institutions.
· AI-700, our ultrasound contrast agent and lead product candidate, if approved for marketing and sale, will compete with nuclear stress tests, the current standard of care in myocardial perfusion imaging. Nuclear contrast agents that are approved for use in myocardial perfusion imaging include products marketed by GE Healthcare and Bristol-Myers Squibb. In 2004, the cost of a nuclear stress test was approximately $770 per procedure. In addition, GE Healthcare and Bristol-Myers Squibb have developed and are marketing ultrasound contrast agents that have been approved by the FDA for use in Left Ventricular Opacification and Endocardial Border Delineation in patients with suboptimal images, and in the future they may seek to broaden their products to include stress echo and myocardial perfusion assessment. Moreover, we are aware that other companies, such as Bracco, are developing ultrasound contrast agents for wall imaging and for radiology applications, and that Point Biomedical is developing an ultrasound contrast agent specifically for myocardial perfusion imaging. In 2006, Point announced that it had filed a NDA for CardioSphere with the FDA. Finally, some cardiologists may find it satisfactory to use stress echo without contrast for the detection of coronary heart disease.
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· AI-850, our reformulation of paclitaxel, if approved for marketing and sale, will also face intense competition from companies such as American Pharmaceutical Partners, NeoPharm and Sonus Pharmaceuticals (in partnership with Schering AG), which are applying significant resources and expertise to developing reformulations of paclitaxel for intravenous delivery. American Pharmaceutical Partners has received FDA approval and is selling their product. Other companies, such as Cell Therapeutics, are developing new chemical entities that involve paclitaxel conjugated, or chemically bound, to another chemical.
· AI-128, our sustained release formulation of an asthma drug, if approved for marketing and sale, will also face intense competition. Companies such as Alkermes possess technology that may be suitable for sustained release pulmonary drug delivery and may have competitive programs that have not been publicly announced or may decide to begin such programs in the future. In addition, large pharmaceutical companies that market FDA-approved asthma drugs may be developing sustained release versions of their asthma drugs that would compete with our product candidates.
Relative to us, most of our competitors have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Many of our competitors may achieve product commercialization or patent protection earlier than we will.
Furthermore, we believe that some of our competitors have used, and may continue to use, litigation to gain a competitive advantage. Finally, our competitors may use different technologies or approaches to the development of products similar to the products we are seeking to develop.
We expect to develop international operations that will expose us to additional business risks.
We expect, whether directly or through collaborative relationships, to develop operations outside the United States in order to market and distribute our products. Regardless of the extent to which we seek to develop these operations ourselves or in collaboration with others, we cannot be sure that our international efforts will be successful. Any expansion into international markets will require additional resources and management attention and will subject us to new business risks. These risks could lower the prices at which we can sell our products or otherwise have an adverse effect on our operating results. Among the risks we believe are most likely to affect any international operations are:
· different regulatory requirements for approval of our product candidates;
· dependence on local distributors;
· longer payment cycles and problems in collecting accounts receivable;
· adverse changes in trade and tax regulations;
· the absence or significant lack of legal protection for intellectual property rights;
· political and economic instability; and
· currency risks.
Risks Related to Our Industry
Even if we obtain marketing approval, our products will be subject to ongoing regulatory review.
If regulatory approval of a product is granted, such approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly, post-marketing follow-up studies. As to products for which marketing approval is obtained, the manufacturer of the product and the manufacturing facilities will be subject to continual review and periodic inspections by the
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FDA and other regulatory authorities. In addition, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related to the product will remain subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the product, manufacturer or facility may result in restrictions on the product or the manufacturer, including withdrawal of the product from the market. We may be slow to adapt, or we may never adapt, to changes in existing requirements or adoption of new requirements or policies.
If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
Market acceptance of our products will be limited if users of our products are unable to obtain adequate reimbursement from third-party payors.
Government health administration authorities, private health insurers and other organizations generally provide reimbursement for products like our product candidates, and our commercial success will depend in part on these third-party payors agreeing to reimburse patients for the costs of our products. Even if we succeed in bringing any of our proposed products to market, we cannot assure you that third-party payors, in the United States, Europe and other markets that we may pursue, will consider our products cost-effective or provide reimbursement in whole or in part for their use or agree to the proposed price.
Significant uncertainty exists as to the reimbursement status of newly approved health care products. Each of our product candidates is intended to replace or alter existing therapies or procedures. These third-party payors may conclude that our products are less safe, effective or cost-effective than these existing therapies or procedures. Therefore, third-party payors may not approve our products for reimbursement.
If third-party payors do not approve our products for reimbursement or fail to reimburse them adequately, sales will suffer as some physicians or their patients will opt for a competing product that is approved for reimbursement or is adequately reimbursed. Even if third-party payors make reimbursement available, these payors’ reimbursement policies may adversely affect the ability of us and our potential collaborators to sell our products on a profitable basis.
Moreover, the trend toward managed healthcare in the United States, the growth of organizations such as health maintenance organizations, and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reduced demand for our products which could adversely affect our business, financial condition and results of operations.
In addition, legislation and regulations affecting the pricing of pharmaceuticals may change in ways adverse to us before or after the FDA or other regulatory agencies approve any of our proposed products for marketing. While we cannot predict the likelihood of any of these legislative or regulatory proposals, if any government or regulatory agencies adopt these proposals they could materially adversely affect our business, financial condition and results of operations.
We may be required to defend lawsuits or pay damages in connection with the alleged or actual harm caused by our products or product candidates.
We face an inherent business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in harm to others. This risk exists in clinical trials as well as in commercial distribution. In addition, the pharmaceutical and biotechnology industries in general have been subject to significant medical malpractice litigation. We may incur significant liability if product
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liability or malpractice lawsuits against us are successful. Furthermore, product liability claims, regardless of their merits, could be costly and divert our management’s attention from other business concerns, or adversely affect our reputation and the demand for our products. Although we maintain product liability insurance, we cannot be certain that this coverage will be adequate or that it will continue to be available to us on acceptable terms.
Rapid technological change could make our products obsolete.
Pharmaceutical technologies have undergone rapid and significant change. We expect that pharmaceutical technologies will continue to develop rapidly. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies. Any compounds, products or processes that we develop may become obsolete before we recover any expenses incurred in connection with their development. Rapid technological change could make our products obsolete, which could materially adversely affect our business, financial condition and results of operations.
Our products involve the use of hazardous materials, and as a result we are exposed to potential liability claims and to costs associated with complying with laws regulating hazardous waste.
Our research and development activities involve the use of hazardous materials, including chemicals and biological materials. We believe that our procedures for handling hazardous materials comply with federal and state regulations. However, there can be no assurance that accidental injury or contamination from these materials will not occur. In the event of an accident, we could be held liable for any damages, which could exceed our available financial resources. This liability could materially adversely affect our business, financial condition and results of operations.
We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products, and we spent approximately $69,000 during the fiscal year ended December 31, 2005 to dispose of these hazardous materials and waste products. We may be required to incur significant costs to comply with environmental laws and regulations in the future that could materially adversely affect our business, financial condition and results of operations.
Risks Related to Our Common Stock
We expect that our stock price will fluctuate significantly.
We completed our initial public offering in October 2003. Prior to this offering, you could not buy or sell our common stock publicly. After this offering, the average daily trading volume for our common stock has been relatively low. An active public market for our common stock may not continue to develop or be sustained. The stock market, particularly in recent years, has experienced significant volatility particularly with respect to pharmaceutical and biotechnology stocks. The volatility of pharmaceutical and biotechnology stocks often does not relate to the operating performance of the companies represented by the stock. Factors that could cause this volatility in the market price of our common stock include:
· announcements of the introduction of new products by us or our competitors;
· market conditions in the pharmaceutical and biotechnology sectors;
· rumors relating to us or our competitors;
· litigation or public concern about the safety of our potential products;
· our quarterly operating results;
· deviations in our operating results from the estimates of securities analysts; and
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· FDA or international regulatory actions.
The market price of our common stock may also fluctuate in response to the exercise by us of rights under the terms of our 6.5% convertible exchangeable preferred stock. For example, we may elect to automatically convert the preferred stock if our common stock price has exceeded 150% of the conversion price of the preferred stock for at least 20 trading days during a 30-day trading period ending within five trading days prior to the notice of automatic conversion. There is a risk of fluctuation in the price of our common stock between the time when we may first elect to automatically convert the preferred stock and the automatic conversion date. These fluctuations may adversely affect the value of our common stock.
Our controlling equity holders may have conflicts of interests with us or you in the future.
As of March 16, 2006, and based on information provided to us by such entities: Quaker Capital Management Corporation and its affiliates will beneficially own approximately 11% of our outstanding common stock; Bank of America Corporation and its affiliates will beneficially own approximately 9% of our outstanding common stock; the Baupost Group LLC will beneficially own approximately 9% of our outstanding common stock; Mr. Peter David Boone will beneficially own approximately 8% of our outstanding common stock; and Federated Investors, Inc. and its affiliates will beneficially own approximately 5% of our outstanding common stock. Collectively these investors will control approximately 42% of our common stock. These investors, particularly if they were to act together as a concentrated group, could exert influence over the election of our directors, direct our policies and operations, including future issuances of common stock or other securities, the payments of dividends, if any, on our common stock, the incurrence of debt by us, amendments to our certificate of incorporation and bylaws and entering into of extraordinary transactions, and their interests, as a concentrated group, may not in all cases be aligned with your interests. This concentration of ownership among a small number of investors may make it more difficult for other stockholders to influence matters requiring stockholder approval and may have the effect of delaying, preventing or deterring a change in control of our company, thereby possibly depriving our stockholders of an opportunity to receive a premium for their common stock as part of any sale or acquisition.
Our common stock is junior to our preferred stock with respect to the right to receive payments in the event of a dissolution, liquidation or winding up of Acusphere.
In February 2005, we issued and sold 900,000 shares of our 6.5% convertible exchangeable preferred stock. As of March 16, 2006, 740,000 of these shares of preferred stock are outstanding. The preferred stock is senior to the common stock as to liquidation. In the event of our voluntary or involuntary dissolution, liquidation or winding up of Acusphere, holders of our preferred stock will receive a liquidation preference in an amount equal to $50 per share, plus all accrued and unpaid dividends through the distribution date. Only after holders of the preferred stock have received their liquidation preference and any accrued and unpaid dividends will we distribute assets, if any are remaining, to our common stock holders.
We may be the subject of securities class action litigation due to future stock price volatility.
In the past, when the market price of a stock has been volatile, holders of that stock have often instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management.
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Future sales of common stock by our existing stockholders may cause our stock price to fall.
The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate. As of March 16, 2006, we have approximately 22,901,720 shares of common stock outstanding and 740,000 shares of convertible preferred stock outstanding that are convertible into approximately 5.4 million shares of our common stock, plus up to a maximum of approximately 1.3 million additional shares of our common stock issuable at our option in satisfaction of the maximum dividend make-whole payment on these shares of preferred stock. All of the shares of common stock issuable upon conversion of our preferred stock will be freely tradable without restriction under the federal securities laws unless purchased by our affiliates.
The terms of our outstanding shares of preferred stock may restrict our ability to raise additional capital or hamper or prevent an acquisition of us.
In February 2005, we issued and sold 900,000 shares of our 6.5% convertible exchangeable preferred stock. As of March 16, 2006, 740,000 of these shares of preferred stock are outstanding. In the event of our voluntary or involuntary dissolution, liquidation or winding up of Acusphere, holders of our preferred stock will receive a liquidation preference in an amount equal to $50 per share, plus all accrued and unpaid dividends through the distribution date. Only after holders of the preferred stock have received their liquidation preference and any accrued and unpaid dividends will we distribute assets, if any are remaining, to our common stock holders. Without the vote or consent of the holders of at least a majority of the shares of preferred stock, we can not authorize or sell any equity security that ranks senior to the preferred stock as to dividends or distributions of assets upon liquidation, dissolution or winding up of Acusphere. As a result of this liquidation preference, it may be difficult for us to raise additional capital through the sale of common stock or junior preferred stock on acceptable terms, or at all.
In addition, without the vote or consent of the holders of at least a majority of the shares of preferred stock we may not effect a consolidation or merger with another entity unless the preferred stock that remains outstanding and its rights, privileges and preferences are unaffected or are converted into or exchanged for preferred stock of the surviving entity having rights, preferences and limitations substantially similar, but no less favorable, to the convertible preferred stock. This provision could hamper a third party’s acquisition of us or discourage a third party from attempting to acquire control of us via a merger.
Under some circumstances, the holders of our outstanding shares of preferred stock may be entitled to elect some of the directors of Acusphere.
In February 2005 we issued and sold 900,000 shares of our 6.5% convertible exchangeable preferred stock. As of March 16, 2006, 740,000 of these shares of preferred stock are outstanding. Cumulative dividends accrue on our preferred stock at an annual rate of $3.25 per share, payable quarterly on the first day of March, June, September and December, commencing June 1, 2005. Any dividends must be declared by our board of directors and must come from funds that are legally available for dividend payments. If we have not paid dividends on the preferred stock in an aggregate amount equal to at least six quarterly dividends whether or not consecutive, we must increase the size of our board of directors by two additional directors. After this time, and for so long as these dividends remain due and unpaid, holders of the preferred stock, voting separately as a class with holders of preferred stock ranking on the same basis as to dividends having like voting rights, will be entitled to elect two additional directors at any meeting of stockholders at which directors are to be elected. These directors will be appointed to classes on the board as determined by our board of directors. These voting rights will terminate when we have declared and either paid or set aside for payment all accrued and unpaid dividends. The terms of office of all directors so elected will terminate immediately upon the termination of these voting rights.
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Provisions of Delaware law or our charter documents could delay or prevent an acquisition of us, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management.
Provisions of Delaware law or our charter or by-laws could hamper a third party’s acquisition of us, or discourage a third party from attempting to acquire control of us. Stockholders who wish to participate in these transactions may not have the opportunity to do so. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. Further, these provisions make it more difficult for stockholders to change the composition of our board of directors in any one year.
These provisions include:
· a provision allowing us to issue preferred stock with rights senior to those of the common stock without any further vote or action by the holders of the common stock;
· the existence of a staggered board of directors in which there are three classes of directors serving staggered three-year terms, thus expanding the time required to change the composition of a majority of directors and potentially discouraging someone from making an acquisition proposal for us;
· the by-laws’ requirement that stockholders provide advance notice when nominating our directors;
· the inability of stockholders to convene a stockholders’ meeting without the chairperson of the board, the chief executive officer, the president or a majority of the board of directors first calling the meeting; and
· the application of Delaware law prohibiting us from entering into a business combination with the beneficial owner of 15% or more of our outstanding voting stock for a period of three years after the 15% or greater owner first reached that level of stock ownership, unless we meet specified criteria.
We have never paid dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We have paid no cash dividends on our common stock to date and, other than cash dividends paid on our preferred stock, we currently intend to retain our future earnings, if any, to fund the development and growth of our businesses. In addition, the terms of any future debt or credit facility may preclude us from paying these dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our primary offices and laboratory facilities are located in one 47,500 square foot facility located in Watertown, Massachusetts. We lease the space in this facility under a ten year , six month operating lease that expires in June 2012. A limited portion of our 47,500 square foot facility has not been internally built-out pending our demand for the space. We intend to improve and use this space when needed. We anticipate that this currently unused space will in the coming years be needed to expand our employee office area and our internal laboratory and pilot-manufacturing capabilities.
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In July 2004, we entered into a lease agreement for 58,000 square feet of commercial manufacturing space in Tewksbury, Massachusetts. This lease has a five year, nine month term with options to extend the lease for up to two additional five-year terms at predetermined rental rates. In September 2004, we began to build-out the manufacturing space portion of this facility to meet the initial commercial manufacturing requirements of AI-700. We intend to demonstrate that we can produce AI-700 at a commercial manufacturing scale prior to our filing of an NDA for AI-700 and, subject to required regulatory approvals, we intend to manufacture AI-700 in this facility for commercial use. In October 2005 we received an occupancy permit for this commercial manufacturing facility. The build-out of the facility is substantially complete, with minor items remaining to be addressed by the contractor. Aside from addressing minor items, our primary efforts at this facility are currently directed at the substantial work required to start-up and qualify equipment and operations in compliance with cGMP’s. We plan to complete this start-up and qualification phase within the next twelve months. Although the build-out of the facility is substantially complete, we cannot assure you that we will not encounter complications in the qualification of operations in this facility which complications could add additional costs or delay our filing of a NDA for AI-700.
We believe that our existing facilities, subject to the successful qualification of the commercial manufacturing facility in Tewksbury, Massachusetts, are adequate to meet our current and foreseeable requirements and that suitable additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock is currently traded on The Nasdaq National Market under the symbol “ACUS.” The following table sets forth the high and low closing prices for our Common Stock as reported on The Nasdaq National Market for the periods indicated, as adjusted to the nearest cent.
| | High | | Low | |
Year Ending December 31, 2006: | | | | | |
First quarter (through March 16, 2006) | | $ | 6.59 | | $5.42 | |
Year Ended December 31, 2005: | | | | | |
Fourth quarter | | $ | 5.57 | | $ | 4.82 | |
Third quarter | | $ | 6.20 | | $ | 4.95 | |
Second quarter | | $ | 5.55 | | $ | 4.05 | |
First quarter | | $ | 6.30 | | $ | 5.12 | |
Year Ended December 31, 2004: | | | | | |
Fourth quarter | | $ | 6.90 | | $ | 6.10 | |
Third quarter | | $ | 8.07 | | $ | 5.98 | |
Second quarter | | $ | 8.47 | | $ | 5.73 | |
First quarter | | $ | 10.40 | | $ | 8.35 | |
On March 16, 2006, the last reported sale price of our common stock on The Nasdaq National Market was $6.33 per share. As of March 16, 2006, there were approximately 126 holders of record of our common
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stock, excluding multiple beneficial holders at depositories, banks and brokers included as a single holder in the single “street” name of each respective depository, bank or broker.
Dividend Policy
We have never declared or paid a cash dividend on our common stock, and we currently do not anticipate paying any cash dividends on our common stock in the foreseeable future.
In February 2005 we issued and sold 900,000 shares of our 6.5% convertible exchangeable preferred stock. Cumulative dividends accrue on our preferred stock at an annual rate of $3.25 per share, payable quarterly on the first day of March, June, September and December. Any dividends must be declared by our board of directors and must come from funds that are legally available for dividend payments. In 2005, we paid $2.2 million in cash dividends on the then outstanding shares of our preferred stock.
As of March 16, 2006, there were 740,000 shares of our preferred stock outstanding. In February 2006, our board of directors declared a quarterly dividend in the amount of $0.8125 per share of preferred stock, or $601,000 in aggregate, which was paid on March 1, 2006, to the holders of record as of the close of business on February 15, 2006.
Delaware law limits our ability to pay cash dividends on the preferred stock. Under Delaware law, cash dividends may only be paid from “surplus” or, if there is no “surplus,” from our net profits for the current or preceding fiscal year. Delaware law defines “surplus” as the amount by which the total assets of a corporation, after subtracting its total liabilities, exceed the corporation’s capital, as determined by its board of directors. Although we currently intend to pay cash dividends on our preferred stock, our ability to pay these dividends will depend upon our financial results, liquidity and financial condition. Unless we have paid or set aside cumulative dividends in full on our preferred stock for all past dividend periods and sufficient funds shall have been set apart for the payment of the dividend for the current period with respect to our preferred stock, we may not declare or pay or set aside cash dividends on our common stock and we may not redeem, purchase or otherwise acquire any of our common stock except under limited circumstances.
Except for dividends payable on our preferred stock, we currently intend to retain all of our future earnings, if any, to finance operations. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and other factors that our board of directors may deem relevant.
Equity Compensation Plan Information
See Part III, Item 12 for information regarding securities authorized for issuance under our equity compensation plans.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from our audited financial statements. This information should be read in conjunction with the financial statements and the related notes thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this Annual Report on Form 10-K.
| | Year Ended December 31, | |
| | 2001 | | 2002 | | 2003 | | 2004 | | 2005 | |
| | (in thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | | | |
Collaboration Revenue | | $ | — | | $ | — | | $ | — | | $ | 1,714 | | $ | 3,428 | |
Operating Expenses: | | | | | | | | | | | |
Research and development(1) | | 11,954 | | 14,460 | | 14,818 | | 25,976 | | 42,159 | |
General and administrative(1) | | 4,551 | | 5,186 | | 4,890 | | 6,165 | | 7,446 | |
Total operating expenses | | 16,505 | | 19,646 | | 19,708 | | 32,141 | | 49,605 | |
Equity in loss of joint venture | | (1,965 | ) | (1,183 | ) | — | | — | | — | |
Interest and other income (expense), net | | 193 | | (1,067 | ) | (2,215 | ) | 468 | | 1,551 | |
Net loss | | (18,277 | ) | (21,896 | ) | (21,923 | ) | (29,959 | ) | (44,625 | ) |
Accretion of dividends and offering costs on preferred stock | | (6,249 | ) | (6,666 | ) | (5,948 | ) | — | | (2,418 | ) |
Net loss available to common stockholders | | $ | (24,526 | ) | $ | (28,562 | ) | $ | (27,871 | ) | $ | (29,959 | ) | (47,044 | ) |
Net loss available to common stockholders per share—Basic and diluted | | $ | (50.81 | ) | $ | (35.39 | ) | $ | (6.66 | ) | $ | (1.92 | ) | (2.49 | ) |
Weighted average shares outstanding—Basic and diluted | | 483 | | 807 | | 4,188 | | 15,603 | | 18,897 | |
| | | | | | | | | | | |
(1) Includes stock based compensation as follows: | | | | | | | | | | | |
Research and development | | $ | 418 | | $ | 915 | | $ | 590 | | $ | 356 | | $ | 199 | |
General and administrative expenses | | 658 | | 1,280 | | 717 | | 584 | | 375 | |
| | $ | 1,076 | | $ | 2,195 | | $ | 1,307 | | $ | 940 | | $ | 574 | |
| | As of December 31, | |
| | 2001 | | 2002 | | 2003 | | 2004 | | 2005 | |
| | (in thousands, except per share data) | |
Balance Sheet Data: | | | | | | | | | | | |
Cash, cash equivalents and short-term investments | | $ | 15,599 | | $ | 7,992 | | $ | 54,562 | | $ | 45,180 | | $ | 51,112 | |
Working capital | | 10,749 | | 2,899 | | 50,931 | | 34,142 | | 31,011 | |
Total assets | | 24,457 | | 13,367 | | 58,924 | | 62,003 | | 95,839 | |
Long-term debt, net of current portion | | 5,290 | | 1,726 | | 205 | | 3,360 | | 17,179 | |
Redeemable convertible preferred stock | | 97,739 | | 91,467 | | — | | — | | — | |
Total stockholders’ (deficit) equity | | (86,228 | ) | (85,348 | ) | 54,375 | | 45,509 | | 57,416 | |
| | | | | | | | | | | | | | | | |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements contained herein, including without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” contains certain projections, estimates and other forward-looking statements. “Forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act of 1995, are not historical facts and involve a number of risks and uncertainties. Words herein such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “potential,” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements.
Forward-looking statements include, but are not limited to: our plans to develop and market new products and the timing of these development programs, in particular the timing of clinical trials and regulatory milestones for AI-700; our clinical development of product candidates, clinical trials and our ability to obtain and maintain regulatory approval for our product candidates; our estimates regarding our capital requirements and our needs for additional financing; our estimates of expenses and future revenues and profitability; our estimates of the size of the potential markets for our product candidates; our selection and licensing of product candidates; our ability to attract collaborators with acceptable development, regulatory and commercialization expertise; the benefits to be derived from corporate collaborations, license agreements and other collaborative efforts, including those relating to the development and commercialization of our product candidates; sources of revenues and anticipated revenues, including contributions from corporate collaborations, license agreements and other collaborative efforts for the development and commercialization of products; our ability to create an effective direct sales and marketing infrastructure for products we elect to market and sell directly; the rate and degree of market acceptance of our product candidates; the timing and amount of reimbursement for our product candidates; the success of other competing therapies that may become available; and the manufacturing capacity for our product candidates, including our plans to qualify a commercial manufacturing facility for AI-700.
Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking statements. Any forward-looking statement should be considered in light of factors discussed in Item 7 under “Certain Factors Which May Affect Future Results” and elsewhere in this Annual Report on Form 10-K. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission, to publicly update or revise any such statements to reflect any change in company expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.
The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.
Overview
We are a specialty pharmaceutical company that develops new drugs and improved formulations of existing drugs using our proprietary porous microparticle technology. We are focused on developing proprietary drugs that can offer significant benefits such as improved safety and efficacy, increased patient compliance, greater ease of use, expanded indications or reduced cost. Our three initial product candidates are designed to address large unmet clinical needs within cardiology, oncology and asthma. Our lead product candidate is a cardiovascular drug in Phase 3 clinical development for the detection of coronary heart disease, the leading cause of death in the United States.
We created our initial product candidates using technology that enables us to control the size and porosity of particles in a versatile manner, so we can customize the particles to address the delivery needs of a variety of drugs. We are focused on creating porous microparticles that are smaller than red blood cells. Some of these microparticles are nanoparticles which are smaller than 1 micron. Small microparticles
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are important for delivering drugs intravenously so that they can pass through the body’s smallest blood vessels, for increasing the surface area of a drug so that the drug will dissolve more rapidly, and for delivering drugs to the lung via inhalation. Porosity is important for entrapping gases in microparticles, for controlling the release rate of the drug from a microparticle, and for targeting inhaled drugs to specific regions of the lung.
We have incurred significant operating losses to develop our product candidates and we anticipate continuing to incur significant operating losses in the coming years. In particular, we expect to incur significant additional expenses and experience other significant capital requirements for the conduct of our Phase 3 clinical program for AI-700 and to complete the build-out and qualification of a manufacturing facility for the initial commercial manufacture of AI-700. Since our inception, we have funded our operations primarily through private and public placements of equity securities, equipment-backed financings and other debt financings.
AI-700 Phase 3 Clinical Trial
Our Phase 3 clinical plan provides for a two-part program consisting of a pilot phase (the “pilot study”), under which new investigators and blinded readers have been qualified and trained, and two independent multi-center pivotal trials (the “32” and “33” trials). Clinical investigators were qualified in the pilot phase on a rolling basis. The pilot phase was completed in 2005, after which more than 20 clinical investigators were qualified to enroll patients in the pivotal studies. Clinical investigators in the Phase 3 pivotal studies are located at clinical sites in North America, Europe and Australia. Data from the Phase 3 pivotal studies are intended for submission to U.S., European, and potentially other regulatory authorities.
The Pilot Study. Our objectives in the pilot study were to train and qualify a sufficient number of clinical sites, investigators and blinded readers for transition into one of the two pivotal trials. These objectives have been accomplished and enrollment in this trial is completed. Clinical sites that were trained in the pilot study transitioned into a pivotal trial when, in our judgment, the clinical site demonstrated that it was prepared to meet the requirements of the clinical trial protocol. Because the pilot study has been conducted for training purposes, there are no defined clinical efficacy endpoints in this study.
The Pivotal Trials. As part of the Phase 3 pivotal study design, the evaluation of AI-700 enhanced stress echo and nuclear stress images from the pivotal trials is performed by blinded readers who receive no information about the patient being evaluated other than the images. We have completed blinded reads on more than half the currently enrolled patients in each of the 32 and 33 trials. During the pivotal trials, we intentionally have no access to efficacy data. We do not expect to publicly disclose results from either pivotal trial until after the trial is closed, quality control checks are completed, the database is locked, the data are revealed to us and we have had an opportunity to review and understand the data, including data regarding clinical outcomes and safety results. As of the date of this annual report, over 700 patients with known or suspected coronary heart disease have been enrolled in the Phase 3 pivotal trials, including over 300 patients in each of the two concurrently run pivotal studies. We use statistical models to predict the number of patients we need in each trial to be able to reach statistical significance. The estimates and assumptions that we are using in our statistical models are primarily derived from our prior clinical studies. Based upon these estimates and assumptions and our statistical analysis plan, we believe that the number of patients that we have enrolled in each of the pivotal studies may be sufficient to achieve statistical significance in these trials.
The “32” Trial. All of the patients enrolled in this trial receive a stress echo study with AI-700 and a nuclear stress test. Patients in this pivotal trial generally undergo coronary angiography only if they have a positive nuclear stress test result. Patients in this pivotal trial who have a negative nuclear stress test result will be evaluated for ninety days thereafter for cardiac events. The primary endpoints of the 32 trial are sensitivity and specificity relative to a truth standard, in comparison to the performance of nuclear stress testing relative to the same truth standard. The truth standard for both modalities is determined with
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angiography, whenever available, or coronary heart disease status with nuclear stress if angiographic data are unavailable. In December 2005, we ceased enrollment of patients in the 32 trial. In March 2006, we announced to the clinical sites that we have completed enrollment in this trial. We have now completed the 90-day follow up period on patients enrolled in this trial. We anticipate making a public announcement regarding the 32 trial results before the end of the second quarter of 2006.
The “33” Trial. All of the patients enrolled in this trial receive a stress echo study with AI-700 and undergo coronary angiography. The majority of patients, but not all, will have a nuclear stress test. All patients in this trial will be evaluated for up to thirty days following the stress echo study. The primary endpoints of the 33 trial are sensitivity and specificity, relative to a truth standard, in comparison to nuclear stress testing, with angiography as the truth standard for both modalities. As of the date of this annual report, and in accordance with the flexibility permitted by our study plan, we are continuing to enroll patients in the 33 trial and anticipate continuing to enroll patients until the end of Q2 2006. We believe that we can continue to enroll patients in the 33 trial through Q2 2006 without delaying our NDA filing date as we project that qualification of our commercial manufacturing facility is the rate-limiting factor to our NDA filing. Our clinical plan, unless otherwise amended, permits us to enroll approximately 450 patients in this study. Once enrollment is closed in this trial and all angiography procedures and the 30-day patient follow-up period are completed, we will conduct quality control checks to ensure that all of the required information has been fully gathered and filed and then lock the database. At that time, the data may be unblinded and available to Acusphere for analysis. We anticipate that this quality control period should be completed within three months of completing the angiography procedures and the post-enrollment follow-up period and that we will have unblinded data from this trial during the fourth quarter of 2006. We anticipate making a public announcement regarding the trial results during the fourth quarter of 2006.
Trial Design and Purpose. We believe that stress echo with AI-700 has the potential to significantly reduce the time, cost and resources needed in the assessment of myocardial perfusion, compared to nuclear stress testing. Myocardial perfusion is blood flow to the heart muscle, a sensitive marker for coronary heart disease. There is no ultrasound contrast agent approved by FDA for use in stress echo or myocardial perfusion imaging. Based upon the end points described above, our 32 and 33 trials are designed to demonstrate non-inferiority of stress echo with AI-700 relative to nuclear stress testing. In April 2005, based in part upon feedback from FDA, we revised the statistical analysis plan on which we base our patient enrollment estimates for the AI-700 Phase 3 clinical trials. Since that time we have continued discussions with the FDA regarding trial design and our statistical analysis plan. As a result of our ongoing discussions with FDA, we may make further revisions. These discussions could lead to delays in the public announcement of the results from our Phase 3 clinical trials, change our sample size estimates and affect whether AI-700 is approved for the indication that we are seeking, the timing of such approval or whether AI-700 is approved at all.
The estimates of, patient enrollment requirements and timing of clinical enrollment, blinded reads, data lock, data release and NDA filing in our Phase 3 trials described above reflect our current assumptions, based on our knowledge and experience and the guidance of our advisors. We cannot assure you that these timelines will be met, nor can we assure you that our estimates and assumptions will not change based upon ongoing regulatory feedback or that, when the trials are completed, we will successfully achieve results that meet or exceed the clinical endpoints of these Phase 3 trials.
AI-700 Manufacturing Facility Update
In July 2004, we entered into a lease agreement for 58,000 square feet of commercial manufacturing and office space in Tewksbury, Massachusetts. In September 2004, we began to build-out the manufacturing space of this facility for commercial manufacturing of AI-700. This manufacturing facility is designed to meet the Company’s estimated initial commercial demand for AI-700 and to allow for increments in capacity. We intend to demonstrate that we can produce AI-700 at a commercial
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manufacturing scale prior to our filing of a NDA for AI-700 and, subject to required regulatory approvals, we intend to manufacture AI-700 in this facility for commercial use. This commercial manufacturing facility must comply with current good manufacturing practices, or cGMPs, enforced by the FDA and overseas regulatory agencies. We have identified potential primary and secondary suppliers of the raw materials used in the production of AI-700.
In October 2005, we received an occupancy permit for this commercial manufacturing facility after which operations commenced on site. By the end of October 2005, most of the procured manufacturing equipment had been subject to start-up activities and were placed in service. The build-out of the facility is substantially complete, with minor items remaining to be addressed by the contractor. Facility improvements are being amortized over the remaining initial term of the lease, or approximately five years. Our primary efforts at this facility are currently directed at the substantial work required to qualify equipment and operations in compliance with cGMP’s. Completion of such qualification includes significant testing and documentation, including stability studies. It also requires that we successfully demonstrate that we can produce AI-700 product within specifications which are consistent with the clinical trial material used in our Phase 3 clinical program. We have demonstrated previously that we can produce AI-700 in a qualified manner. We need to repeat this demonstration in our commercial manufacturing facility prior to filing our NDA. Based upon our current plans, we expect to complete this qualification phase by the end of Q2 2007 after which we believe that we will have all of the manufacturing related data necessary to file our NDA.
Although the build-out of the facility is substantially complete, we cannot assure you that we will not encounter complications in the qualification of operations in this facility which complications could add additional costs or delay our filing of a NDA for AI-700.
European Collaboration Agreement
In July 2004, we entered into a collaboration, license and supply agreement with Nycomed pursuant to which we granted Nycomed rights to develop and market AI-700 in Europe. As part of the agreement, Nycomed has agreed to provide up to $70 million in license fees, research and development funding, and milestone payments, including $12 million in payments over the first two years, of which $11 million was received by us prior to December 31, 2005 with the remaining $1 million payment due to us in 2006. The remaining $58 million in milestone payments are related to regulatory approvals and achievement of certain sales goals. In addition, Nycomed has agreed to pay us to manufacture AI-700 for them and to pay us royalties on Nycomed’s sales of AI-700. Nycomed will be responsible for sales, marketing and the regulatory submissions required for marketing throughout its sales territory, which includes the member states of the European Union, as well as Russia/CIS and Turkey. During the fiscal year ended December 31, 2005, we recognized $3.4 million in revenue derived from our collaboration with Nycomed.
In October 2005, the Company and Nycomed agreed to amend the strategic collaboration agreement in order to accelerate $150,000 in milestone payments to support activities associated with AI-700 brand development and related trademark activities. In February 2006, the Company and Nycomed agreed to further amend the agreement to accelerate an additional $1.85 million in milestone payments in order to fund certain activities associated with the qualification of our manufacturing facility. Beginning with costs incurred in February 2006, we may begin to draw down on this $1.85 million in accelerated funding up to $370,000 per month. Any payments received pursuant to these amendments are considered advances against a future milestone payment for a European regulatory filing, or Marketing Authorization Application (“MAA”), and will be deducted from that milestone payment. Payments received under these amendments will be classified as deferred revenue until the MAA milestone is achieved, provided that the applicable revenue recognition criteria are met.
The Nycomed agreement is subject to termination provisions. Under certain of these termination provisions, if we fail in any material respect to use all commercially reasonable efforts to carry out referenced obligations under the agreement, we would be obligated to pay Nycomed liquidated damages of
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up to $12 million. We plan to carry out all of these obligations, which we believe are in our control. There can be no assurance that termination of this agreement will not occur or that such termination would not result in us incurring liquidated damages of up to $12 million.
Financial Operations Overview
Revenue. We have not generated any revenue from product sales since our inception. In connection with our strategic collaboration agreement with Nycomed, as of December 31, 2005 we have cumulatively received $11.0 million in license fees and research and development payments and we anticipate receiving an additional $1.0 million in such contractually scheduled research and development payments in 2006. In October 2005, we and Nycomed agreed to amend the agreement in order to accelerate $150,000 in milestone payments to support activities associated with AI-700 brand development and related trademark activities. This amount has been deferred as of December 31, 2005. In February 2006, the Company and Nycomed agreed to further amend the agreement to accelerate $1.85 million in milestone payments in order to fund certain activities associated with the qualification of our manufacturing facility in Tewksbury, Massachusetts. We anticipate being paid this $1.85 million in 2006 as the qualification costs are incurred. Any payments received pursuant to these amendments are considered advances against a future milestone payment for a European regulatory filing, or MAA, and will be deducted from that milestone payment. Payments received under these amendments will be classified as deferred revenue until the MAA milestone is achieved provided that the applicable revenue recognition criteria are met. Further in the future, we will seek to generate revenue from a combination of product sales, up-front or milestone payments and manufacturing payments in connection with collaborative or strategic relationships, and royalties resulting from the license of our products and intellectual property.
Research and Development Expense. Research and development expense consists of expenses incurred in developing, manufacturing and testing product candidates. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers in conjunction with independently monitoring our clinical trials and acquiring and evaluating data in conjunction with our clinical trials, costs of materials used in clinical trials and research and development, costs incurred to validate manufacturing equipment and facilities, costs of contract manufacturing services, depreciation of capital resources used to develop our products, costs of facilities, legal and other costs of pursuing patent protection on select elements of our intellectual property and stock-based compensation. We expense research and development costs, including patent related costs, as incurred. We believe that significant investment in product development is a competitive necessity and plan to continue these investments in order to realize the potential of our product candidates and proprietary technologies. Development programs for later stage product candidates, such as AI-700, tend to cost more than earlier stage programs due to the length and the number of patients enrolled in clinical trials for later stage programs and due to costs of scaling production to commercial scale.
General and Administrative Expense. General and administrative expense consists primarily of salaries and other related costs for personnel in executive, finance, accounting, information technology, business development and human resource functions. Other costs include facility costs not otherwise included in research and development expense, professional fees for legal and accounting services and stock-based compensation.
Interest Income. Interest income consists of interest earned on our cash and cash equivalents.
Interest Expense. Interest expense consists of interest incurred on equipment leases and other financing arrangements. Interest expense also includes interest recognized in connection with embedded derivatives.
Change in Valuation of Derivative. The terms of our February 2005 convertible perferred stock offering and our March 2005 Mass Development loan agreement contain features considered to be embedded derivatives which are recorded at estimated fair value in accordance with Statement of
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Financial Accounting Standards No. 133, Accounting for Derivative Instruments (SFAS 133). Change in valuation of derivative consists of other income (expense) recognized or incurred on the change in estimated fair value of these derivatives at the end of each reporting period. The change in the value of the derivative related to the preferred stock is affected by a number of assumptions including the number of preferred shares outstanding, the amount of dividends paid and the probability and timing of conversion into common stock. The derivative liability is reduced for any make-whole payments made during the period upon conversions of preferred stock to common stock. The change in the value of the derivative related to the loan is affected by the expected timing of future positive net cash flows from operations.
Dividends on Preferred Stock. For the year ended December 31, 2005, dividends on preferred stock consisted of dividends paid or accumulated on the convertible exchangeable preferred stock which we issued in February 2005. Dividends on preferred stock exclude any make-whole payments on conversion of preferred stock to common stock. Dividends on our preferred stock are cumulative from the date of original issue at the annual rate of $3.25 per share, payable quarterly on the first day of March, June, September, and December. Any dividend payment must be declared by our board of directors and must come from funds that are legally available for dividend payments. Prior to the completion of our initial public offering in 2003, we had outstanding convertible preferred stock which was entitled to accretion of dividends, the amount of which decreased the amount of stockholders’ equity available to common stockholders and effectively increased the loss per share of common stock. This preferred stock all converted in common stock in conjunction with the initial public offering. All preferred stock dividends which were accreted before October 14, 2003 were forfeited by the preferred stockholders on that date in connection with the conversion of these preferred shares to common stock.
Results of Operations
Revenue. Collaboration revenue was $3.4 million for the year ended December 31, 2005, compared to $1.7 million in 2004 and $0.0 collaboration revenue recognized in 2003. Collaboration revenue was earned under our agreement with Nycomed which was entered into in July 2004. Under this agreement, excluding any payments that we might receive based upon the achievement of specified milestones, we are scheduled to receive $12 million in license fees and research and development payments through June 2006, of which $11.0 million was received as of December 31, 2005. We recognize revenue associated with these $12 million in payments ratably over a period of forty-two months, representing the estimated development period over which such fees are earned. In addition, in October 2005, Nycomed agreed to amend our agreement and paid us $150,000 to fund certain activities associated with creating a brand name for AI-700 and related trademark activities. This amount has been deferred as of December 31, 2005.
Research and Development Expense. Research and development expense for the year ended December 31, 2005 was $42.2 million compared to $26.0 million in 2004 and $14.8 million in 2003. The $16.2 million increase in 2005 over 2004 represented an increase of 62% and the $11.2 million increase in 2004 over 2003 represented an increase of 76%. Included in the increase in research and development expense in 2005 is $6.2 million that we expensed in connection with our acquisition of patents from Schering.
The remaining $10.0 million increase during 2005 in research and development expense is primarily due to a $5.8 million increase in direct costs, including a $1.9 million increase in salaries related to increased staffing levels, a $1.1 million increase in consulting and contract services and a $2.3 million increase in materials and supplies. These increases are primarily due to activities relating to AI-700, including increased Phase 3 clinical program costs and increased costs associated with preparing for commercial manufacturing of AI-700. The increases reflect costs associated with a higher number of clinical sites enrolling patients in the AI-700 Phase 3 clinical program, a higher rate of patient enrollment in these clinical trials and related increases in costs for clinical data management and independent clinical site monitoring. The increase in research and development costs also includes increased costs associated
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with increasing full and part-time personnel and operating costs associated with efforts to build-out and qualify a commercial manufacturing facility for AI-700.
The higher research and development expense in 2005 compared to 2004 primarily resulted from increased activities in the AI-700 Phase 3 clinical program, including clinical site costs, data management costs, independent monitoring costs and costs of manufacturing clinical materials. The increase in research and development costs also includes costs associated with increasing full and part-time personnel. The increase in research and development costs in 2004 compared to 2003 primarily resulted from costs associated with the start of our Phase 3 clinical program for AI-700, including increased costs associated with clinical site training and clinical site monitoring. The increase in research and development costs in 2005 compared to 2004 also includes increases in indirect costs. These increases included a $6.2 million charge under the Schering Patent Transfer Agreement and increased facility and depreciation costs resulting primarily from the lease agreement entered into in 2004 the Company’s commercial manufacturing facility in Tewksbury, Massachusetts and the depreciation of improvements to that facility and equipment installed in that facility the majority of which went into service in October 2005.
The following table summarizes the primary components of our research and development expense for the years ended December 31, 2003, 2004 and 2005:
| | Years Ended December 31, | |
| | 2003 | | 2004 | | 2005 | |
| | (In thousands) | |
AI-700 | | $ | 8,560 | | $ | 18,522 | | $ | 24,320 | |
AI-850 and AI-128 | | 777 | | 151 | | 6 | |
Other direct costs | | 1,305 | | 2,022 | | 2,149 | |
Total direct costs | | $ | 10,642 | | $ | 20,695 | | $ | 26,475 | |
Indirect costs: | | | | | | | |
Facility costs | | 1,962 | | 2,745 | | 4,523 | |
Depreciation | | 1,299 | | 1,261 | | 3,571 | |
Stock-based compensation | | 590 | | 356 | | 199 | |
Schering patent transfer costs | | — | | — | | 6,218 | |
Other patent costs | | 325 | | 919 | | 1,173 | |
Total indirect costs | | 4,176 | | 5,281 | | 15,684 | |
Total research and development expense | | $ | 14,818 | | $ | 25,976 | | $ | 42,159 | |
Research and development costs generally increase as programs progress from early stage clinical trials to late stage clinical trials. Our primary research and development programs are as follows:
· Late Stage Clinical Development Program (AI-700). Our lead product candidate, AI-700, which is a cardiovascular drug designed for the detection of coronary heart disease. We incurred direct research and development expense for AI-700 in 2005 of $24.3 million, $18.5 million in 2004 and $8.6 million in 2003. Of these amounts, $10.2 million in 2005, $7.9 million in 2004 and $4.0 million in 2003 were related to materials and manufacturing, validation, quality assurance and quality control costs, including $1.7 million in contract manufacturing costs in 2003. Patient enrollment in the Phase 3 clinical program for AI-700 are anticipated to decline in 2006 as we completed enrollment in the 32 trial in December 2005 and we seek to complete enrollment in the 33 trial during 2006, however, costs associated with clinical data management and evaluation, as well as regulatory affairs costs and increased costs associated with qualifying our commercial manufacturing facility for AI-700 in Tewksbury, Massachusetts, including depreciation costs on assets placed in service in late 2005, are likely to offset all or most of the potential expense savings in 2005 from reduced patient enrollment costs.
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· Early Stage Clinical Development Programs (AI-850 and AI-128). Our initial clinical applications of our HDDS technology, AI-850, and our PDDS technology, AI-128, have each completed a Phase 1 trial. During 2005, we prioritized our clinical spending to AI-700 and incurred no clinical costs on AI-850 or AI-128. In late 2005, we commenced a feasibility study regarding the use of our HDDS technology in connection with a product candidate under development by a larger pharmaceutical company. That company is reimbursing us for the cost of the study. In 2006 we anticipate other direct costs of early stage development programs to increase. The amount of such increase will depend upon the extent to which we are successful in commencing new feasibility studies with partners for our HDDS and PDDS technologies, if at all, whether such studies result in subsequent development work funded by potential partners, the amount of funding provided by such current and potential partners, staffing levels available to support such projects and the extent to which we elect to pursue a development of HDDS or PDDS product candidates with our own resources.
· Other. Other direct research and development costs primarily consist of management and preclinical evaluation of other product candidates.
Each of our research and development programs is subject to risks and uncertainties, including the requirement to seek regulatory approvals, which are outside of our control. For example, our clinical trials may be subject to delays or rejections based on our inability to enroll patients at the rate that we expect or our inability to produce clinical trial material in sufficient quantities and of sufficient quality to meet the schedule for our planned clinical trials. Moreover, the product candidates identified in these research and development programs, particularly our early stage programs, must overcome significant technological, manufacturing and marketing challenges before they can be successfully commercialized. As a result of these risks and uncertainties, we are unable to predict with any certainty the period in which material net cash inflows from such projects could be expected to commence or the completion date of these programs. Failure to commercialize these product candidates on a timely basis could have a material adverse affect on our business, financial condition and results of operations. We may seek to establish collaborative relationships to help us commercialize these product candidates, but there can be no assurance that we will be successful in doing so.
General and Administrative Expense. General and administrative expense in the year ended December 31, 2005 was $7.4 million, compared to $6.2 million for 2004 and $4.9 million for 2003. The $1.2 million increase in 2005 over 2004 represented an increase of 19% while the $1.3 million increase in 2004 over 2003 represented an increase of 27%. The increase in general and administrative expense in both 2005 and 2004 were principally due to additional personnel, consultants and increased costs for investor relations, business development and other activities.
The following table summarizes the primary components of our general and administrative expenses for the years ended December 31, 2003, 2004 and 2005:
| | Years Ended December 31, | |
| | 2003 | | 2004 | | 2005 | |
| | (In thousands) | |
Direct costs | | $ | 3,228 | | $ | 5,251 | | $ | 6,673 | |
Indirect costs: | | | | | | | |
Facility costs | | 511 | | 303 | | 253 | |
Depreciation | | 434 | | 27 | | 145 | |
Stock-based compensation | | 717 | | 584 | | 375 | |
Total indirect costs | | 1,662 | | 914 | | 772 | |
Total general and administrative expense | | $ | 4,890 | | $ | 6,165 | | $ | 7,446 | |
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We anticipate some overall increase in general and administrative expense, including increases in costs for investor relations and business development activities. We intend to continue to incur various internal and external business development costs to support our various product development efforts, and certain of these expenses are likely to increase overall.
Interest and Other Income (Expense). Interest and other income (expense) for the year ended December 31, 2005 was $1.6 million of net income, compared to $468,000 of net income in 2004 and $2.2 million of net expense in 2003. The $1.1 million increase in net income in 2005 over 2004 represented an increase of 231% and the $2.7 million increase in net income in 2004 over 2003 represented an increase of 121%. During these years, interest and other income (expense) consisted of the following:
| | Year Ended December 31, | |
| | 2003 | | 2004 | | 2005 | |
| | (in thousands) | |
Interest income | | $ | 200 | | $ | 558 | | $ | 1,845 | |
Other income | | 22 | | 43 | | — | |
Interest expense | | (2,437 | ) | (133 | ) | (551 | ) |
Change in valuation of derivative | | — | | — | | 257 | |
Total, net | | $ | (2,215 | ) | $ | 468 | | $ | 1,551 | |
The increase in interest income in 2005 compared to 2004 was primarily due to higher average fund balances available for investment resulting from the $45.0 million preferred stock financing in February 2005 and the $18.7 million common stock offering completed in September 2005. The increase in interest income in 2004 compared to 2003 was primarily due to higher average fund balances available for investing resulting from funds received for the initial public officering in October 2003 and the $21.5 million private placement completed in October 2004. The increase in interest expense in 2005 compared to 2004 was primarily related to increased borrowings under our two equipment financing lines and non-cash interest accretion charges of $349,000 related to the Schering patent agreement. The interest expense was partially offset by the capitalization of interest associated with the build out of our Tewksbury facility. The decrease in interest expense in 2004 compared to 2003 was primarily due to interest costs associated with bridge loans of $1.9 million, interest paid on subordinated loans payable of $195,000 and amortization of the discount of $177,000 in 2003 compared to zero in 2004.
Change in Valuation of Derivative. The change in valuation of derivative amounted to $257,000 in 2005. The increase in change in valuation of derivative was related to the embedded derivative instrument from the dividend make-whole payment feature of the preferred stock offering that closed in February 2005. We determined the initial fair value of the dividend make-whole payment feature to be $3.1 million at February 24, 2005 (the commitment date). As of December 31, 2005, the derivative liability was valued at $1.1 million. During 2005, the Company distributed 288,526 shares of its common stock with a fair value of $1.7 million in satisfaction of the make-whole provision related to the conversion of 160,000 shares of preferred stock into common stock.
Effect of Preferred Stock on Loss Available to Common Stockholders. Our net loss available to common stockholders includes dividends paid as well as dividends accumulated on preferred stock. The accumulated portion represents one month of dividend accumulated but not declared as of the end of the period. This amount of dividends accumulated is included in the calculation of per share net loss available to common stockholders.
In 2005, dividends paid or accumulated on preferred stock totaled $2.4 million compared to zero in 2004. The increase in dividends on preferred stock results from the issuance on February 24, 2005 of 900,000 shares of 6.5% exchangeable preferred stock. During 2005, $2.2 million in dividends were paid in cash to holders of this preferred stock. During 2005, certain of the shares of preferred stock were voluntarily converted into common stock such that at December 31, 2005 740,000 shares of preferred stock were outstanding. In February 2006, the board of directors declared a dividend on the shares of preferred
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stock outstanding as of February 15, 2006. This dividend, which totaled $0.6 million was paid on March 1, 2006. In addition to dividends paid on preferred stock, the calculation of per share net loss available to common stockholders includes $0.2 million of dividends accumulated on preferred stock representing one month of dividend accumulated but not declared as of December 31, 2005.
In 2004 , there was no accretion of dividends on preferred stock because all previously outstanding shares of preferred stock were converted to common stock in conjunction with our initial public offering in October 2003. In 2003, in connection with this conversion of preferred stock to common stock, all previously accreted dividends on the convertible preferred stock were forfeited by the holders.
Liquidity and Capital Resources
Historically, we have financed our business through the issuance of equity securities, debt financings and equipment leases and, more recently, with funds from our collaboration with Nycomed. Our liquidity requirements have arisen primarily from research and development expenditures, equipment expenditures and payments on outstanding indebtedness. As of December 31, 2005, we had cash and cash equivalents of $51.1 million. As of December 31, 2005 we owed $65,000 from capital leases and $21.3 million from notes payable and other long-term obligations. We also had operating lease commitments totaling $18.8 million for rent of our facilities.
During the year ended December 31, 2005, operating activities used $30.7 million of cash. Net cash used by operating activities during this period resulted primarily from a net loss of $44.6 million and a decrease in accounts payable of $1.1 million. These uses of cash were partially offset by an increase, net of amortization, in deferred revenue of $1.7 million, primarily from payments received from Nycomed, a non-cash write-off of intellectual property of $6.2 million, net of $1.0 million paid in 2005 under the Schering Patent Transfer Agreement, non-cash charges for depreciation and amortization of $4.0 million and an increase of $1.5 million in accrued expenses. In 2006 we anticipate that our cash spending from operating activities will be higher than in 2005 during quarters in which we continue to enroll patients. We estimate cash spending from operations during 2006 to approximate $9 to $11 million per quarter during trial enrollment, with a reduction once clinical trial enrollment is concluded.
During the year ended December 31, 2005, investing activities used $32.9 million in cash. This use of cash was primarily used for purchases of equipment and leasehold improvement costs incurred in connection with the build-out of our commercial manufacturing facility for AI-700. Because the build-out of that facility was substantially completed in 2005, we anticipate equipment and leasehold improvement costs in 2006 will be substantially less than in 2005. Based upon our current plans, we estimate purchases of equipment and leasehold improvements in 2006 to be approximately $3 to $4 million in excess of current outstanding purchase orders of $846,000. We intend to seek financing for under additional equipment financing lines.
During the year ended December 31, 2005, financing activities provided $69.5 million in cash. Net cash provided by financing activities during this period resulted primarily from the net proceeds of a redeemable convertible preferred stock financing in February 2005 of $41.9 million, net proceeds of a common stock financing in September 2005 of $17.6 million and from borrowings under equipment financing lines of $12.2 million, net of repayments under those lines. These funding activities were partially offset by the payment of dividends during 2005 on the redeemable convertible preferred stock of $2.2 million.
In September 2005, we sold 3,566,000 shares of its common stock at $5.25 per share resulting in net proceeds of approximately $17.5 million after deducting underwriting discounts, commissions and offering expenses.
In June 2005, we entered into a $7.0 million equipment financing line with Oxford Finance Corporation (“Oxford”). Borrowings under this equipment line can be made against qualified purchases, subject to review and approval by Oxford, through April 2006. Borrowings are collateralized by qualified purchases and repaid over 36 to 48 months depending on the nature of the equipment financed. The
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equipment line is structured as a loan agreement with interest rates fixed at the time of each borrowing based on the U.S. Federal Reserve’s Three Year and Four Year Treasury Constant Maturity Rates. Interest rates on borrowings made through December 31, 2005 under this line range from 10.3% to 10.8%, respectively. Loan amounts are subject to acceleration upon the happening of certain customary events of default including failure to timely pay principal and interest. We have cumulatively borrowed $5.6 million under this line during 2005, of which $5.3 million was outstanding at December 31, 2005. The loans under this line are secured by certain equipment in our Watertown and Tewksbury facilities.
In March 2005, we borrowed $2.0 million under a loan agreement with MassDevelopment to help finance certain tenant improvements to our commercial manufacturing facility in Tewksbury, Massachusetts. Interest accrues under the loan at 5.0% per annum with retroactive adjustments to 9% upon our reaching certain defined earning levels. The repayment of principal and accrued interest will coincide with the term of the Tewksbury lease which has a five-year, nine-month term with options to extend the lease for up to two additional five-year terms. No payments are due under the loan for the first twenty-four months. Unpaid interest during this twenty-four month period shall be accrued and principal and interest shall be repaid on a monthly basis thereafter such that the total amount outstanding shall fully amortize over the balance of the term in equal installments. The loan is subject to acceleration upon certain customary events of default, including failure to timely pay principal and interest. The loan is secured by certain of the tenant improvements made at the Tewksbury facility.
On February 24, 2005, we issued 900,000 shares of 6.5% convertible exchangeable preferred stock (“Preferred Stock”) at $50.00 per share resulting in net proceeds of approximately $41.9 million after deducting underwriting discounts, commissions and offering expenses. Each share of Preferred Stock has a liquidation preference of $50.00 per share. Dividends on the Preferred Stock are cumulative from the date of original issue at the annual rate of $3.25 per share, payable quarterly on the first day of March, June, September, and December. Any dividends must be declared by our board of directors and must come from funds that are legally available for dividend payments. During 2005, the Company paid $2.2 million in dividends on our Preferred Stock. As of December 31, 2005, 740,000 shares of Preferred Stock were outstanding. In February 2006, our board of directors declared a quarterly dividend on the Preferred Stock for all holders as of February 15, 2006. This dividend, which totaled $601,000 in aggregate, was paid on March 1, 2006.
We may elect to automatically convert some or all of the Preferred Stock into shares of our common stock if the closing price of our common stock has exceeded $10.30 per share (150% of the conversion price) for at least 20 trading days during any 30-day trading period, ending within five trading days prior to notice of automatic conversion. Prior to March 1, 2009, if we elect to automatically convert, or if any holder elects to voluntarily convert, the Preferred Stock, we will also make an additional payment, the Make-Whole payment, equal to the aggregate amount of dividends that would have been payable on the Preferred Stock so converted from the original date of issuance through and including March 1, 2009, less any dividends already paid on the Preferred Stock. This additional payment is payable by us, at our option, in cash, in additional shares of its common stock, or in a combination of cash and shares of common stock. We have reserved a maximum of approximately 2.0 million shares of common stock for issuance under this Make-Whole provision.
As of December 31, 2005, 160,000 shares of Preferred Stock had been voluntarily converted into 1,166,181 shares of the Company’s common stock. In connection with such conversions, we issued an additional 288,526 shares of the Company’s common stock in satisfaction of the required Make-Whole payment.
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We may elect to redeem the Preferred Stock at declining redemption prices on or after March 6, 2009. The Preferred Stock is exchangeable, in whole but not in part, at our option on any dividend payment date beginning on March 1, 2006 (the “Exchange Date”) for our 6.5% convertible subordinated debentures (“Debentures”) at the rate of $50 principal amount of Debentures for each share of Preferred Stock. The Debentures, if issued, will mature 25 years after the Exchange Date and have terms substantially similar to those of the Preferred Stock.
In October 2004, we completed the second and final closing of a $21.1 million private financing, after deducting underwriting discounts, commissions and offering expenses. In July 2004 we completed the first closing of this financing. In the combined closings of the financing we issued to institutional and accredited investors an aggregate of 4,014,478 shares of common stock at a price of $6.25 per share and warrants to purchase up to an aggregate of 802,895 additional shares of common stock at an exercise price of $8.50 per share.
In April 2004, we entered into an equipment financing line with General Electric Capital Corporation. In 2004 and 2005, the Company borrowed an aggregate of $10.5 million against this line. As of December 31, 2005, net of repayments, we had $8.4 million outstanding under this line. Such borrowings are collateralized by corresponding equipment and other capital purchases with repayment due in monthly installments over 36 to 48 months, depending on the nature of the equipment financed, with the last such repayment scheduled for March 2009. Interest rates on these borrowings were fixed at the time of each borrowing and range from 8.7% to 10.1%. No further additional amount may be borrowed under this line. The loans under this line are subject to acceleration upon the happening of certain customary events of default, including failure to timely pay principal and interest.
In July 2004, we entered into a collaboration, license and supply agreement with Nycomed in which we granted Nycomed rights to develop and market AI-700 in Europe. Under the original terms of this agreement, Nycomed paid us license fees and research and development payments totaling $6.0 million in 2004 and $5.0 million in 2005. Nycomed is scheduled to pay us an additional $1.0 million in research and development payments in 2006. The original agreement also provides for Nycomed to pay to us up to $58.0 million in milestone payments upon achievement of certain regulatory milestones and sales goals. Under the agreement, Nycomed has agreed to pay us to manufacture AI-700 for them and to pay us royalties on Nycomed’s sales of AI-700. In October 2005, our agreement with Nycomed was amended such that Nycomed paid us an additional $150,000 in 2005 for activities associated with creating a brand name for AI-700 and related trademark activities which amount decreased by $150,000 the potential $58.0 in milestone payments which may be earned under the agreement. In February 2006, the Company and Nycomed agreed to further amend the agreement to accelerate $1.85 million in milestone payments in order to fund certain activities associated with the qualification of our manufacturing facility in Tewksbury, Massachusetts. We anticipate being paid this $1.85 million in 2006 as the qualification costs are incurred. Any payments received pursuant to these amendments are considered advances against a future milestone payment for a European regulatory filing, or MAA, and will be deducted from that milestone payment. In connection with our original agreement with Nycomed, we are obligated to pay a customary fee to our financial advisor. The fee is comprised of cash and warrants. The total amount of cash payments is dependent upon the timing and magnitude of the amounts paid to us by Nycomed. In 2004 and 2005, we paid our advisor $325,000 and $285,000, respectively, in connection with this transaction. On November 30, 2004, in connection with the Nycomed transaction, we issued a warrant to our financial advisor to purchase up to 55,732 shares of our common stock at an exercise price of $6.28 per share
In July 2004, we entered into a lease agreement for 58,000 square feet of commercial manufacturing space in Tewksbury, Massachusetts. This lease has a five year, nine month term with options to extend the lease for up to two additional five-year terms at predetermined rental rates. Initially, we will receive nine months of occupancy free of base rent, followed by base rent of approximately $400,000 for the next twelve months with scheduled annual rental rate increases thereafter. In October 2004, we paid an initial security
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deposit of $1.0 million to the landlord as part of the lease, subject to reduction if we make certain tenant improvements and upon the installation of equipment in the facility. In August 2004, we entered into a $2.0 million loan agreement with the Massachusetts Development Finance Agency, the economic development authority of the Commonwealth of Massachusetts, to help fund tenant improvements to the Tewksbury facility. Financing is available under this loan agreement upon completion by us of certain tenant improvements to the Tewksbury facility. The term of this facility, if utilized, is expected to coincide with the term of the Tewksbury lease. As of December 31, 2004, no borrowings had been made under this loan agreement.
We believe, based on our operating plans, that our existing resources, including scheduled proceeds from Nycomed, will be adequate to fund our planned operations, including spending necessary to complete enrollment in our AI-700 Phase 3 clinical program into early 2007, or longer if we elect to reduce our rate of spending. Unless we reduce our current rate of spending, we will require significant additional funds, which we may raise through public or private sales of equity, or from borrowings, or from strategic partners. Our future capital requirements will depend on many factors, including the scope and progress made in our research and development activities and our clinical trials and the size and timing of creating expanded manufacturing capabilities. We may also need additional funds for possible future strategic acquisitions of businesses, patent licenses, products or technologies complementary to our business. We do not expect to generate significant revenues for AI-700, other than possible license or milestone payments, unless or until we or current or potential partners complete clinical trials and receive marketing approval from the applicable regulatory authorities. Allowing our resources to become depleted may make future funding more difficult or expensive. When additional funds are required or, in advance of such requirements, we anticipate that funds will be needed, we may raise such funds from time to time through public or private sales of equity or from borrowings or from strategic partners or we may delay funding of certain development activities which could delay the filing of our AI-700 NDA and the commercialization of AI-700 which would have a materially adverse impact on our growth plans. We are evaluating our funding alternatives, additional equity financing may be dilutive to our stockholders; debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate as a business; and strategic partnerships may result in royalties or other terms which reduce our economic potential from products under development.
Shelf Registration Statement
We have on file with the U.S. Securities and Exchange Commission “SEC” a “universal shelf” registration statement on Form S-3 (Registration No. 333-123854) which provides for the offer, from time to time, of common stock, preferred stock, debt securities and warrants up to an aggregate of $81.3 million. This shelf registration statement was declared effective by the SEC on April 15, 2005. As of the filing of this report, the shelf registration statement remains effective and, subject to market conditions and our capital needs, and so long as we are then eligible to use the registration statement under SEC rules, we may again seek to use any remaining availability under the shelf registration statement by making an offering of securities covered for sale under the registration statement. In addition, we may amend our shelf registration statement or file a new shelf registration statement to increase our potential access to capital. If we elect to raise additional capital using a shelf registration statement, we may use the net proceeds from the sale of these securities for general corporate purposes, which may include funding clinical trials, research and development, regulatory activities and the qualification of our commercial manufacturing facility in Tewksbury, Massachusetts, acquisitions, including acquisitions of companies, products, intellectual property or other technology, repayment or refinancing of existing indebtedness, investments, capital expenditures, repurchase of our capital stock and for any other purposes that we may specify in any prospectus supplement. Our management has broad discretion in the use of net proceeds and could spend net proceeds in ways with which our shareholders may not agree and in ways that do not necessarily improve our operating results or the value of our common stock. The existence of this shelf
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registration statement is not intended to be indicative of any particular financing plan by us. If and when we pursue additional financing through the issuance of additional equity or debt securities, this shelf registration statement is intended to help facilitate such transactions.
Off-Balance Sheet Financing Arrangements
We currently do not have any special purpose entities or off-balance sheet financing arrangements other than operating leases.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2005 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:
Payments Due by Period
(In Thousands)
Contractual Obligations | | | | Total
Obligations
All Years | | 2006 | | 2007 Through
2008 | | 2009 Through
2010 | | After 2010 | |
| | (in thousands) | |
Capital lease obligations (including interest) | | | $ | 77 | | | $ | 18 | | | $ | 35 | | | | $ | 24 | | | | $ | — | | |
Operating lease obligations | | | 18,821 | | | 2,746 | | | 5,911 | | | | 6,022 | | | | 4,142 | | |
Notes payable (including interest) | | | 18,531 | | | 4,952 | | | 10,508 | | | | 3,071 | | | | — | | |
Intellectual property acquisition cost obligations | | | 6,000 | | | 3,000 | | | 3,000 | | | | | | | | | | |
Purchase orders for capital equipment and leasehold improvements | | | 846 | | | 846 | | | — | | | | — | | | | — | | |
Total contractual cash obligations | | | $ | 44,275 | | | $ | 11,562 | | | $ | 19,454 | | | | $ | 9,117 | | | | $ | 4,142 | | |
Our operating lease obligations relate to our facility leases.
As of December 31, 2005, we have entered into purchase orders for capital equipment and leasehold improvements which total approximately $6.2 million. Against these purchase orders we have paid approximately $5.3 million in deposits. The table above reflects the remaining amounts due on these purchase orders. In 2006, we anticipate expenditures for equipment purchases totaling approximately $3.0 to $4.0 million in excess of the above reflected amounts.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which 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 judgments that affect the reported amounts of assets, liabilities and expenses. On an on-going basis, we evaluate our estimates and judgments, including those related to accrued expenses, fair valuation of stock related to stock-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue. We recognize revenue from license arrangements in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”) and FASB Emerging Issue Task Force Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). We recognize revenue from license payments not tied to achieving a specific performance milestone ratably over the period over which we are obligated to perform services. The period over which we are obligated to perform services is estimated based on available facts and circumstances. We recognize revenue from performance payments, when such performance is substantially in our control and when we believe that completion of such performance is reasonably probable, ratably over the period over which we estimate that we will perform such performance obligations. Substantive at-risk milestone payments, which are based on achieving a specific performance milestone when performance of such milestone is contingent on performance by others or for which achievement can not be reasonably estimated or assured, are recognized as revenue when the milestone is achieved and the related payment is due, provided that there is no substantial future service obligation associated with the milestone. We do not recognize revenue in connection with license arrangements until payments are collected or due and reasonably assured of being collected. In addition, we do not recognize revenue in circumstances where the arrangement includes a refund provision until the refund condition is no longer applicable unless, in our judgment, the refund circumstances are within our operating control and unlikely to occur. Payments received in advance of being recognized as revenue are deferred.
We are recognizing collaboration revenue of $12.0 million associated with the initial license and performance-based payments under the Nycomed agreement based on an estimated recognition period of forty-two months over which we are obligated to perform services supporting the agreement and assumes that AI-700 will be ready for commercialization before the end of 2007. This estimated recognition period may change if available facts and circumstances change. Were the estimated development period to be extended, we would record a reduction in cumulative revenue recognized in our statement of operations in the period in which the change in development period is determined. Our agreement with Nycomed has been modified such that Nycomed has paid us $150,000 for activities associated with creating a brand name for AI-700 and related trademark activities and to reimburse us for up to $1.8 million for support of activities to support the validation of the our commercial manufacturing facility for AI-700. These amounts were originally scheduled to be paid to us upon Nycomed’s filing for regulatory approval of AI-700 in Europe. While the amounts are not refundable, we plan to defer recognition of these amounts until after the original regulatory filing milestone has been achieved. Payments received for current and potential HDDS and PDDS feasibility studies, which are offset by costs incurred for such studies, are recognized as revenue over the estimated performance period of each such study. A change in these estimates could result in a significant change to the amount of revenue recognized in future periods. In addition, if the Nycomed collaboration agreement is terminated for reasons other than certain non-performance by us, we would recognize the remainder of the payments we have received or otherwise expect to collect over the amortization period at the time of termination. We will not recognize revenue associated with the potential additional $56 million in milestone-based payments that may be earned under the Nycomed agreement until the underlying regulatory and sales milestones are achieved.
Fixed Assets. Property and equipment are recorded at cost and depreciated over their estimated useful lives of three to five years using the straight-line method. The majority of our equipment is related to our ongoing research and development activities, including equipment which, subject to regulatory approvals, we intended to use for commercial manufacture of AI-700. We consider that this equipment is placed in service when operation of the equipment is started-up and begin depreciating the equipment at this time. The equipment in our commercial manufacturing facility is currently undergoing research and
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development related activities that result in wear and tear on the equipment including include ongoing calibration and testing.
Leasehold improvements and equipment under capital leases are recorded at cost. We depreciate leasehold improvements and equipment under capital leases over the lesser of their useful lives or the remainder of their respective lease terms. During periods of leasehold build-out, we record such costs and construction in progress and do not begin depreciation of such costs until the improvements are substantially completed and available for use. We began depreciation of leasehold improvements at our Tewksbury facility in October 2005 upon receipt of an occupancy permit and taking occupancy of the facility. Our leasehold improvements costs on this facility approximate $23.6 million and are being depreciated ratably over remaining term of our present lease which is scheduled in expire in April 2010. We believe that the use of the original term of the lease for the depreciation period, rather than assuming that the lease term is renewed, is appropriate given the inherent uncertainties with a product such as AI-700, which has not yet completed its phase 3 clinical trials and requires regulatory approvals before it can be marketed. The Risk Factors included under Section 1A of this document discuss the uncertainties associated with AI-700.
Accrued Expenses. As part of the process of preparing consolidated financial statements we are required to estimate accrued expenses. This process involves identifying services which have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our consolidated financial statements. Examples of estimated expenses for which we accrue include professional service fees, such as lawyers and accountants, and contract service fees such as amounts paid to clinical monitors, data management organizations and investigators in conjunction with clinical trials, and fees paid to the engineering and construction management contractor used in the build-out of our commercial manufacturing facility for AI-700. In connection with such service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs which have begun to be incurred or we under- or over-estimate the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high. The date on which certain services commence, the level of services performed on or before a given date and the cost of such services are often judgmental. We make these judgments based upon the facts and circumstances known to us in accordance with accounting principles generally accepted in the United States of America.
Stock-Based Compensation and Other Equity Instruments. We have elected to follow APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for our stock-based compensation plans, rather than the alternative fair value accounting method provided for under SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, we have not recorded stock-based compensation expense for stock options issued to employees in fixed amounts with exercise prices at least equal to the fair value of the underlying common stock on the date of grant. For those stock options that were granted at less than fair market value, are recorded as expense in the financial statements. In the notes to our consolidated financial statements we provide pro forma disclosures in accordance with SFAS No. 123 and related pronouncements. We expect to adopt SFAS No. 123R on January 1, 2006 using the Statement’s modified prospective application method. We do not yet have an estimate of the effect on our statements of operations of adopting SFAS No. 123. We account for transactions in which services are received in exchange for equity instruments based on the fair value of such services received from non-employees or of the equity instruments issued, whichever is more reliably measured, in accordance with SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. We account for transactions in which we grant warrants in connection with the issuance of debt in accordance with APB 14, Accounting for
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Convertible Debt and Debt Issued with Stock Purchase Warrants. The two factors which most affect charges or credits to operations related to stock-based compensation are the fair value of the common stock underlying stock options for which stock-based compensation is recorded and the volatility of such fair value.
Accounting for equity instruments granted or sold by us under APB No. 14, APB No. 25, SFAS No. 123 and EITF No. 96-18 requires fair value estimates of the equity instrument granted or sold. If our estimates of the fair value of these equity instruments are too high or too low, it would have the effect of overstating or understating expenses. When equity instruments are granted or sold in exchange for the receipt of goods or services and the value of those goods or services can be readily estimated, we use the value of such goods or services to determine the fair value of the equity instruments. When equity instruments are granted or sold in exchange for the receipt of goods or services and the value of those goods or services can not be readily estimated, as is true in connection with most stock options and warrants granted to employees or non-employees, we estimated the fair value of the equity instruments based upon consideration of factors which we deemed to be relevant at the time using cost, market and/or income approaches to such valuations. Because shares of our common stock were not publicly traded prior to our initial public offering in October 2003, market factors historically considered in valuing stock and stock option grants include: (i) comparative values of public companies discounted for the risk and limited liquidity provided for in the shares we are issuing, (ii) pricing of private sales of our convertible preferred stock, (iii) prior valuations of stock grants and the effect of events that have occurred between the time of such grants, (iv) economic trends, (v) perspective provided by investment banks and (vi) the comparative rights and preferences of the security being granted compared to the rights and preferences of our other outstanding equity.
Derivative Liabilities. The terms of our February 2005 convertible preferred stock offering and our March 2005 MassDevelopment loan agreement contain features considered to be embedded derivatives which are recorded at estimated fair value in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments (SFAS 133). The estimation of this fair value includes various assumptions and estimates, including assumptions and estimates of risk free interest rates, stock price volatility and the timing of future preferred stock conversions. Changes in these estimates and assumptions can increase or decrease the value of this derivative liability. Changes in the fair value of the derivative financial instrument are included in other income (expense). The convertible preferred stock terms include a dividend make-whole payment provision, which has been initially recorded at its estimated fair value. This derivative liability is reduced upon conversion of the preferred stock as well as dividends declared by our board of directors, if any. The MassDevelopment loan agreement includes a provision for a retroactive interest rate increase in the event that we achieve certain defined positive operating cash flows. The initial fair value of the MassDevelopment loan derivative is being amortized over a term beginning with the loan agreement effective date and ending with the estimated payment date of the retroactive interest. The fair value of both derivative liabilities are re-measured at each reporting period.
Income Taxes. As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure 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. In addition, as of December 31, 2005, we had federal tax net operating loss carryforwards of $53.6 million, which expire through 2024. We also have research and development credit carryforwards of $6.1 million. We have recorded a valuation allowance to fully offset against these otherwise recognizable net deferred tax assets due to the uncertainty surrounding the timing of the realization of the tax benefit. In the event that we determine in the future that we will be able to realize all or a portion of its net deferred tax benefit, an adjustment to deferred tax valuation allowance would increase net income in the period in which such a determination is made. The Tax Reform Act of 1986
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contains provisions that may limit the utilization of net operating loss carryforwards and credits available to be used in any given year in the event of significant changes in ownership interest, as defined.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS No. 123R”). This Statement is a revision of SFAS No. 123 and supersedes Accounting Principles Board Opinion No. 25 and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). In 2006, we expect to adopt SFAS No. 123R using the Statement’s modified prospective application method. While we believe the adoption of this standard will cause our annual compensation costs to increase, we have not yet estimated the amount of additional operating expense which will need to be recorded in 2006 upon the adoption of SFAS No.123R.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not used derivative financial instruments for speculative or trading purposes. However, we are exposed to market risk related to changes in interest rates. Our current policy is to maintain an investment portfolio consisting mainly of U.S. money market and government-grade securities, directly or through managed funds, with maturities of one year or less. Our cash is deposited in and invested through highly rated financial institutions in North America. Our short-term investments are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels at December 31, 2005, we estimate that the fair value of our investment portfolio would decline by an immaterial amount. We currently have the ability to hold our fixed income investments until maturity, and therefore we do not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments. Our equipment loans and capital leases are not subject to interest rate fluctuations because the interest rates are fixed at the time of borrowing.
Effects of Inflation
Our assets are primarily monetary, consisting of cash, cash equivalents and short-term investments. Because of their liquidity, these assets are not directly affected by inflation. We also believe that we have intangible assets in the value of our technology. In accordance with generally accepted accounting principles, we have not capitalized the value of this intellectual property on our consolidated balance sheet. Due to the nature of this intellectual property, we believe that these intangible assets are not affected by inflation. Because we intend to retain and continue to use our equipment, furniture and fixtures and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate of inflation affects our expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Financial Statements, together with the independent auditors’ report, appear at pages F-1 through F-20, respectively, of this Annual Report on Form 10-K.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2005 (the “Evaluation Date”), the Company’s management, with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective in ensuring that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
During the periods covered by this report, the Company was not subject to the provisions of Section 404 of the Sarbanes-Oxley Act of 2002.
Internal Control Over Financial Reporting
During the fourth quarter of 2005, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2005.
Code of Ethics
We have adopted a “code of ethics” as defined by regulations promulgated under the Securities Act of 1933, as amended, and the Exchange Act and a “code of conduct” as defined by qualitative listing requirements promulgated by The Nasdaq National Market that apply to all of our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We collectively refer to these codes as our Code of Business Conduct and Ethics, a current copy of which is attached as an exhibit to this Annual Report on Form 10-K. A current copy of our Code of Business Conduct and Ethics may also be obtained by any person, without charge, upon request directed to our Investor Relations department at: Acusphere, Inc., Attention: Investor Relations, 500 Arsenal Street, Watertown, MA 02472.
We intend to disclose substantive amendments to or waivers (including implicit waivers) of any provision of the Code of Business Conduct and Ethics that apply to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on our website available at http://www.acusphere.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2005.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2005.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Consolidated Financial Statements.
For a list of the financial information included herein, see the Index on Page F-1.
2. Financial Statement Schedules.
Except for the schedule of Unaudited Quarterly Results of Operations no financial statement schedules have been submitted because they are not required, not applicable, or because the information required is included in the financial statements or the notes thereto.
3. Exhibit Index.
Exhibit
Number | | Description |
3.01 | | Amended and Restated Certificate of Incorporation of registrant (incorporated herein by reference to Exhibit 3.01 to the registrant’s Annual Report on Form 10-K for the Fiscal Year ended December 31, 2005) |
3.02 | | Amended and Restated By-laws of registrant (incorporated herein by reference to Exhibit 3.04 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
3.03 | | Certificate of Powers, Designations, Preferences and Rights of the registrant’s 61¤2% Convertible Exchangeable Preferred Stock (incorporated herein by reference to Exhibit 3.04 to the registrant’s Annual Report on Form 10-K for the Fiscal Year ended December 31, 2005) |
4.01 | | Specimen Certificate for shares of common stock of registrant (incorporated herein by reference to Exhibit 4.01 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
4.02 | | Form of Indenture between the registrant and The Bank of New York, as trustee, relating to the issuance from time to time in one or more series of debentures, notes, bonds or other evidences of indebtedness (incorporated herein by reference to Exhibit 4.01 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
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4.03 | | Form of Debt Security (incorporated herein by reference to Exhibit 4.02 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
4.04 | | Form of Debt Warrant Agreement (together with form of Debt Warrant Certificate (incorporated herein by reference to Exhibit 4.03 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
4.05 | | Form of Common Stock Warrant Agreement (together with form of Common Stock Warrant Certificate (incorporated herein by reference to Exhibit 4.04 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
4.06 | | Form of Preferred Stock Warrant Agreement (together with form of Preferred Stock Warrant Certificate) (incorporated herein by reference to Exhibit 4.05 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
4.07 | | Form of Designation for the Preferred Stock (together with Preferred Stock Certificate) (incorporated herein by reference to Exhibit 4.06 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
4.08 | | Indenture between the registrant and The Bank of New York, as trustee, relating to the issuance of 61¤2% Convertible Subordinated Debentures (incorporated herein by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed February 28, 2005) |
4.09 | | Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.01) |
4.10 | | Certificate of Powers, Designations, Preferences and Rights of the registrant’s 61¤2% Convertible Exchangeable Preferred Stock (incorporated by reference to Exhibit 3.03) |
10.01† | | 1994 Stock Plan, as amended (incorporated herein by reference to Exhibit 10.01 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.02† | | 2003 Stock Plan (incorporated herein by reference to Exhibit 10.02 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.03† | | 2003 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.03 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.04† | | Acusphere, Inc. 2005 Stock Option and Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on June 20, 2005) |
10.05† | | Acusphere, Inc. Management Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on March 16, 2005) |
10.06† | | Stock Repurchase and Registration Agreement by and among the registrant, Harry R. Allcock, Sherri C. Oberg, Robert S. Langer, Richard Kronenthal and Walter Levison, dated as of April 30, 1996 (incorporated herein by reference to Exhibit 10.05 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.07† | | Letter Agreement by and among the registrant, Sherri C. Oberg and Robert S. Langer, dated as of April 30, 1996 (incorporated herein by reference to Exhibit 10.06 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.08 | | Tenth Amended and Restated Investors’ Rights Agreement by and among registrant, Sherri C. Oberg and the Investors named therein, dated as of April 11, 2003, as amended (incorporated herein by reference to Exhibit 10.07 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.9 | | Warrant Agreement by and between the registrant and Comdisco, Inc., dated as of June 6, 1997 (incorporated herein by reference to Exhibit 10.09 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.10 | | Warrant Agreement by and between the registrant and Comdisco, Inc., dated as of February 26, 1998 (incorporated herein by reference to Exhibit 10.10 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
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10.11 | | Warrant Agreement by and between the registrant and Comdisco, Inc., dated as of August 19, 1998 (incorporated herein by reference to Exhibit 10.12 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.12 | | Warrant Agreement by and between the registrant and Gregory Stento, dated as of August 19, 1998 (incorporated herein by reference to Exhibit 10.14 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.13 | | Warrant Agreement by and between the registrant and Comdisco, Inc., dated as of October 16, 1998 (incorporated herein by reference to Exhibit 10.15 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.14 | | Warrant Agreement by and between the registrant and Comdisco, Inc., dated as of October 19, 1998 (incorporated herein by reference to Exhibit 10.16 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.15 | | Warrant Agreement by and between the registrant and Comdisco, Inc., dated as of January 5, 2000 (incorporated herein by reference to Exhibit 10.17 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.16 | | Master Lease Agreement by and among the registrant, Acusphere Securities Corporation and Transamerica Business Credit Corporation, dated as of February 21, 2001 (incorporated herein by reference to Exhibit 10.18 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.17 | | Warrant Agreement by and between the registrant and TBCC Funding Trust I, dated of February 21, 2001 (incorporated herein by reference to Exhibit 10.19 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.18 | | Lease Agreement, by and between registrant and ARE-500 Arsenal Street, LLC, dated as of March 30, 2001 (incorporated herein by reference to Exhibit 10.20 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.19 | | Warrant Agreement by and between the registrant and Alexandria Real Estate Equities, L.P., dated of March 30, 2001 (incorporated herein by reference to Exhibit 10.21 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.20 | | CTM Agreement by and between the registrant and Hollister-Stier Laboratories LLC, dated as of September 7, 2001 (incorporated herein by reference to Exhibit 10.22 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) (confidential treatment previously granted) |
10.21 | | Development and Supply Agreement by and between the registrant and Hollister-Stier Laboratories LLC dated as of November 30, 2001 (incorporated herein by reference to Exhibit 10.23 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) (confidential treatment previously granted) |
10.22 | | Warrant Agreement by and between the registrant and GATX Ventures, Inc., dated as of September 27, 2001 (incorporated herein by reference to Exhibit 10.25 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.23 | | Warrant Agreement by and between the registrant and Venture Lending & Leasing III, LLC, dated as of September 27, 2001 (incorporated herein by reference to Exhibit 10.26 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.24 | | Termination Agreement by and among the registrant, Acusphere Newco, Ltd., Elan Corporation, plc, Elan Pharma International Limited and Elan International Services, Ltd. dated as of September 26, 2003 (incorporated herein by reference to Exhibit 10.27 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) (confidential treatment previously granted) |
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10.25 | | Form of Indemnification Agreement by and between the registrant and each of its directors (incorporated herein by reference to Exhibit 10.28 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.26 | | Form of Warrant issued by the registrant dated as of April 11, 2003 and June 27, 2003 to each of the investors listed on the schedule of warrantholders attached thereto (incorporated herein by reference to Exhibit 10.29 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.27† | | Form of Indemnification Agreement by and between the registrant and certain of its employees (incorporated herein by reference to Exhibit 10.30 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.28 | | Form of Stock and Warrant Purchase Agreement dated as of July 29, 2004 (incorporated herein by reference to Exhibit 10.01 to the registrant’s Current Report on Form 8-K filed July 29, 2004 (File No. 000-50405)) |
10.29 | | Form of Warrant issued by the registrant to certain investors (incorporated herein by reference to Exhibit 10.02 to the registrant’s Current Report on Form 8-K filed July 29, 2004) |
10.30 | | Amendment No. 2 to Tenth Amended and Restated Investors’ Rights Agreement dated as of July 29, 2004 (incorporated herein by reference to Exhibit 10.03 to the registrant’s Current Report on Form 8-K filed July 29, 2004) |
10.31 | | Collaboration, License and Supply Agreement by and between the registrant and Nycomed Danmark ApS dated July 6, 2004 (incorporated herein by reference to Exhibit 10.04 to the registrant’s Amendment No. 2 to Form S-1 Registration Statement on Form S-3, File No. 333-119027) (confidential treatment previously granted) |
10.32 | | First Amendment to Collaboration, License and Supply Agreement by and between the registrant and Nycomed Danmark ApS dated October 19, 2005 (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed October 24, 2005) |
10.33 | | Commercial Building Lease by and between 890 East LLC and the registrant dated as of July 20, 2004 (incorporated herein by reference to Exhibit 10.05 to the registrant’s Amendment No. 2 to Form S-1 Registration Statement on Form S-3, File No. 333-119027) (confidential treatment previously granted) |
10.34 | | Promissory Note with Massachusetts Development Finance Agency (incorporated herein by reference to Exhibit 10.33 to the registrant’s Registration Statement on Form S-1, File No. 333-119027) |
10.35 | | Promissory Note with Massachusetts Development Finance Agency (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed March 25, 2005) |
10.36 | | Master Security Agreement by and between the registrant and General Electric Capital Corporation dated April 16, 2004 (incorporated herein by reference to Exhibit 10.34 to the registrant’s Registration Statement on Form S-1, File No. 333-119027) |
10.37 | | Form of Promissory Note with General Electric Capital Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on March 2, 2005) |
10.38 | | Form of Promissory Note with General Electric Capital Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed December 23, 2004) |
10.39 | | Form of Promissory Note with General Electric Capital Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed January 2, 2005) |
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10.40 | | Form of Promissory Note with General Electric Capital Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed March 2, 2005) |
10.41 | | Form of Promissory Note with General Electric Capital Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed April 4, 2005) |
10.42 | | Master Security Agreement by and between the registrant and Oxford Finance Corporation dated June 20, 2005 (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed June 27, 2005) |
10.43 | | Form of Promissory Note with Oxford Finance Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed June 27, 2005) |
10.44 | | Form of Promissory Note with Oxford Finance Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed August 31, 2005) |
10.45 | | Form of Promissory Note with Oxford Finance Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed September 29, 2005) |
10.46 | | Form of Promissory Note with Oxford Finance Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed November 21, 2005) |
10.47 | | Form of Promissory Note with Oxford Finance Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed December 21, 2005) |
10.48 | | Terms and Conditions for Engineering, Procurement and Construction Management Services (incorporated herein by reference to Exhibit 10.09 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2004) (confidential treatment previously granted) |
10.49 | | Contract Work Authorization (Form 1) No. 1 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.10 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2004) (confidential treatment previously granted) |
10.50 | | Contract Work Authorization (Form 1) No. 2 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed December 14, 2004) |
10.51 | | Contract Work Authorization (Form 1) No. 3 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed March 14, 2005) |
10.52 | | Contract Work Authorization (Form 1) No. 4 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed April 19, 2005) |
10.53 | | Contract Work Authorization (Form 1) No. 5 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed May 2, 2005) |
10.54 | | Contract Work Authorization (Form 1) No. 6 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed May 18, 2005) |
71
10.55 | | Contract Work Authorization (Form 1) No. 7 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed June 20, 2005) |
10.56 | | Contract Work Authorization (Form 1) No. 8 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed July 20, 2005) |
10.57 | | Contract Work Authorization (Form 1) No. 9 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed August 9, 2005) |
10.58 | | Contract Work Authorization (Form 1) No. 10 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed September 7, 2005) |
10.59 | | Contract Work Authorization (Form 1) No. 11 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed October 3, 2005) |
10.60 | | Contract Work Authorization (Form 2) No. 1 for Agency Procurements (incorporated herein by reference to Exhibit 10.11 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2004) (confidential treatment previously granted) |
10.61 | | Contract Work Authorization (Form 2) No. 2 for Agency Procurements (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed March 14, 2005) |
10.62 | | Contract Work Authorization (Form 2) No. 2 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed December 14, 2004) |
10.63† | | Form of 2005 Stock Option and Incentive Plan Incentive Stock Option Agreement (4 year vesting schedule) (incorporated herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005) |
10.64† | | Form of 2005 Stock Option and Incentive Plan Non-Statutory Stock Option Agreement (4 year vesting schedule) (incorporated herein by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005) |
10.65† | | Form of 2005 Stock Option and Incentive Plan Non-Statutory Stock Option Agreement (1 year vesting schedule) (incorporated herein by reference to Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005) |
10.66† | | Form of 2003 Stock Option and Incentive Plan Incentive Stock Option Agreement (4 year vesting schedule) (incorporated herein by reference to Exhibit 10.4 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005) |
10.67† | | Form of 2003 Stock Option and Incentive Plan Non-Statutory Stock Option Agreement (4 year vesting schedule) (incorporated herein by reference to Exhibit 10.5 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005) |
10.68† | | Form of 2003 Stock Option and Incentive Plan Non-Statutory Stock Option Agreement (1 year vesting schedule) (incorporated herein by reference to Exhibit 10.6 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005) |
10.69 | | Amendment No. 3 to Tenth Amended and Restated Investors’ Rights Agreement dated as of October 26, 2004 (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed November 1, 2004) |
10.70 | | Amendment to Lease between ARE-500 Arsenal Street, LLC and Acusphere, Inc. (incorporated herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2005) |
72
10.71 | | Patent Transfer agreement dated May 11, 2005 between Schering Aktiengesellschaft and Acusphere, Inc. (incorporated herein by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2005) |
12.01 | | Computation of Ratios of Earnings to Fixed Charges (incorporated herein by reference to Exhibit 12.01 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
14.01* | | Code of Business Conduct and Ethics |
21.01* | | List of Subsidiaries |
23.01* | | Consent of Deloitte & Touche LLP |
24.01* | | Power of Attorney (included in signature page) |
31.1* | | Rule 13a-14(a)/15d-14(a) Certification |
31.2* | | Rule 13a-14(a)/15d-14(a) Certification |
32.1** | | Section 1350 Certifications |
* Filed herewith.
** Furnished herewith
† Indicates a management contract or any compensatory plan, contract or arrangement.
(b) Exhibits.
We hereby file as part of this Form 10-K the exhibits listed in Item 15(a)(3) above. Exhibits which are incorporated herein by reference can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C., and at the Commission’s regional offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60611-2511, and at 233 Broadway, New York, NY 10279. Copies of such material can also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 29549, at prescribed rates.
(c) Financial Statement Schedule.
Except for the schedule of Unaudited Quarterly Results of Operations no financial statement schedules have been submitted because they are not required, not applicable, or because the information required is included in the financial statements or the notes thereto.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | ACUSPHERE, INC. |
| | By: /s/ Sherri C. Oberg | |
| | Sherri C. Oberg |
| | President and Chief Executive Officer |
| | Date: March 20, 2006 |
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Acusphere, Inc., hereby severally constitute and appoint Sherri C. Oberg and John F. Thero, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, all amendments to this report, and generally to do all things in our names and on our behalf in such capacities to enable Acusphere, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | | | | Title | | | | Date | |
/s/ SHERRI C. OBERG | | President and Chief Executive Officer and Director | | March 20, 2006 |
Sherri C. Oberg | | (Principal Executive Officer) | | |
/s/ JOHN F. THERO | | Senior Vice President and Chief Financial Officer | | March 20, 2006 |
John F. Thero | | (Principal Financial and Accounting Officer) | | |
/s/ JR. FRANK BALDINO, JR. | | Director | | March 20, 2006 |
JR. Frank Baldino, Jr. | | | | |
/s/ GAREN BOHLIN | | Director | | March 20, 2006 |
Garen Bohlin | | | | |
/s/ SANDRA L. FENWICK | | Director | | March 20, 2006 |
Sandra L. Fenwick | | | | |
/s/ MARTYN GREENACRE | | Director | | March 20, 2006 |
Martyn Greenacre | | | | |
/s/ DEREK LEMKE-VON AMMON | | Director | | March 20, 2006 |
Derek Lemke-von Ammon | | | | |
74
EXHIBIT INDEX
Exhibit
Number | | Description |
3.01 | | Amended and Restated Certificate of Incorporation of registrant (incorporated herein by reference to Exhibit 3.01 to the registrant’s Annual Report on Form 10-K for the Fiscal Year ended December 31, 2005) |
3.02 | | Amended and Restated By-laws of registrant (incorporated herein by reference to Exhibit 3.04 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
3.03 | | Certificate of Powers, Designations, Preferences and Rights of the registrant’s 6.5% Convertible Exchangeable Preferred Stock (incorporated herein by reference to Exhibit 3.04 to the registrant’s Annual Report on Form 10-K for the Fiscal Year ended December 31, 2005) |
4.01 | | Specimen Certificate for shares of common stock of registrant (incorporated herein by reference to Exhibit 4.01 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
4.02 | | Form of Indenture between the registrant and The Bank of New York, as trustee, relating to the issuance from time to time in one or more series of debentures, notes, bonds or other evidences of indebtedness (incorporated herein by reference to Exhibit 4.01 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
4.03 | | Form of Debt Security (incorporated herein by reference to Exhibit 4.02 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
4.04 | | Form of Debt Warrant Agreement (together with form of Debt Warrant Certificate (incorporated herein by reference to Exhibit 4.03 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
4.05 | | Form of Common Stock Warrant Agreement (together with form of Common Stock Warrant Certificate (incorporated herein by reference to Exhibit 4.04 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
4.06 | | Form of Preferred Stock Warrant Agreement (together with form of Preferred Stock Warrant Certificate) (incorporated herein by reference to Exhibit 4.05 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
4.07 | | Form of Designation for the Preferred Stock (together with Preferred Stock Certificate) (incorporated herein by reference to Exhibit 4.06 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
4.08 | | Indenture between the registrant and The Bank of New York, as trustee, relating to the issuance of 6.5% Convertible Subordinated Debentures (incorporated herein by reference to Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed February 28, 2005) |
4.09 | | Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.01) |
4.10 | | Certificate of Powers, Designations, Preferences and Rights of the registrant’s 6.5% Convertible Exchangeable Preferred Stock (incorporated by reference to Exhibit 3.03) |
10.01† | | 1994 Stock Plan, as amended (incorporated herein by reference to Exhibit 10.01 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.02† | | 2003 Stock Plan (incorporated herein by reference to Exhibit 10.02 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.03† | | 2003 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.03 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.04† | | Acusphere, Inc. 2005 Stock Option and Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on June 20, 2005) |
10.05† | | Acusphere, Inc. Management Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on March 16, 2005) |
10.06† | | Stock Repurchase and Registration Agreement by and among the registrant, Harry R. Allcock, Sherri C. Oberg, Robert S. Langer, Richard Kronenthal and Walter Levison, dated as of April 30, 1996 (incorporated herein by reference to Exhibit 10.05 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.07† | | Letter Agreement by and among the registrant, Sherri C. Oberg and Robert S. Langer, dated as of April 30, 1996 (incorporated herein by reference to Exhibit 10.06 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.08 | | Tenth Amended and Restated Investors’ Rights Agreement by and among registrant, Sherri C. Oberg and the Investors named therein, dated as of April 11, 2003, as amended (incorporated herein by reference to Exhibit 10.07 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.9 | | Warrant Agreement by and between the registrant and Comdisco, Inc., dated as of June 6, 1997 (incorporated herein by reference to Exhibit 10.09 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.10 | | Warrant Agreement by and between the registrant and Comdisco, Inc., dated as of February 26, 1998 (incorporated herein by reference to Exhibit 10.10 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.11 | | Warrant Agreement by and between the registrant and Comdisco, Inc., dated as of August 19, 1998 (incorporated herein by reference to Exhibit 10.12 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.12 | | Warrant Agreement by and between the registrant and Gregory Stento, dated as of August 19, 1998 (incorporated herein by reference to Exhibit 10.14 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.13 | | Warrant Agreement by and between the registrant and Comdisco, Inc., dated as of October 16, 1998 (incorporated herein by reference to Exhibit 10.15 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.14 | | Warrant Agreement by and between the registrant and Comdisco, Inc., dated as of October 19, 1998 (incorporated herein by reference to Exhibit 10.16 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.15 | | Warrant Agreement by and between the registrant and Comdisco, Inc., dated as of January 5, 2000 (incorporated herein by reference to Exhibit 10.17 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.16 | | Master Lease Agreement by and among the registrant, Acusphere Securities Corporation and Transamerica Business Credit Corporation, dated as of February 21, 2001 (incorporated herein by reference to Exhibit 10.18 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.17 | | Warrant Agreement by and between the registrant and TBCC Funding Trust I, dated of February 21, 2001 (incorporated herein by reference to Exhibit 10.19 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.18 | | Lease Agreement, by and between registrant and ARE-500 Arsenal Street, LLC, dated as of March 30, 2001 (incorporated herein by reference to Exhibit 10.20 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.19 | | Warrant Agreement by and between the registrant and Alexandria Real Estate Equities, L.P., dated of March 30, 2001 (incorporated herein by reference to Exhibit 10.21 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.20 | | CTM Agreement by and between the registrant and Hollister-Stier Laboratories LLC, dated as of September 7, 2001 (incorporated herein by reference to Exhibit 10.22 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) (confidential treatment previously granted) |
10.21 | | Development and Supply Agreement by and between the registrant and Hollister-Stier Laboratories LLC dated as of November 30, 2001 (incorporated herein by reference to Exhibit 10.23 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) (confidential treatment previously granted) |
10.22 | | Warrant Agreement by and between the registrant and GATX Ventures, Inc., dated as of September 27, 2001 (incorporated herein by reference to Exhibit 10.25 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.23 | | Warrant Agreement by and between the registrant and Venture Lending & Leasing III, LLC, dated as of September 27, 2001 (incorporated herein by reference to Exhibit 10.26 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.24 | | Termination Agreement by and among the registrant, Acusphere Newco, Ltd., Elan Corporation, plc, Elan Pharma International Limited and Elan International Services, Ltd. dated as of September 26, 2003 (incorporated herein by reference to Exhibit 10.27 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) (confidential treatment previously granted) |
10.25 | | Form of Indemnification Agreement by and between the registrant and each of its directors (incorporated herein by reference to Exhibit 10.28 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.26 | | Form of Warrant issued by the registrant dated as of April 11, 2003 and June 27, 2003 to each of the investors listed on the schedule of warrantholders attached thereto (incorporated herein by reference to Exhibit 10.29 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.27† | | Form of Indemnification Agreement by and between the registrant and certain of its employees (incorporated herein by reference to Exhibit 10.30 to the registrant’s Registration Statement on Form S-1, File No. 333-106725) |
10.28 | | Form of Stock and Warrant Purchase Agreement dated as of July 29, 2004 (incorporated herein by reference to Exhibit 10.01 to the registrant’s Current Report on Form 8-K filed July 29, 2004 (File No. 000-50405)) |
10.29 | | Form of Warrant issued by the registrant to certain investors (incorporated herein by reference to Exhibit 10.02 to the registrant’s Current Report on Form 8-K filed July 29, 2004) |
10.30 | | Amendment No. 2 to Tenth Amended and Restated Investors’ Rights Agreement dated as of July 29, 2004 (incorporated herein by reference to Exhibit 10.03 to the registrant’s Current Report on Form 8-K filed July 29, 2004) |
10.31 | | Collaboration, License and Supply Agreement by and between the registrant and Nycomed Danmark ApS dated July 6, 2004 (incorporated herein by reference to Exhibit 10.04 to the registrant’s Amendment No. 2 to Form S-1 Registration Statement on Form S-3, File No. 333-119027) (confidential treatment previously granted) |
10.32 | | First Amendment to Collaboration, License and Supply Agreement by and between the registrant and Nycomed Danmark ApS dated October 19, 2005 (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed October 24, 2005) |
10.33 | | Commercial Building Lease by and between 890 East LLC and the registrant dated as of July 20, 2004 (incorporated herein by reference to Exhibit 10.05 to the registrant’s Amendment No. 2 to Form S-1 Registration Statement on Form S-3, File No. 333-119027) (confidential treatment previously granted) |
10.34 | | Promissory Note with Massachusetts Development Finance Agency (incorporated herein by reference to Exhibit 10.33 to the registrant’s Registration Statement on Form S-1, File No. 333-119027) |
10.35 | | Promissory Note with Massachusetts Development Finance Agency (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed March 25, 2005) |
10.36 | | Master Security Agreement by and between the registrant and General Electric Capital Corporation dated April 16, 2004 (incorporated herein by reference to Exhibit 10.34 to the registrant’s Registration Statement on Form S-1, File No. 333-119027) |
10.37 | | Form of Promissory Note with General Electric Capital Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on March 2, 2005) |
10.38 | | Form of Promissory Note with General Electric Capital Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed December 23, 2004) |
10.39 | | Form of Promissory Note with General Electric Capital Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed January 2, 2005) |
10.40 | | Form of Promissory Note with General Electric Capital Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed March 2, 2005) |
10.41 | | Form of Promissory Note with General Electric Capital Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed April 4, 2005) |
10.42 | | Master Security Agreement by and between the registrant and Oxford Finance Corporation dated June 20, 2005 (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed June 27, 2005) |
10.43 | | Form of Promissory Note with Oxford Finance Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed June 27, 2005) |
10.44 | | Form of Promissory Note with Oxford Finance Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed August 31, 2005) |
10.45 | | Form of Promissory Note with Oxford Finance Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed September 29, 2005) |
10.46 | | Form of Promissory Note with Oxford Finance Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed November 21, 2005) |
10.47 | | Form of Promissory Note with Oxford Finance Corporation under Master Security Agreement, together with schedule of borrowing (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed December 21, 2005) |
10.48 | | Terms and Conditions for Engineering, Procurement and Construction Management Services (incorporated herein by reference to Exhibit 10.09 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2004) (confidential treatment previously granted) |
10.49 | | Contract Work Authorization (Form 1) No. 1 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.10 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2004) (confidential treatment previously granted) |
10.50 | | Contract Work Authorization (Form 1) No. 2 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed December 14, 2004) |
10.51 | | Contract Work Authorization (Form 1) No. 3 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed March 14, 2005) |
10.52 | | Contract Work Authorization (Form 1) No. 4 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed April 19, 2005) |
10.53 | | Contract Work Authorization (Form 1) No. 5 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed May 2, 2005) |
10.54 | | Contract Work Authorization (Form 1) No. 6 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed May 18, 2005) |
10.55 | | Contract Work Authorization (Form 1) No. 7 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed June 20, 2005) |
10.56 | | Contract Work Authorization (Form 1) No. 8 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed July 20, 2005) |
10.57 | | Contract Work Authorization (Form 1) No. 9 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed August 9, 2005) |
10.58 | | Contract Work Authorization (Form 1) No. 10 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed September 7, 2005) |
10.59 | | Contract Work Authorization (Form 1) No. 11 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed October 3, 2005) |
10.60 | | Contract Work Authorization (Form 2) No. 1 for Agency Procurements (incorporated herein by reference to Exhibit 10.11 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2004) (confidential treatment previously granted) |
10.61 | | Contract Work Authorization (Form 2) No. 2 for Agency Procurements (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed March 14, 2005) |
10.62 | | Contract Work Authorization (Form 2) No. 2 for Engineering and Construction Management Services (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed December 14, 2004) |
10.63† | | Form of 2005 Stock Option and Incentive Plan Incentive Stock Option Agreement (4 year vesting schedule) (incorporated herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005) |
10.64† | | Form of 2005 Stock Option and Incentive Plan Non-Statutory Stock Option Agreement (4 year vesting schedule) (incorporated herein by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005) |
10.65† | | Form of 2005 Stock Option and Incentive Plan Non-Statutory Stock Option Agreement (1 year vesting schedule) (incorporated herein by reference to Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005) |
10.66† | | Form of 2003 Stock Option and Incentive Plan Incentive Stock Option Agreement (4 year vesting schedule) (incorporated herein by reference to Exhibit 10.4 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005) |
10.67† | | Form of 2003 Stock Option and Incentive Plan Non-Statutory Stock Option Agreement (4 year vesting schedule) (incorporated herein by reference to Exhibit 10.5 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005) |
10.68† | | Form of 2003 Stock Option and Incentive Plan Non-Statutory Stock Option Agreement (1 year vesting schedule) (incorporated herein by reference to Exhibit 10.6 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2005) |
10.69 | | Amendment No. 3 to Tenth Amended and Restated Investors’ Rights Agreement dated as of October 26, 2004 (incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed November 1, 2004) |
10.70 | | Amendment to Lease between ARE-500 Arsenal Street, LLC and Acusphere, Inc. (incorporated herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2005) |
10.71 | | Patent Transfer agreement dated May 11, 2005 between Schering Aktiengesellschaft and Acusphere, Inc. (incorporated herein by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2005) |
12.01 | | Computation of Ratios of Earnings to Fixed Charges (incorporated herein by reference to Exhibit 12.01 to the registrant’s Registration Statement on Form S-3, File No. 333-121618) |
14.01* | | Code of Business Conduct and Ethics |
21.01* | | List of Subsidiaries |
23.01* | | Consent of Deloitte & Touche LLP |
24.01* | | Power of Attorney (included in signature page) |
31.1* | | Rule 13a-14(a)/15d-14(a) Certification |
31.2* | | Rule 13a-14(a)/15d-14(a) Certification |
32.1* | | Section 1350 Certifications |
* Filed herewith.
** Furnished herewith
† Indicates a management contract or any compensatory plan, contract or arrangement.
ACUSPHERE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Acusphere, Inc.
Watertown, Massachusetts
We have audited the accompanying consolidated balance sheets of Acusphere, Inc. and subsidiaries (the “Company”) as of December 31, 2004 and 2005, and the related consolidated statements of operations, redeemable convertible preferred stock, stockholders’ equity, and comprehensive loss, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2004 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 16, 2006
F-2
ACUSPHERE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | As of December 31, | |
| | 2004 | | 2005 | |
ASSETS | | | | | |
CURRENT ASSETS: | | | | | |
Cash and cash equivalents | | $ | 45,179,915 | | $ | 51,112,341 | |
Other current assets | | 2,096,681 | | 1,141,721 | |
Total current assets | | 47,276,596 | | 52,254,062 | |
PROPERTY AND EQUIPMENT, at cost: | | | | | |
Property and equipment | | 20,876,140 | | 53,725,961 | |
Less accumulated depreciation and amortization | | 8,006,819 | | 11,886,288 | |
Property and equipment, net | | 12,869,321 | | 41,839,673 | |
OTHER ASSETS | | 1,857,306 | | 1,745,393 | |
TOTAL | | $ | 62,003,223 | | $ | 95,839,129 | |
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY | | | | | |
CURRENT LIABILITIES: | | | | | |
Current portion of long-term obligations | | $ | 1,071,627 | | $ | 6,726,721 | |
Current portion of deferred revenue | | 3,428,571 | | 3,428,571 | |
Derivative liability | | — | | 1,078,490 | |
Accounts payable | | 4,237,934 | | 3,179,917 | |
Accrued expenses | | 4,396,020 | | 6,829,240 | |
Total current liabilities | | 13,134,152 | | 21,242,939 | |
LONG-TERM LIABILITIES: | | | | | |
Long-term obligations, net of current portion | | 2,502,579 | | 14,600,803 | |
Deferred revenue, net of current portion | | 857,143 | | 2,578,571 | |
Total long-term liabilities | | 3,359,722 | | 17,179,374 | |
COMMITMENTS (Note 11) | | | | | |
STOCKHOLDERS’ EQUITY: | | | | | |
Preferred stock, $0.01 par value per share
Authorized—5,000,000 shares as of December 31, 2004 and 2005 Designated 6.5% convertible exchangeable—none as of December 31, 2004 and 1,000,000 shares as of December 31, 2005;
issued and outstanding, none as of December 31, 2004 and 740,000 shares as of December 31, 2005 | | — | | 7,400 | |
Common stock, $0.01 par value per share
Authorized, 98,500,000 shares as of December 31, 2004 and 2005; issued and outstanding, 17,810,922 shares as of December 31, 2004 and 22,870,559 as of December 31, 2005 | | 178,109 | | 228,706 | |
Additional paid-in capital | | 221,672,237 | | 277,591,555 | |
Deferred stock-based compensation | | (914,492 | ) | (358,965 | ) |
Accumulated deficit | | (175,426,505 | ) | (220,051,880 | ) |
Total stockholders’ equity | | 45,509,349 | | 57,416,816 | |
TOTAL | | $ | 62,003,223 | | $ | 95,839,129 | |
See notes to consolidated financial statements.
F-3
ACUSPHERE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | Year Ended December 31, | |
| | 2003 | | 2004 | | 2005 | |
COLLABORATION REVENUE | | $ | — | | $ | 1,714,286 | | $ | 3,428,571 | |
OPERATING EXPENSES: | | | | | | | |
Research and development | | 14,818,253 | | 25,975,601 | | 42,159,164 | |
General and administrative | | 4,890,136 | | 6,165,922 | | 7,446,070 | |
Total operating expenses | | 19,708,389 | | 32,141,523 | | 49,605,234 | |
Interest income | | 199,883 | | 557,747 | | 1,844,909 | |
Other income | | 22,701 | | 43,718 | | — | |
Change in valuation of derivative | | — | | — | | 257,010 | |
Interest expense | | (2,437,632 | ) | (133,276 | ) | (550,631 | ) |
NET LOSS | | (21,923,437 | ) | (29,959,048 | ) | (44,625,375 | ) |
Dividends on preferred stock | | (5,948,073 | ) | — | | (2,418,457 | ) |
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS | | $ | (27,871,510 | ) | $ | (29,959,048 | ) | $ | (47,043,832 | ) |
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS PER SHARE—Basic and diluted | | $ | (6.66 | ) | $ | (1.92 | ) | $ | (2.49 | ) |
WEIGHTED-AVERAGE SHARES OUTSTANDING—Basic and diluted | | 4,187,672 | | 15,602,832 | | 18,897,130 | |
See notes to consolidated financial statements.
F-4
ACUSPHERE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK,
STOCKHOLDERS’ EQUITY, AND COMPREHENSIVE LOSS
| | | | Stockholders’ Equity | | | |
| | Redeemable Convertible
Preferred Stock | | Convertible
Preferred Stock | | Common Stock | | Additional | | Treasury Stock | | Accumulated
Other | | Deferred | | | | Total | | | |
| | Number of
Shares | | Carrying
Value | | Number of
Shares | | $0.01
Par Value | | Number of
Shares | | $0.01
Par Value | | Paid-in
Capital | | Number of
Shares | | Cost | | Comprehensive
Income | | Stock-Based
Compensation | | Accumulated
Deficit | | Stockholders’
Equity | | Comprehensive
Loss | |
BALANCE, January 1, 2003 | | 31,145,083 | | $ 91,467,075 | | $ — | | $ — | | 1,218,876 | | $ 12,189 | | $ 34,029,519 | | 6,027 | | $ (361 | ) | $ 288 | | $ (1,793,404 | ) | $ (117,595,947 | ) | $ (85,347,716 | ) | | |
Exercise of stock options | | | | | | | | | | 34,395 | | 344 | | 67,800 | | | | | | | | | | | | 68,144 | | | |
Issuance of restricted common stock | | | | | | | | | | 14,956 | | 150 | | 102,149 | | | | | | | | (102,299 | ) | | | — | | | |
Warrants issued with convertible notes | | | | | | | | | | | | | | 761,500 | | | | | | | | | | | | 761,500 | | | |
Retirement of treasury stock | | | | | | | | | | (6,027 | ) | (60 | ) | (301 | ) | (6,027 | ) | 361 | | | | | | | | — | | | |
Conversion of preferred shares to common | | (3,731,999 | ) | (9,123,216 | ) | | | | | 732,600 | | 7,326 | | 9,115,890 | | | | | | | | | | | | 9,123,216 | | | |
Amortization of deferred stock-based compensation | | | | | | | | | | | | | | | | | | | | | | 1,307,052 | | | | 1,307,052 | | | |
Deferred stock-based compensation related to employees | | | | | | | | | | | | | | 1,396,347 | | | | | | | | (1,396,347 | ) | | | — | | | |
Reversal of deferred compensation | | | | | | | | | | | | | | (261,769 | ) | | | | | | | 261,769 | | | | — | | | |
Issuance of common stock from exercise of warrant | | | | | | | | | | 998 | | 10 | | (10 | ) | | | | | | | | | | | — | | | |
Unrealized loss on short-term investments | | | | | | | | | | | | | | | | | | | | (288 | ) | | | | | (288 | ) | $ (288 | ) |
Accretion of dividends and offering costs on preferred stock | | | | 5,948,073 | | | | | | | | | | | | | | | | | | | | (5,948,073 | ) | (5,948,073 | ) | | |
Dividends forfeited on preferred stock conversion | | | | (23,521,685 | ) | | | | | | | | | 23,521,685 | | | | | | | | | | | | 23,521,685 | | | |
Issuance of common stock from initial public offering (“IPO”), net of offering costs | | | | | | | | | | 3,750,000 | | 37,500 | | 47,580,943 | | | | | | | | | | | | 47,618,443 | | | |
Issuance of common stock from convertible notes payable and accrued interest, at IPO | | | | | | | | | | 2,411,846 | | 24,118 | | 20,400,152 | | | | | | | | | | | | 20,424,270 | | | |
Conversion of preferred shares to common, at IPO | | (27,413,084 | ) | (64,770,247 | ) | | | | | 6,136,889 | | 61,368 | | 64,708,879 | | | | | | | | | | | | 64,770,247 | | | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | | (21,923,437 | ) | (21,923,437 | ) | (21,923,437 | ) |
Comprehensive net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ (21,923,725 | ) |
BALANCE, DECEMBER 31, 2003 | | — | | — | | — | | — | | 14,294,533 | | 142,945 | | 201,422,784 | | — | | — | | — | | (1,723,229 | ) | (145,467,457 | ) | 54,375,043 | | | |
See notes to consolidated financial statements.
ACUSPHERE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK,
STOCKHOLDERS’ EQUITY, AND COMPREHENSIVE LOSS (Continued)
| | | | Stockholders’ Equity | | | |
| | Redeemable Convertible
Preferred Stock | | Convertible
Preferred Stock | | Common Stock | | Additional | | Treasury Stock | | Accumulated
Other | | Deferred | | | | Total | | | |
| | Number of
Shares | | Carrying
Value | | Number of
Shares | | $0.01
Par Value | | Number of
Shares | | $0.01
Par Value | | Paid-in
Capital | | Number of
Shares | | Cost | | Comprehensive
Income | | Stock-Based
Compensation | | Accumulated
Deficit | | Stockholders’
Equity | | Comprehensive
Loss | |
BALANCE, DECEMBER 31, 2003 | | — | | — | | — | | — | | 14,294,533 | | 142,945 | | 201,422,784 | | — | | — | | — | | (1,723,229 | ) | (145,467,457 | ) | 54,375,043 | | | |
Exercise of stock options | | | | | | | | | | 68,734 | | 687 | | 88,909 | | | | | | | | | | | | 89,596 | | | |
Issuance of common stock from employee stock purchase plan | | | | | | | | | | 3,960 | | 40 | | 24,407 | | | | | | | | | | | | 24,447 | | | |
Issuance of common stock to board members for services performed | | | | | | | | | | 3,695 | | 37 | | 23,557 | | | | | | | | (23,594 | ) | | | — | | | |
Amortization of deferred stock-based compensation | | | | | | | | | | | | | | | | | | | | | | 940,078 | | | | 940,078 | | | |
Deferred stock-based compensation related to non-employees | | | | | | | | | | | | | | 150,852 | | | | | | | | (150,852 | ) | | | — | | | |
Reversal of deferred compensation for terminated employees | | | | | | | | | | | | | | (43,105 | ) | | | | | | | 43,105 | | | | — | | | |
Warrant issued to financial advisor | | | | | | | | | | | | | | 241,639 | | | | | | | | | | | | 241,639 | | | |
Issuance of common stock from private financing, net of offering costs | | | | | | | | | | 3,440,000 | | 34,400 | | 19,763,194 | | | | | | | | | | | | 19,797,594 | | | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | | (29,959,048 | ) | (29,959,048 | ) | (29,959,048 | ) |
Comprehensive net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | (29,959,048 | ) |
BALANCE, DECEMBER 31, 2004 | | — | | — | | — | | — | | 17,810,922 | | 178,109 | | 221,672,237 | | — | | — | | — | | (914,492 | ) | (175,426,505 | ) | 45,509,349 | | | |
See notes to consolidated financial statements.
ACUSPHERE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK,
STOCKHOLDERS’ EQUITY, AND COMPREHENSIVE LOSS (Continued)
| | | | Stockholders’ Equity | | | |
| | Redeemable Convertible
Preferred Stock | | Convertible
Preferred Stock | | Common Stock | | Additional | | Treasury Stock | | Accumulated
Other | | Deferred | | | | Total | | | |
| | Number of
Shares | | Carrying
Value | | Number of
Shares | | $0.01
Par Value | | Number of
Shares | | $0.01
Par Value | | Paid-in
Capital | | Number of
Shares | | Cost | | Comprehensive
Income | | Stock-Based
Compensation | | Accumulated
Deficit | | Stockholders’
Equity | | Comprehensive
Loss | |
BALANCE, DECEMBER 31, 2004 | | — | | — | | — | | — | | 17,810,922 | | 178,109 | | 221,672,237 | | — | | — | | — | | (914,492 | ) | (175,426,505 | ) | 45,509,349 | | | |
Exercise of stock options | | | | | | | | | | 20,089 | | 201 | | 20,884 | | | | | | | | | | | | 21,085 | | | |
Issuance of common stock from employee stock purchase plan | | | | | | | | | | 8,017 | | 81 | | 38,055 | | | | | | | | | | | | 38,136 | | | |
Issuance of common stock to board members for services performed | | | | | | | | | | 10,824 | | 108 | | 58,642 | | | | | | | | (58,750 | ) | | | — | | | |
Amortization of deferred stock-based compensation | | | | | | | | | | | | | | | | | | | | | | 573,822 | | | | 573,822 | | | |
Deferred stock-based compensation related to
non-employees | | | | | | | | | | | | | | (37,992 | ) | | | | | | | 37,992 | | | | — | | | |
Reversal of deferred compensation for terminated employees | | | | | | | | | | | | | | (2,463 | ) | | | | | | | 2,463 | | | | — | | | |
Issuance of common and preferred stock from financing, net of offering costs | | | | | | 900,000 | | 9,000 | | 3,566,000 | | 35,660 | | 56,350,678 | | | | | | | | | | | | 56,395,338 | | | |
Preferred stock conversion including make-whole dividend | | | | | | (160,000 | ) | (1,600 | ) | 1,454,707 | | 14,547 | | 1,709,554 | | | | | | | | | | | | 1,722,501 | | | |
Dividends paid on preferred stock | | | | | | | | | | | | | | (2,218,040 | ) | | | | | | | | | | | (2,218,040 | ) | | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | | (44,625,375 | ) | (44,625,375 | ) | (44,625,375 | ) |
Comprehensive net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (44,625,375 | ) |
BALANCE, DECEMBER 31, 2005 | | — | | — | | 740,000 | | $ | 7,400 | | 22,870,559 | | $ | 228,706 | | $ | 277,591,555 | | — | | — | | — | | $ | (358,965 | ) | $ | (220,051,880 | ) | $ | 57,416,816 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
(concluded)
ACUSPHERE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | Year Ended December 31, | |
| | 2003 | | 2004 | | 2005 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | |
Net loss | | $ | (21,923,437 | ) | $ | (29,959,048 | ) | $ | (44,625,375 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | |
Stock-based compensation expense | | 1,307,052 | | 940,078 | | 573,822 | |
Depreciation and amortization | | 1,733,417 | | 1,367,837 | | 4,007,291 | |
Loss on disposal of property and equipment | | — | | 30,545 | | — | |
Write-off of noncash IP acquisition cost | | — | | — | | 5,218,132 | |
Noncash interest expense | | 1,120,526 | | 43,261 | | 795,133 | |
Noncash rent expense | | 53,640 | | 244,068 | | 510,668 | |
Noncash amortization of deferred revenue | | — | | (1,714,286 | ) | (3,428,572 | ) |
Noncash amortization of fee to financial advisor | | — | | 100,000 | | 269,040 | |
Noncash amortization of warrants to financial advisor | | — | | 34,520 | | — | |
Noncash change in valuation of derivative | | — | | — | | (257,009 | ) |
Changes in operating assets and liabilities: | | | | | | | |
Deferred revenue | | — | | 6,000,000 | | 5,150,000 | |
Other current assets | | (283,836 | ) | (1,390,728 | ) | 613,698 | |
Accounts payable | | 782,267 | | 2,717,952 | | (1,058,018 | ) |
Accrued expenses | | 1,703,194 | | 2,266,580 | | 1,548,687 | |
Net cash used in operating activities | | (15,507,177 | ) | (19,319,221 | ) | (30,682,503 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | |
Purchases of property and equipment | | (534,713 | ) | (12,183,102 | ) | (32,977,643 | ) |
Increase in other assets | | (119,220 | ) | (257,506 | ) | 111,913 | |
Maturities of short-term investments | | 195,410 | | — | | — | |
Net cash used in investing activities | | (458,523 | ) | (12,440,608 | ) | (32,865,730 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | |
Payments on long-term obligations | | (4,395,089 | ) | (979,545 | ) | (2,546,510 | ) |
Proceeds from long-term obligations | | 19,440,342 | | 3,445,274 | | 14,732,649 | |
Net proceeds from sale of redeemable convertible preferred stock | | — | | — | | 41,887,416 | |
Net proceeds from sale of common stock in initial public offering | | 47,618,443 | | — | | — | |
Net proceeds from sales of common stock | | — | | 19,797,594 | | 17,565,923 | |
Payment of preferred stock dividends | | — | | — | | (2,218,040 | ) |
Proceeds from exercise of stock options | | 68,144 | | 89,596 | | 21,085 | |
Proceeds from issuance of common stock from employee stock purchase plan | | — | | 24,447 | | 38,136 | |
Net cash provided by financing activities | | 62,731,840 | | 22,377,366 | | 69,480,659 | |
| | | | | | | | | | |
(continued)
See notes to consolidated financial statements.
F-8
ACUSPHERE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
| | Year Ended December 31, | |
| | 2003 | | 2004 | | 2005 | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | 46,766,140 | | (9,382,463 | ) | 5,932,426 | |
CASH AND CASH EQUIVALENTS, Beginning of period | | 7,796,238 | | 54,562,378 | | 45,179,915 | |
CASH AND CASH EQUIVALENTS, End of period | | $ | 54,562,378 | | $ | 45,179,915 | | $ | 51,112,341 | |
SUPPLEMENTAL SCHEDULE OF CASH FLOWS INFORMATION: | | | | | | | |
Cash paid during the period for interest | | $ | 1,317,106 | | $ | 90,013 | | $ | 990,241 | |
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING TRANSACTIONS: | | | | | | | |
Common stock issued for preferred conversion, including make whole dividend | | — | | — | | 1,722,501 | |
Common stock issued to board members for services performed | | — | | 23,594 | | 58,750 | |
Common stock warrants issued to financial advisor | | $ | — | | $ | 241,639 | | $ | — | |
Unrealized gain (loss) on investments | | $ | (288 | ) | $ | — | | $ | — | |
Deferred compensation for services to be performed | | $ | 1,236,877 | | $ | — | | $ | — | |
Accretion of preferred stock dividends and offering costs | | $ | 5,948,073 | | $ | — | | $ | — | |
Dividends forfeited on preferred stock conversion | | $ | 23,521,685 | | $ | — | | $ | — | |
Common stock warrants issued with convertible notes | | $ | 761,500 | | $ | — | | $ | — | |
Common stock warrants exercised | | $ | 10 | | $ | — | | $ | — | |
Promissory notes and accrued interest converted into common stock, at IPO | | $ | 20,424,270 | | $ | — | | $ | — | |
(concluded)
See notes to consolidated financial statements.
F-9
ACUSPHERE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations
Acusphere, Inc. and Subsidiaries (“Acusphere” or the “Company”) is a specialty pharmaceutical company that develops new drugs and improved formulations of existing drugs using its proprietary microparticle technology. The Company’s lead product, AI-700, is in Phase 3 clinical trials.
Acusphere is devoting substantially all of its efforts towards the research and development of its product candidates and raising capital. Acusphere is subject to a number of risks. Principal among these risks are the need to develop regulatory approved commercially usable products, competition from substitute products and larger companies and the need to obtain adequate financing necessary to fund product development.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the application of certain accounting policies described below and elsewhere in the notes to the consolidated financial statements.
Principles of Consolidation—The accompanying consolidated financial statements include the amounts of Acusphere, Inc. and its wholly owned subsidiaries, Acusphere Securities Corporation, Acusphere, Ltd. and Acusphere Newco, Ltd. (to February 2003). Acusphere Securities Corporation was established in December 1996 as a Massachusetts securities corporation. Acusphere, Ltd. was established in 2004 for statutory purposes and has no operations, employees or assets. Acusphere Newco, Ltd., as established in June 2000 by the Company and Elan Corporation, plc. (“Elan”), was 80.1% owned by the Company. In September 2002, the joint venture relationship was terminated at which time Acusphere Newco, Ltd. became a wholly owned subsidiary of the Company. In February 2003, Acusphere Newco, Ltd. was dissolved. The Company’s investment in Acusphere Newco, Ltd. was accounted for under the equity method from inception through the termination date of the joint venture relationship and consolidated from that date through February 2003. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimated or assumed.
Cash and Cash Equivalents—Cash equivalents consist of short-term, highly liquid investments, including money market accounts, with original maturity dates of 90 days or less when purchased. Cash equivalents are carried at cost, which approximates their fair market value.
Property and Equipment—Property and equipment are recorded at cost and depreciated over their estimated useful lives of three to five years using the straight-line method. The majority of equipment is related to ongoing research and development activities, including equipment intended for commercial manufacture of AI-700. The equipment in our commercial manufacturing facility was placed in service in October 2005 and is being utilized in research and development related activities, including ongoing calibration and testing. Depreciation commences on equipment when it is placed in service. Interest costs associated with the construction of the facility were capitalized in accordance with the provisions of SFAS No. 34, “Capitalization of Interest.”
Equipment under capital leases and leasehold improvements are depreciated over the lesser of their useful lives or the remainder of the lease term. Depreciation of such equipment and leasehold improvements commences when it is placed in service. Property and equipment is reviewed for impairment
F-10
whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable and recognizes a loss when it is probable that the estimated future cash flows will be less than the carrying value of the asset. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for manufacturing facility start-up and validation are charged to expense as incurred.
Other Assets—Other assets consist primarily of lease related deposits and deferred rent expense.
Fair Value of Financial Instruments—The carrying amounts of Acusphere’s financial instruments, which include cash equivalents, accounts payable, accrued expenses, and long-term obligations, approximate their fair values.
Concentrations of Credit Risk and Limited Suppliers—The financial instruments that potentially subject Acusphere to concentrations of credit risk are cash and cash equivalents. Acusphere’s cash and cash equivalents are maintained with a highly rated commercial bank and its related investment management company.
Acusphere relies on certain materials used in its development process, each of which is available from limited sources. The failure of a supplier or subcontractor to deliver on schedule could delay or interrupt the development process and thereby adversely affect Acusphere’s operating results.
Collaboration Revenue—Collaboration revenue consists of revenue earned under license arrangements with collaborative partners in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”) and FASB Emerging Issue Task Force Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). Revenue from license payments not tied to achieving a specific performance milestone is recognized ratably over the period over which services are obligated to be performed. The period over which services are obligated to be performed is estimated based on available facts and circumstances. Revenue is recognized from performance payments, when such performance is substantially in Acusphere’s control and when Acusphere believes that completion of such performance is reasonably probable, ratably over the period over which it estimates that it will perform such performance obligations. Substantive at-risk milestone payments, which are based on achieving a specific performance milestone when performance of such milestone is contingent on performance by others or for which achievement can not be reasonably estimated or assured, are recognized as revenue when the milestone is achieved and the related payment is due, provided that there is no substantial future service obligation associated with the milestone. Revenue in connection with license arrangements is recognized over the term of the arrangement and is limited to payments collected or due and reasonably assured of collection. In circumstances where the arrangement includes a refund provision, the Company defers revenue recognition until the refund condition is no longer applicable unless, in Acusphere’s judgment, the refund circumstances are within its operating control and unlikely to occur. Payments received in advance of being recognized as revenue are deferred.
Research and Development Expenses—Research and development costs primarily consist of salaries, consulting and contract services and material costs. These expenses include related costs for clinical sites enrolling patients in the AI-700 Phase 3 clinical program, costs for clinical data management and independent clinical site monitoring and operating costs associated with efforts to build-out and qualify a commercial manufacturing facility. Research and development expenses also include costs to acquire patents, which are expensed if technological feasibility has yet to be achieved. Acusphere charges all research and development expenses to operations as incurred, net of expenses reimbursed from third parties.
Derivative Financial Instruments—The Company’s 6.5% convertible exchangeable preferred stock contains a feature whereby, prior to March 1, 2009, if the Company elects to automatically convert, or if any holder elects to voluntarily convert, the preferred stock, the Company will also make an additional payment (“make-whole payment”) equal to the aggregate amount of dividends that would have been
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payable on the preferred stock so converted from the original date of issuance of February 24, 2005 through and including March 1, 2009, less any dividends already paid on the preferred stock. This feature represents an embedded derivative which is required to be accounted for separately from the preferred stock. The estimated fair value of this feature is valued using a risk-weighted binomial model that incorporates factors such as the Company’s cost of capital, stock price volatility and the estimated timing of preferred stock conversions. Changes in the estimated fair value of the liability represented by these factors, as well as any make-whole payments, are charged to the consolidated statements of operations. These adjustments will be required until the feature is either triggered or expires.
The Company’s loan agreement with MassDevelopment contains a feature providing for a retroactive interest rate increase in the event the Company achieves positive operating cash flow as defined in the agreement. This feature represents an embedded derivative which is required to be accounted for separately from the related loan. The estimated fair value of this feature is valued using a risk-weighted discounted cash flow methodology that incorporates factors such as the Company’s cost of capital and the probability and estimated timing of the Company achieving positive operating cash flow, as defined. Changes in the estimated fair value of the liability represented by these factors are charged to the consolidated statements of operations. These adjustments will be required until the feature is either triggered or expires.
Income Taxes—Deferred tax liabilities and assets are provided for differences between the book and tax bases of existing assets and liabilities and tax loss carryforwards and credits, using tax rates expected to be in effect in the years in which differences are expected to reverse. Valuation allowances are provided to the extent realization of tax assets is not considered likely.
Stock-Based Compensation—Acusphere’s employee stock option plan is accounted for using the intrinsic-value-based method of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The intrinsic method requires that compensation expense, if any, be determined by calculating the difference between the fair value of the Company’s common stock and the strike price of the option at a measurement date. The measurement date is generally when the number of shares and the strike price of the option are known. Acusphere uses the fair-value method to account for nonemployee stock-based compensation.
Acusphere has computed the pro forma disclosures required under SFAS No. 123, “Accounting for Stock-Based Compensation,” for options granted using the Black-Scholes option-pricing model prescribed by SFAS No. 123. The assumptions used and weighted-average information are as follows:
| | December 31, | |
| | 2003 | | 2004 | | 2005 | |
Risk-free interest rate | | 2.53%-3.12 | % | 2.31%-3.66 | % | 3.46%-4.53 | % |
Expected dividend yield | | — | | — | | — | |
Expected lives | | 4 years | | 4 years | | 4 years | |
Expected volatility | | 60.0%-100.0% | | 44.3%-54.2% | | 36.34%-47.98% | |
Weighted-average fair value of options granted | | $ | 6.20 | | $ | 3.21 | | $ | 2.25 | |
| | | | | | | | | | |
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Had stock-based compensation expense for the plan been determined consistent with SFAS No. 123, Acusphere’s net loss would have been the following pro forma amounts:
| | Year Ended December 31, | |
| | 2003 | | 2004 | | 2005 | |
Applicable to common stockholders: | | | | | | | |
Net loss—as reported | | $ | (27,871,510 | ) | $ | (29,959,048 | ) | $ | (47,043,832 | ) |
Add: Stock-based employee compensation expense included in reported net loss | | 1,211,273 | | 776,581 | | 460,130 | |
Deduct: Stock-based employee compensation expense determined under fair value method | | (1,184,230 | ) | (1,738,994 | ) | (2,094,926 | ) |
Net loss—proforma | | $ | (27,844,467 | ) | $ | (30,921,461 | ) | $ | (48,678,628 | ) |
Net loss per share (basic and diluted): | | | | | | | |
As reported | | $ | (6.66 | ) | $ | (1.92 | ) | $ | (2.49 | ) |
Pro forma | | $ | (6.65 | ) | $ | (1.98 | ) | $ | (2.58 | ) |
Net Loss Per Share—Basic and diluted net loss per common share is calculated by dividing the net loss applicable to common stockholders by the weighted-average number of unrestricted common shares outstanding during the period. Diluted net loss per common share is the same as basic net loss per common share, since the effects of potentially dilutive securities are antidilutive for all periods presented. Antidilutive securities, which consisted of redeemable convertible preferred stock (in 2003 only), convertible exchangeable preferred stock (in 2005 only), stock options, warrants, and restricted common stock that are not included in the diluted net loss per share calculation, aggregated 1,758,029, 3,155,942 and 9,846,627 as of December 31, 2003, 2004, and 2005, respectively. The following table reconciles the weighted-average common shares outstanding to the shares used in the computation of basic and diluted weighted-average common shares outstanding:
| | Year Ended December 31, | |
Historical | | | | 2003 | | 2004 | | 2005 | |
Weighted-average common shares outstanding | | 4,191,321 | | 15,611,644 | | 18,900,260 | |
Less weighted-average restricted common shares
outstanding | | (3,649 | ) | (8,812 | ) | (3,130 | ) |
Basic and diluted weighted-average common shares
outstanding | | 4,187,672 | | 15,602,832 | | 18,897,130 | |
| | | | | | | | | |
Comprehensive Loss—Comprehensive loss is defined as the change in stockholders’ equity during a period from transactions and other events and circumstances from non-owner sources. Acusphere has disclosed comprehensive loss for all periods presented in the accompanying consolidated statements of redeemable convertible preferred stock, stockholders’ equity, and comprehensive loss.
Disclosures About Segments of an Enterprise—Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. To date, Acusphere has viewed its operations and manages its business as one operating segment.
Recent Accounting Pronouncements—In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS No. 123R”). This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
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and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). Acusphere expects to adopt SFAS No. 123R using the Statement’s modified prospective application method. While the adoption of this standard is expected to cause our compensation costs to increase, the Company does not yet have an estimate of the effect on its statement of operations of adopting SFAS No. 123R and is currently evaluating the impact of adoption.
3. Balance Sheet Data
| | As of December 31, | |
| | 2004 | | 2005 | |
Other assets consist of the following: | | | | | |
Deposits | | $ | 1,212,996 | | $ | 1,242,495 | |
Other assets | | 644,310 | | 502,898 | |
| | $ | 1,857,306 | | $ | 1,745,393 | |
Accrued expenses consist of the following: | | | | | |
Accrued contract services | | $ | 2,500,573 | | $ | 2,113,458 | |
Accrued vacation | | 398,230 | | 479,940 | |
Accrued bonus | | 478,006 | | 800,000 | |
Accrued construction, equipment and commissioning costs | | — | | 1,898,017 | |
Other accrued expenses | | 1,019,211 | | 1,537,825 | |
| | $ | 4,396,020 | | $ | 6,829,240 | |
4. Property and Equipment
Property and equipment at cost consist of the following:
| | As of December 31, | | Estimated | |
| | 2004 | | 2005 | | Useful Life | |
Equipment | | $ | 10,279,147 | | $ | 20,589,088 | | 3-5 years | |
Furniture and fixtures | | 188,252 | | 345,394 | | 5 years | |
Leasehold improvements | | 171,277 | | 30,985,667 | | Lease term | |
Sub-total depreciable assets | | 10,638,676 | | 51,920,149 | | | |
Less: accumulated depreciation and amortization | | (8,006,819 | ) | (11,886,288 | ) | | |
Total depreciable assets, net | | 2,631,857 | | 40,033,861 | | | |
Deposits on equipment purchases | | 6,774,256 | | 1,805,812 | | N/A | |
Construction in progress | | 3,463,208 | | — | | N/A | |
Total property and equipment, net | | $ | 12,869,321 | | $ | 41,839,673 | | | |
Deposits on equipment purchases represent progress payments for long-lead time capital equipment purchases. Amounts recorded as construction in progress represent costs incurred but not invoiced for the build-out of Acusphere’s commercial manufacturing facility for AI-700 located in Tewksbury, Massachusetts. Depreciation on leasehold improvements to this commercial manufacturing facility commenced upon the latter of completion of the improvements or October 2005, at which time the Company received an occupancy permit and began operating use of the facility. Included in leasehold improvements is capitalized interest in the amount of $813,000 at December 31, 2005.
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5. Long-term Obligations
The carrying value of long-term obligations was as follows:
| | As of December 31, | |
| | 2004 | | 2005 | |
Capital lease obligations | | $ | 205,419 | | $ | 64,797 | |
Notes payable | | 3,368,787 | | 15,695,549 | |
Other long-term obligations | | — | | 5,567,178 | |
Subtotal | | 3,368,787 | | 21,262,727 | |
Subtotal long-term obligations | | 3,574,206 | | 21,327,524 | |
Less current maturities | | 1,071,627 | | 6,726,721 | |
Long-term obligations, net | | $ | 2,502,579 | | $ | 14,600,803 | |
Future payments under all capital lease, notes payable and other long-term obligations are as follows as of December 31, 2005:
| | Capital Lease
Obligations | | Notes Payable and Other Long-term Obligations | |
Year Ending December 31, | | | | | | | |
2006 | | | $ | 17,742 | | | $ | 6,713,641 | |
2007 | | | 17,742 | | | 7,404,226 | |
2008 | | | 17,742 | | | 4,274,995 | |
2009 | | | 17,742 | | | 2,653,649 | |
2010 | | | 5,816 | | | 216,216 | |
Thereafter | | | — | | | — | |
Total future minimum payments | | | 76,784 | | | 21,262,727 | |
Less amount representing future interest | | | 11,987 | | | — | |
Present value of future minimum payments | | | 64,797 | | | 21,262,727 | |
Less current portion of long-term obligations | | | 13,080 | | | 6,713,641 | |
Long-term portion of long-term obligations | | | $ | 51,717 | | | $ | 14,549,086 | |
Capital Lease Obligations
The Company leases capital equipment through Banc of America Leasing Corporation. The remaining monthly payments range from $460 to $1,019 with maturities through June 2010. Interest rates for the above leases range from 7.3% to 9.2%. Acusphere does not have any additional borrowing availability under these lease arrangements as of December 31, 2005.
At December 31, 2005, the cost and net carrying value of equipment under capital leases amounted to approximately $73,000 and $65,000, respectively.
Notes Payable
Equipment Promissory Notes—In June 2005, the Company entered into a $7.0 million equipment financing line with Oxford Finance Corporation. Borrowings under this equipment line can be made against qualified purchases, subject to review and approval by Oxford Finance Corporation, through April 2006. Such borrowings are to be collateralized by corresponding qualified purchases and repaid over 36 to 48 months, depending on the nature of the equipment financed. Interest rates are fixed at the time of each borrowing under the equipment line with such rates adjusted between borrowings based on the U.S. Federal Reserve’s Three Year and Four Year Treasury Constant Maturity Rates. Interest rates on borrowings made through December 31, 2005 on this line range from 10.3% to 10.8%, respectively. The
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loans under this financing line are subject to acceleration upon the happening of certain customary events of default, including failure to timely pay principal and interest. As of December 31, 2005, the Company had cumulatively borrowed $5.6 million under this line, of which $5.3 million was outstanding net of repayments. Monthly payments for the amounts outstanding under the equipment financing line are required through December 2010.
In April 2004, the Company entered into an equipment financing line with General Electric Capital Corporation. In 2004 and 2005, the Company borrowed an aggregate of $10.5 million against this line. As of December 31, 2005, net of repayments, the Company had $8.4 million outstanding under this line. Such borrowings are collateralized by corresponding equipment and other capital purchases with repayment due in monthly installments over 36 to 48 months, depending on the nature of the equipment financed, with the last such repayment scheduled for March 2009. Interest rates on these borrowings were fixed at the time of each borrowing and range from 8.7% to 10.1%. No further additional amount may be borrowed under this line. The loans under this line are subject to acceleration upon the occurrence of certain customary events of default, including failure to timely pay principal and interest.
Facility Loan Agreement—In August 2004, Acusphere entered into a loan with MassDevelopment under which up to $2.0 million of financing is available upon completion by Acusphere of certain tenant improvements to its commercial manufacturing facility in Tewksbury, Massachusetts. Interest accrues under the loan at 5.0% per annum with retroactive adjustments to 9% in the event the Company achieves positive operating cash flow as defined in the agreement. The repayment of principal and accrued interest coincides with the term of the Tewksbury lease which has a five-year, nine-month term with options to extend the lease for up to two additional five-year terms. No payments are due under the loan for the first twenty-four months. Unpaid interest during this twenty-four month period is accrued and principal and accrued interest shall be repaid on a monthly basis thereafter such that the total amount outstanding shall fully amortize over the balance of the term in equal installments. The loan is subject to acceleration upon certain customary events of default, including failure to timely pay principal and interest. In the first quarter of 2005, the Company borrowed $2.0 million under this agreement, secured by certain improvements made at the Tewksbury facility. As of December 31, 2005, Acusphere has $2.0 million outstanding under this financing arrangement, and has accrued interest payable of approximately $77,000 related to this loan.
The retroactive interest rate adjustment feature of the loan agreement was deemed to be an embedded derivative instrument requiring separate accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and was initially valued at $62,000. The derivative asset is being amortized as interest expense over a term beginning with the loan agreement effective date and ending with the currently expected payment date of the retroactive interest. The fair value of the derivative liability will be re-measured at each reporting period, with any change in value charged or credited to interest expense. There was no change in the estimated fair value of the derivative liability at December 31, 2005.
Other Long-Term Obligations
In May 2005, pursuant to a Patent Transfer Agreement with Schering, Acusphere acquired from Schering rights, title and interest in nine patent families, including various U.S. and international ultra-sound related patents, and licenses to two other patent families. In consideration of the transfer and assignment of these patents, the company agreed to pay Schering a total of $7.0 million of which $1.0 million was paid in May 2005, $3.0 million is due in May 2006, and $3.0 million is due in May 2007. The present value of these future payments was calculated to be $5.6 million, using an imputed interest rate of 9.8%, and was recorded as a liability under other long-term obligations at December 31, 2005. During 2005, the Company recorded an expense of $6.2 million, included in research and development, for these patents since the Company had yet to establish technological feasibility.
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6. Deferred Revenue
In July 2004, the Company entered into a collaboration, license and supply agreement with Nycomed in which the Company granted Nycomed rights to develop and market AI-700 in Europe. As part of this agreement, Nycomed paid the Company $6.0 million and $5.0 million in 2004 and 2005, respectively, as a license fee and for Acusphere’s research and development efforts. Under the terms of this agreement, Nycomed is scheduled to pay the Company an additional $1.0 million in 2006 for research and development efforts. The agreement provides for other potential milestones and royalties to be paid to the Company when earned. The Company is recognizing the $12 million in scheduled payments over a period of forty-two months from the date of the agreement, reflecting the estimated period over which the amount is to be earned.
In October 2005, this agreement was modified and Nycomed paid the Company an additional $150,000 with a corresponding decrease of equal amount in a future potential milestone which may be earned by the Company. The Company intends to defer the $150,000 until the time that Nycomed files for regulatory approval of AI-700 in Europe, based upon the originally stated milestone in the agreement. During the years ended December 31, 2004 and 2005, the Company recognized $1.7 million and $3.4 million, respectively, in collaboration revenue under its agreement with Nycomed, as amended.
In February 2006, the Company and Nycomed agreed to further amend the agreement to accelerate an additional $1.85 million in milestone payments in order to fund certain activities associated with the qualification of our manufacturing facility. Beginning with costs incurred in February 2006, the Company may begin to draw down on this $1.85 million in accelerated funding up to $370,000 per month. Any payments received pursuant to these amendments are considered advances against a future milestone payment for a European regulatory filing, or Marketing Authorization Application (“MAA”), and will be deducted from that milestone payment. Payments received under these amendments will be classified as deferred revenue until the MAA milestone is achieved, provided that the applicable revenue recognition criteria are met.
In connection with the Company’s agreement with Nycomed, the Company is obligated to pay a customary fee to its financial advisor in this transaction. The total fee, of which $325,000 and $285,000 was paid by the Company in 2004 and 2005, respectively, is comprised of cash and warrants and is dependent upon the timing and magnitude of the amounts to be paid by Nycomed to the Company.
7. Income Taxes
At December 31, 2005, Acusphere had a federal net operating loss (“NOL”) carryforward for income tax purposes of approximately $136,518,000 and a Massachusetts NOL of approximately $115,812,000. Acusphere also has approximately $6,116,000 of research and development (“R&D”) credits as of December 31, 2005 available to offset future income taxes payable, if any. The Tax Reform Act of 1986 contains provisions that may limit the utilization of tax attributes (including NOL carryforwards and R&D credits) available to be used in any given year in the event of significant changes in ownership interests, as defined in IRC Section 382.
The components of Acusphere's deferred tax asset at December 31, 2004 and 2005 are as follows:
| | 2004 | | 2005 | |
Net operating loss carryforwards | | $ | 33,144,000 | | $ | 53,682,000 | |
Temporary timing differences | | 17,694,000 | | 13,147,000 | |
Research and development credit carryforwards | | 5,282,000 | | 6,116,000 | |
Deferred tax asset | | 56,120,000 | | 72,945,000 | |
Less valuation allowance | | (56,120,000 | ) | (72,945,000 | ) |
| | $ | — | | $ | — | |
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The temporary differences principally consist of capitalized start-up expenses and depreciation adjustments for income tax purposes. Acusphere has established a full valuation allowance equal to the amount of its deferred tax asset as the realization of such asset is uncertain. The Company’s effective income tax rate is zero for all periods presented due to the full valuation allowance. The increase in the valuation allowance over the prior year is primarily due to the increase in the NOL carryforward, the valuation allowance increased $15.5 million from 2003 to 2004 primarily as a result of the Company’s net loss.
8. Stockholders’ Equity
Convertible Exchangeable Preferred Stock
On February 24, 2005, the Company issued 900,000 shares of 6.5% convertible exchangeable preferred stock (the “Preferred Stock”) at $50.00 per share resulting in aggregate gross proceeds to the Company of $45.0 million (net proceeds of approximately $41.9 million after deducting underwriting discounts, commissions and offering expenses). Each share of Preferred Stock has a liquidation preference of $50.00 per share. Dividends on the Preferred Stock are cumulative from the date of original issue at the annual rate of $3.25 per share, payable quarterly on the first day of March, June, September, and December. Any dividends must be declared by the Company’s board of directors and must come from funds that are legally available for dividend payments. During the period ended December 31, 2005, dividends accumulated on the Preferred Stock totaled $2.5 million, of which $2.2 million were paid as of December 31, 2005.
The Preferred Stock is convertible into the Company’s common stock at any time at the option of the holder at a conversion rate of 7.2886 shares of common stock for each share of Preferred Stock, based on an initial conversion price of $6.86 per share. The initial conversion price is subject to adjustment in certain customary events, but is not subject to “price based” anti-dilution adjustment. The Company has reserved approximately 6.6 million shares of common stock for issuance upon such conversion.
The Company may elect to automatically convert some or all of the Preferred Stock into shares of common stock if the closing price of the Company’s common stock has exceeded $10.30 per share (150% of the conversion price) for at least 20 trading days during any 30-day trading period, ending within five trading days prior to notice of automatic conversion. Prior to March 1, 2009, if the Company elects to automatically convert, or if any holder elects to voluntarily convert, the Preferred Stock, the Company will also make an additional payment (“Make-Whole” payment) equal to the aggregate amount of dividends that would have been payable on the Preferred Stock so converted from the original date of issuance through and including March 1, 2009, less any dividends already paid on the Preferred Stock. This additional payment is payable by the Company, at its option, in cash, in additional shares of its common stock, or in a combination of cash and shares of common stock. The Company has reserved a maximum of approximately 2.0 million shares of common stock for issuance under this Make-Whole provision.
During the year ended December 31, 2005, 160,000 shares of Preferred Stock were voluntarily converted into 1,166,181 shares of the Company’s common stock. In connection with such conversions, the Company issued an additional 288,526 shares of the Company’s common stock in satisfaction of the required Make-Whole payment. The fair value of this payment was approximately $1.8 million, which was charged to the derivative liability during the fourth quarter of 2005.
In accordance with SFAS No. 133, the Company is required to separate and account for as an embedded derivative, the dividend make-whole payment feature of the Preferred Stock offering. As an embedded derivative instrument, the dividend make-whole payment feature must be measured at fair value and reflected as a liability. Changes in the fair value of the derivative are recognized in earnings as a component of other income/(expense). The Company determined the fair value of the dividend make-whole payment feature to be $3.1 million at February 24, 2005 (the commitment date). This amount
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was allocated from the proceeds of the Preferred Stock to the derivative liability. During 2005, make-whole payments related to the conversion of 160,000 shares were made and the derivative liability was reduced for the fair value of these payments. At December 31, 2005, the derivative liability was revalued at approximately $1.1 million.
The Company may elect to redeem the Preferred Stock at declining redemption prices on or after March 6, 2009.
The Preferred Stock is exchangeable, in whole but not in part, at the option of the Company on any dividend payment date beginning on March 1, 2006 (the “Exchange Date”) for the Company’s 6.5% convertible subordinated debentures (“Debentures”) at the rate of $50 principal amount of Debentures for each share of Preferred Stock. The Debentures, if issued, will mature 25 years after the Exchange Date and have terms substantially similar to those of the Preferred Stock.
The Preferred Stock has no maturity date and no voting rights prior to conversion into common stock, except under limited circumstances.
Common Stock
On September 28, 2005, the Company sold 3,566,000 shares of its common stock at $5.25 per share resulting in aggregate gross proceeds to the Company of $18.7 million (net proceeds of approximately $17.5 million after deducting underwriting discounts, commissions and offering expenses).
In July 2004, Acusphere entered into definitive purchase agreements with institutional and accredited investors for a $21.5 million private placement of up to 3,440,000 newly issued shares of common stock at a price of $6.25 per share and warrants to purchase up to an additional 688,000 shares of common stock at an exercise price of $8.50 per share. In August 2004, a partial closing of this private placement was consummated, resulting in aggregate gross proceeds to Acusphere of approximately $17.9 million (net proceeds of approximately $16.5 million) and the issuance of 2,865,522 shares of common stock and warrants to purchase up to an additional 573,105 shares of common stock. In October 2004, a second and final closing of this private financing resulted in aggregate gross proceeds to Acusphere of approximately $3.6 million (net proceeds of approximately $3.2 million) and the issuance of 574,478 shares of common stock at a price of $6.25 per share and warrants to purchase up to an additional 114,895 shares of common stock at an exercise price of $8.50 per share.
On October 14, 2003, Acusphere’s Registration Statement on Form S-1, as amended, was declared effective by the Securities and Exchange Commission permitting the Company to sell shares of common stock in an initial public offering (“IPO”). On October 7, 2003, Acusphere sold 3,750,000 shares of common stock in the IPO for $14.00 per share which resulted in net proceeds of approximately $47,600,000 to the Company, after deducting $4,900,000 in underwriting fees and offering-related expenses.
Holders of common stock are entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Holders of common stock are entitled to receive ratably any dividends as may be declared by the Company’s board of directors.
Conversions to Common Stock—On July 1, 2003, in connection with the issuance of the subordinated convertible promissory notes, 3,731,999 shares of outstanding preferred stock converted into 732,600 shares of common stock. On October 14, 2003, at the time of IPO, all of the remaining then outstanding shares of preferred stock and all of the Company’s then outstanding subordinated convertible promissory notes, including accrued interest, converted into 8,548,735 shares of common stock.
During the year ended December 31, 2005, 160,000 shares of Preferred Stock were voluntarily converted into 1,166,181 shares of the Company’s common stock. In connection with such conversions, the
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Company issued an additional 288,526 shares of the Company’s common stock in satisfaction of the required Make-Whole payment.
Stock Plans—In June 2005, the 2005 Stock Option and Incentive Plan (the “2005 Plan”) was approved. The 2005 Plan became effective on June 16, 2005 and provides that a maximum of 1,700,000 shares of common stock may be issued as incentive stock options (“ISO’s”), nonqualified stock option, awards of common stock and direct purchases of common stock by Acusphere employees, officers, directors and consultants. The maximum number of shares that may be granted to any employee under the 2005 Plan shall not exceed 1,000,000 shares of common stock during any calendar year. No option or share has been issued under the 2005 Plan as of December 31, 2005.
In July 2003, the 2003 Stock Option and Incentive Plan (the “2003 Plan”) was approved. The 2003 Plan became effective on the closing of the Company’s IPO on October 14, 2003 and provides that a maximum of 2,500,000 shares of common stock may be issued as ISO’s, nonqualified stock option, awards of common stock and direct purchases of common stock by Acusphere employees, officers, directors and consultants. The maximum number of shares that may be granted to any employee under the 2003 Plan shall not exceed 583,334 shares of common stock during any calendar year. Acusphere had 471,304 shares available for future stock and option grants under the 2003 Plan at December 31, 2005.
In March 1994, the 1994 Stock Plan (the “1994 Plan”) was approved. The 1994 Plan, as amended provides that a maximum of 1,423,663 shares of common stock could be issued as ISO’s, nonqualified stock options and stock grants. No new stock options or other stock grants can be made by the Company under the 1994 Plan after March 7, 2004.
In July 2003, the 2003 Employee Stock Purchase Plan (the “Purchase Plan”) was approved which became effective on the closing of the Company’s IPO on October 14, 2003. The Purchase Plan provides for the issuance of a maximum of 233,334 shares of common stock. Eligible employee may contribute up to 10% of their total cash compensation with a maximum of 417 shares semi-annually. The first sale of shares under this plan occurred on February 29, 2004. During 2004 and 2005, 3,960 and 8,017 shares, respectively, of common stock were sold to employees under this plan. Acusphere had 221,357 shares available for future sales of common stock under this plan at December 31, 2005.
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Stock option activity under the 1994 and 2003 Plans was as follows:
| | Number of
Shares | | Exercise Price
Per Share | | Weighted-
Average
Exercise
Price Per
Share | |
Balance, January 1, 2003 | | 763,930 | | $ | 0.60 - $7.20 | | | $ | 3.36 | | |
Granted | | 505,072 | | 0.84 - 13.02 | | | 8.00 | | |
Exercised | | (34,395 | ) | 0.60 - 7.20 | | | 1.98 | | |
Canceled | | (62,645 | ) | 0.84 - 7.20 | | | 6.71 | | |
Balance, December 31, 2003 | | 1,171,962 | | $ | 0.60 - $13.02 | | | $ | 5.23 | | |
Granted | | 783,939 | | 6.01 - 9.60 | | | 8.29 | | |
Exercised | | (68,734 | ) | 0.60 - 7.20 | | | 1.30 | | |
Canceled | | (54,685 | ) | 0.60 - 13.02 | | | 5.77 | | |
Balance, December 31, 2004 | | 1,832,482 | | $ | 0.84 - $13.02 | | | $ | 6.67 | | |
Granted | | 1,423,600 | | 4.28 - 6.30 | | | 5.59 | | |
Exercised | | (20,089 | ) | 0.84 - 2.82 | | | 1.05 | | |
Canceled | | (100,960 | ) | 0.84 - 8.86 | | | 6.22 | | |
Balance, December 31, 2005 | | 3,135,033 | | 0.84 - 13.02 | | | $ | 6.23 | | |
Exercisable, December 31, 2005 | | 1,420,500 | | $ | 0.84 - $13.02 | | | $ | 5.95 | | |
Exercisable, December 31, 2004 | | 777,432 | | 0.84 - 13.02 | | | 5.49 | | |
Exercisable, December 31, 2003 | | 443,048 | | 0.60 - 13.02 | | | 3.63 | | |
The following table summarizes information relating to currently outstanding and exercisable options as of December 31, 2005 as follows:
Exercise Price | | | | Number of
Shares | | Outstanding
Weighted-
Average
Remaining
Contractual
Life (in Years) | | Weighted-
Average
Exercise
Price | | Exercisable
Number of
Shares | | Weighted-
Average
Exercise
Price | |
$ 0.00 - 1.31 | | 468,693 | | | 6.3 | | | | $ | 0.86 | | | 372,461 | | | $ | 0.87 | | |
1.31 - 2.61 | | 61,821 | | | 3.0 | | | | 1.89 | | | 61,821 | | | 1.89 | | |
2.61 - 3.91 | | 0 | | | 0 | | | | 0 | | | 0 | | | 0 | | |
3.91 - 5.21 | | 294,900 | | | 9.6 | | | | 4.83 | | | 56,218 | | | 4.84 | | |
5.21 - 6.51 | | 1,252,603 | | | 8.9 | | | | 5.84 | | | 296,882 | | | 5.90 | | |
6.51 - 7.81 | | 226,301 | | | 5.7 | | | | 7.18 | | | 212,540 | | | 7.20 | | |
7.81 - 9.11 | | 327,869 | | | 7.5 | | | | 8.69 | | | 153,359 | | | 8.70 | | |
9.11 - 10.42 | | 218,500 | | | 8.1 | | | | 9.59 | | | 104,443 | | | 9.59 | | |
10.42 - 11.72 | | 0 | | | 0 | | | | 0 | | | 0 | | | 0 | | |
11.72 - 13.02 | | 284,346 | | | 7.7 | | | | 13.02 | | | 162,776 | | | 13.02 | | |
| | 3,135,033 | | | 8.0 | | | | 6.23 | | | 1,420,500 | | | $ | 5.95 | | |
Grants Resulting in Stock-based Compensation Expense—In 2000, Acusphere issued 1,667 shares of common stock, 1,369 shares of restricted common stock, and 10,000 options to purchase common stock to non-employees in consideration of services rendered. During 2001 and 2003, Acusphere issued 13,791 and 14,956 shares, respectively, of restricted common stock to a non-employee and certain directors in consideration of services rendered. These shares of restricted common stock vest ratably from 6 to 48 months from their respective dates of issuance. Acusphere has the right to repurchase the unvested portion of the restricted common stock at the original issue price upon certain events. Acusphere recorded
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these issuances of securities (stock options and restricted stock) at fair value at date of grant, which was $53,822, $419,594 and $102,299 in 2000, 2001 and 2003, respectively, and is recording stock-based compensation over the vesting periods. Pursuant to EITF Issue No. 96-18, “Accounting for Equity Instruments Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” Acusphere must periodically remeasure the fair value of unvested non-employee equity instruments through the earlier of a performance commitment or performance completion, as defined in EITF Issue No. 96-18. The periodic remeasurement of the fair value may result in additional charges to operations in future periods.
Acusphere issued options to employees to purchase approximately 230,119, and 267,723 shares of common stock during the years ended December 31, 2001 and 2003, respectively, at exercise prices deemed for accounting purposes to be below market value. Acusphere has recorded the difference between the exercise price and the fair value of $4,884,975 in 2001 and $1,396,347 in 2003 as deferred stock-based compensation and is amortizing this deferred compensation as charges to operations over the vesting periods of the options.
9. Convertible Preferred Stock and Warrants
Prior to the Company’s IPO, sales of convertible preferred stock provided the primary source of funding for the Company. On October 14, 2003, effective upon the closing of Company’s IPO, all then outstanding shares of preferred stock were converted to common stock based upon conversion ratios defined for each series of preferred stock. There were no shares of this convertible preferred stock outstanding as of December 31, 2003. Series G and Series H Preferred Stock were converted into common shares prior to 2003.
Common Stock Warrants—On November 30, 2004, Acusphere issued a warrant to purchase up to 55,732 shares of its common stock at an exercise price of $6.28 per share to a financial adviser in consideration of its services to the Company in connection with the consummation of its collaborative agreement with Nycomed Danmark ApS. The warrant may be exercised any time and expires on November 30, 2009. The number of shares issuable upon exercise of the warrant and the exercise price thereof is subject to adjustment from time to time in the event of stock subdivisions, stock splits and stock combinations. The warrant does not include a cashless exercise feature. Acusphere recorded the deemed fair value of the warrant of $241,639, based upon the Black-Scholes option-pricing model, as a deferred consulting expense included in other assets, which is being amortized over the collaborative agreement’s revenue recognition term as consulting expense. $34,520 and $69,040 of amortization has been recorded within general and administrative expense during 2004 and 2005, respectively.
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As of December 31, 2005, warrants to purchase shares of the Company’s stock, the origination of which were derived in connection with debt and lease financing transactions and the collaborative agreement with Nycomed, were outstanding for an aggregate of 1,316,508 shares of common stock at an effective weighted average price of $9.73 per shares as follows:
Number of
Shares | | Exercise Price
Per Share | | Expiration
Date | |
4,724 | | | 12.84 | | | August 21, 2006 | |
7,517 | | | 12.84 | | | June 6, 2007 | |
5,194 | | | 28.50 | | | February 21, 2008 | |
3,404 | | | 18.00 | | | February 26, 2008 | |
450,897 | | | 8.46 | | | April 11, 2008 | |
684 | | | 14.00 | | | April 11, 2008 | |
7,540 | | | 8.46 | | | June 27, 2008 | |
573,105 | | | 8.50 | | | August 2, 2008 | |
16,212 | | | 19.80 | | | October 16, 2008 | |
14,934 | | | 19.80 | | | October 19, 2008 | |
114,895 | | | 8.50 | | | October 20, 2008 | |
55,732 | | | 6.28 | | | November 30, 2009 | |
2,688 | | | 19.80 | | | January 5, 2010 | |
30,844 | | | 28.50 | | | March 30, 2011 | |
28,138 | | | 28.50 | | | September 27, 2011 | |
1,316,508 | | | | | | | |
During 2003, warrants were exercised at $9.30 per share resulting in the issuance of 998 shares of common stock. No warrants were exercised during 2004 or 2005.
10. Research and License Agreements
Acusphere has clinical and pre-clinical study research agreements with various institutions. Total expenses incurred amounted to approximately $1,818,000, $4,839,000 and $7,605,121 in sponsored-research expenses relating to such agreements during the years ended December 31, 2003, 2004 and 2005, respectively.
11. Commitments
Operating Leases—Acusphere has leased office, laboratory and manufacturing space under various agreements classified as operating leases. During 2003, 2004 and 2005, rent expense totaled approximately $2,473,000, $2,920,000 and $3,197,000, respectively.
Acusphere’s headquarters is in Watertown, MA where it operates in a facility under a lease with an original term of 10-year which began in December 2001. Acusphere is required to maintain a security deposit totaling $997,500 as a condition of this lease. This deposit amount is included in other assets at December 31, 2004 and 2005. In conjunction with the lease agreement, Acusphere issued a warrant to the lessor which allows for the purchase of 30,844 shares of common stock. Acusphere recorded the deemed fair value of the warrant of $536,402, based upon the Black-Scholes option-pricing model, as a deferred rent expense included in other assets, which is being amortized over the lease term as rent expense. $53,640 of amortization has been recorded within rent expense for each of the years ended December 31, 2003, 2004 and 2005. During 2005, the term of this lease was extended by six months.
In July 2004, Acusphere entered into a lease agreement for 58,000 square feet of commercial manufacturing space in Tewksbury, Massachusetts. This lease has a five year, nine month term with
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options to extend the lease for up to two additional five-year terms at predetermined rental rates. Under the lease, Acusphere received nine months of occupancy free of base rent, followed by base rent of approximately $400,000 for the next twelve months with scheduled annual rental rate increases thereafter. In October 2004, Acusphere paid an initial security deposit of $1.0 million to the landlord as part of the lease, subject to reduction if the Company makes certain improvements to the facility. A total of $0.9 million of this deposit amount is included in other current assets at December 31, 2004, and $0.1 million is included in other assets at December 31, 2004. The $0.9 million was refunded to the Company during 2005.
Future minimum payments due under the non-cancelable facility leases are as follows as of December 31, 2005:
Year Ending December 31, | | | | | |
2006 | | $ | 2,746,000 | |
2007 | | 2,885,000 | |
2008 | | 3,026,000 | |
2009 | | 3,171,000 | |
2010 | | 2,851,000 | |
Thereafter | | 4,142,000 | |
| | $ | 18,821,000 | |
Service Contracts—On November 11, 2004, as amended March 9, 2005, Acusphere entered into an agency procurement agreement with Parsons Commercial Technology, Inc. (“Parsons”) authorizing Parsons to procure as agent to the Company manufacturing and other equipment in connection with the build-out of the commercial manufacturing facility in Tewksbury, Massachusetts. As of December 31, 2005, the total estimated value of equipment purchased under this agreement was $4.3 million for which the Company had paid $4.1 million.
On November 11, 2004, Acusphere entered into an engineering and construction management services agreement with Parsons authorizing Parsons to perform on behalf of the Company engineering, design and construction management services in connection with the build-out of the Company’s commercial manufacturing facility in Tewksbury, Massachusetts. This agreement was amended subsequently in 2004 and in 2005 as the build-out progressed. The build-out of this facility was substantially completed in 2005. The total estimated value of this cost plus percentage fee type contract is $26.7 million. As of December 31, 2005, Acusphere had paid approximately $23.7 million against this contract and recorded $2.8 million in accrued expenses and accounts payable.
12. Employee Benefit Plan
Acusphere has a 401(k) profit sharing plan covering all employees of the Company who meet certain defined requirements. Under the terms of the 401(k) plan, the employees may elect to make tax-deferred contributions up to 20% of their salaries, subject to certain limitations as defined by the Internal Revenue Code. During 2005, the Company accrued a matching contribution of $142,000 representing a match of 50% of contributions per employee up to a maximum Company contribution of $2,500 per employee. Under the 401(k) plan, employees are not eligible to invest directly in shares of Acusphere’s stock. The Company made no matching contributions in 2004 and 2003.
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Item 15.2.Supplemental Financial Statement Schedule
Quarterly Results of Operations (Unaudited)
The following is a summary of our unaudited quarterly results of operations for the fiscal years ended December 31, 2004 and 2005:
| | Revenue | | Net Loss | | Net Loss
Available to
Common
Stockholders | | Net Loss
Available to
Common
Stockholders
Per Share—
Basic and Diluted | |
Year Ended December 31, 2004 | | | | | | | | | | | |
First Quarter | | $ | — | | $ | (6,924,562 | ) | $ | (6,924,562 | ) | | $ | (0.48 | ) | |
Second Quarter | | — | | (7,619,210 | ) | (7,619,210 | ) | | (0.53 | ) | |
Third Quarter | | 857,143 | | (6,318,640 | ) | (6,318,640 | ) | | (0.39 | ) | |
Fourth Quarter | | 857,143 | | (9,096,636 | ) | (9,096,636 | ) | | (0.51 | ) | |
Year Ended December 31, 2005 | | | | | | | | | | | |
First Quarter | | 857,143 | | (7,972,628 | ) | (7,972,628 | ) | | (0.45 | ) | |
Second Quarter(1) | | 857,143 | | (15,343,137 | ) | (16,374,927 | ) | | (0.92 | ) | |
Third Quarter | | 857,143 | | (9,710,553 | ) | (10,441,803 | ) | | (0.58 | ) | |
Fourth Quarter | | 857,143 | | (11,599,057 | ) | (12,254,474 | ) | | (0.56 | ) | |
| | | | | | | | | | | | | | | |
(1) Our net loss for the second quarter of 2005 includes $6.2 million in expense from the Company’s acquisition of certain intellectual property rights from Schering in May 2005.
