Alexza Pharmaceuticals (ALXA) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2013

or

¨ 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 000-51820

ALEXZA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware	77-0567768
(State or other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)
2091 Stierlin Court Mountain View, California	94043
(Address of principal executive offices)	(Zip Code)

(Registrant’s telephone number, including area code): (650) 944-7000

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (do not check if a smaller reporting company)	Smaller reporting company	x

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

Total number of shares of common stock outstanding as of November 1, 2013: 17,278,554.

ALEXZA PHARMACEUTICALS, INC.

TABLE OF CONTENTS

	page
PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012		3
Condensed Consolidated Statements of Loss and Comprehensive Loss for the three and nine months ended September 30, 2013 and 2012		4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		32
Item 4. Controls and Procedures		33
PART II. OTHER INFORMATION		33
Item 1A. Risk Factors		33
Item 1. Legal Proceedings		33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		62
Item 3. Defaults Upon Senior Securities		62
Item 4. Mine Safety Disclosures		62
Item 5. Other Information		62
Item 6. Exhibits		63
SIGNATURES		64
EXHIBIT INDEX		65

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ALEXZA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	September 30,			December 31,
	2013			2012(1)
ASSETS
Current assets:
Cash and cash equivalents	$	23,807		$	17,715
Marketable securities		8,650			—
Restricted cash		—			5,051
Accounts receivable		25			—
Inventory		2,061			—
Prepaid expenses and other current assets		1,795			852
Total current assets		36,338			23,618
Property and equipment, net		15,507			16,531
Other assets		1,727			402
Total assets	$	53,572		$	40,551
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,067		$	2,147
Accrued clinical trial expenses		1,024			96
Other accrued expenses		4,317			3,599
Current portion of contingent consideration liability		2,200			3,500
Financing obligations		1,524			6,461
Current portion of deferred revenue		2,915			2,915
Total current liabilities		16,047			18,718
Deferred rent		6,809			8,059
Noncurrent portion of contingent consideration liability		41,100			6,100
Noncurrent portion of deferred revenues		2,915			5,101
Long-term debt		6,649			—
Stockholders’ equity:
Preferred stock		—			—
Common stock		2			2
Additional paid-in-capital		348,584			337,184
Accumulated other comprehensive income		2			—
Accumulated deficit		(368,536	)		(334,613	)
Total stockholders’ (deficit) equity		(19,948	)		2,573
Total liabilities and stockholders’ equity	$	53,572		$	40,551

(1) The condensed consolidated balance sheet at December 31, 2012 has been derived from audited consolidated financial statements at that date.

See accompanying notes to the financial statements.

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ALEXZA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF LOSS

AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Revenue	$	2,166		$	729		$	46,530		$	3,341
Operating expenses:
Cost of goods sold		3,951			—			6,912			—
Research and development		5,457			4,784			16,475			14,826
General and administrative		3,097			2,338			12,016	��		6,487
Total operating expenses		12,505			7,122			35,403			21,313
(Loss) income from operations		(10,339	)		(6,393	)		11,127			(17,972	)
(Loss) gain on change in fair value of contingent consideration liability		(1,613	)		(200	)		(44,013	)		1,000
Interest and other income (expense), net		1			5			18			413
Interest expense		(461	)		(333	)		(1,055	)		(1,146	)
Net loss	$	(12,412	)	$	(6,921	)	$	(33,923	)	$	(17,705	)
Basic and diluted net loss per share	$	(0.72	)	$	(0.52	)	$	(2.06	)	$	(1.55	)
Shares used to compute basic and diluted net loss per share		17,238			13,235			16,467			11,394
Change in unrealized (loss)/gain on marketable securities		(3	)		—			2			—
Comprehensive loss	$	(12,415	)	$	(6,921	)	$	(33,921	)	$	(17,705	)

See accompanying notes to the financial statements.

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ALEXZA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended
	September 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(33,923	)	$	(17,705	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Share-based compensation		2,499			2,476
Change in fair value of contingent liability		44,013			(1,000	)
Recognition of right to borrow asset		(2,800	)		—
Amortization of debt discount, deferred interest and right-to-borrow asset		766			350
Amortization of premium (discount) on available-for-sale securities		(6	)		1
Depreciation and amortization		2,511			3,467
Gain on disposal of property and equipment		(15	)		(409	)
Changes in operating assets and liabilities:
Receivables		(25	)		10,000
Inventory		(2,061	)		—
Prepaid expenses and other current assets		(943	)		(117	)
Accounts payable		1,920			(1,771	)
Accrued clinical and other expenses		1,549			(688	)
Deferred revenues		(2,186	)		(1,890	)
Other liabilities		(1,250	)		(3,700	)
Net cash provided by (used in) operating activities		10,049			(10,986	)
Cash flows from investing activities:
Purchases of available-for-sale securities		(10,642	)		—
Maturities of available-for-sale securities		2,000			2,000
Decrease in noncurrent restricted cash		—			200
Purchases of property and equipment		(1,488	)		(214	)
Proceeds from the disposal of property and equipment		16			425
Net cash (used in) provided by investing activities		(10,114	)		2,411
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants and exercise of stock options and stock purchase rights		6,446			35,177
Payment of contingent payments to Symphony Allegro Holdings, LLC		(10,313	)		(5,000	)
Change in current restricted cash		5,051			(6,469	)
Proceeds from financing obligations		10,000			—
Payments of financing obligations		(5,027	)		(4,520	)
Net cash provided by financing activities		6,157			19,188
Net increase in cash and cash equivalents		6,092			10,613
Cash and cash equivalents at beginning of period		17,715			14,902
Cash and cash equivalents at end of period	$	23,807		$	25,515

See accompanying notes to the financial statements.

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ALEXZA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. The Company and Basis of Presentation

Business

Alexza Pharmaceuticals, Inc. (the “Company”), was incorporated in the state of Delaware on December 19, 2000 as FaxMed, Inc. In June 2001, the Company changed its name to Alexza Corporation and in December 2001 became Alexza Molecular Delivery Corporation. In July 2005, the Company changed its name to Alexza Pharmaceuticals, Inc.

The Company is a pharmaceutical development company focused on the research, development, and commercialization of novel proprietary products for the acute treatment of central nervous system conditions. The Company’s first commercial product, ADASUVE^®, or Staccato^® loxapine, and its product candidates are all based on theStaccato system, a proprietary technology developed by the Company. The Company’s facilities and employees are currently located in the United States, and the Company operates in one business segment.

In May 2013, the Company entered into a License and Supply Agreement (the “Teva Agreement”) with Teva Pharmaceuticals USA, Inc. (“Teva”) to provide Teva with an exclusive license to develop and commercialize ADASUVE in the U.S. (see Note 10). The Company has an existing Collaboration, License and Supply Agreement (the “Ferrer Agreement”) with Grupo Ferrer Internacional, S.A. (“Ferrer”) for the commercialization of ADASUVE in Europe, Latin American, Russia and the Commonwealth of Independent States countries (see Note 10).

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s interim consolidated financial information. The results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013 or for any other interim period or any other future year.

The accompanying unaudited condensed consolidated financial statements and notes to condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 26, 2013.

Basis of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Significant Risks and Uncertainties

The Company has incurred significant losses from operations since its inception and expects losses to continue for the foreseeable future. As of September 30, 2013, the Company had cash, cash equivalents and marketable securities of $32.5 million and working capital of $20.3 million. The Company believes that, based on its cash, cash equivalents and marketable securities balance at September 30, 2013, estimated product revenues, royalties and milestone payments associated with the sale of ADASUVE, remaining proceeds available under the Convertible Promissory Note and Agreement to Lend with Teva (the “Teva Note”, see Note 8) and its current expected cash usage, it has sufficient capital resources to meet its anticipated cash needs into the third quarter of 2014. The Company plans to raise additional capital to fund its operations and working capital, to develop its product candidates and to continue the development of its commercial manufacturing capabilities. In addition to product revenues, royalties and milestone payments, the Company plans to finance its operations through the sale of equity securities, utilization of debt arrangements, such as the Teva Note (see Note 8), or additional distribution or licensing collaborations. Such funding may not be available or may be on terms that are not favorable to the Company. The Company’s inability to raise capital as and when needed could have a negative impact on its financial condition and its ability to continue as a going concern. The accompanying financial statements

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have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.

2. Summary of Significant Accounting Policies

Revenue Recognition

Revenue is recognized when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured. Prior to the second quarter of 2013, the Company’s revenue consisted primarily of amounts earned from collaboration agreements and under research grants with the National Institutes of Health. Beginning in the second quarter of 2013, the Company also had revenue from product sales.

For collaboration agreements, revenues for non-refundable upfront license fee payments where the Company continues to have performance obligations are recognized as performance occurs and obligations are completed. Revenues for non-refundable upfront license fee payments where the Company does not have significant future performance obligations are recognized when the agreement is signed and the payments are due. See Note 10 for a description of the Company’s collaboration agreements.

For multiple element arrangements, such as collaboration agreements in which a collaborator may purchase several deliverables, each deliverable is accounted for as a separate unit of accounting if both of the following criteria are met: (i) the delivered item or items have value to the customer on a standalone basis and (ii) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the Company’s control. The Company evaluates how the consideration should be allocated among the units of accounting and allocates revenue to each non-contingent element based upon the relative selling price of each element. The Company determines the relative selling price for each deliverable using (i) vendor-specific objective evidence (“VSOE”) of selling price, if it exists; (ii) third-party evidence (“TPE”) of selling price, if it exists; or (iii) the Company’s best estimated selling price for that deliverable if neither VSOE nor TPE of selling price exists for that deliverable. Revenue allocated to each element is then recognized when the basic four revenue recognition criteria described above are met for each element.

For milestone payments received in connection with its collaboration agreements, the Company has elected to adopt the milestone method of accounting under Financial Accounting Standards Board Accounting Standards Codification 605-28,Milestone Method. Under the milestone method, revenues for payments which meet the definition of a milestone will be recognized as the respective milestones are achieved.

Product revenue is recognized as follows:

• Persuasive Evidence of an Arrangement. The Company currently sells product through license and supply agreements with its collaborators, Ferrer and Teva. Persuasive evidence of an arrangement is generally determined by the receipt of an approved purchase order from the collaborator in connection with the terms of the license and supply agreements.

• Delivery. Typically, ownership of the product passes to the collaborator upon shipment. The Company’s current license and supply agreements also provide its collaborators with an acceptance period during which they may reject any product which does not conform to agreed-upon specifications. Because ADASUVE is a new product, a new technology and the Company’s first product to be commercialized and because the Company does not have a history of producing product to collaborator specifications, the Company will not consider delivery to have occurred until after the collaborator acceptance period has ended or the collaborator has affirmatively accepted the product. Once the Company has demonstrated over the course of time an ability to produce the product reliably to collaborator specifications, the Company will consider delivery to have occurred upon shipment in the absence of any other relevant shipment or acceptance terms.

• Sales Price Fixed or Determinable. Sales prices for product shipments are determined by the license and supply agreements and documented in the purchase orders. After the collaborator acceptance period has ended or the collaborator has affirmatively accepted the product, the Company’s collaborators do not have any product return or replacement rights, including for expired products.

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• Collectability. Payment for the product is contractually obligated under the license and supply agreements. The Company will monitor payment histories for its collaborators and specific issues as they arise to determine whether collection is probable for a specific transaction and defer revenue as necessary.

Royalty revenue from the Company’s collaboration agreements will be recognized as the Company receives information from its collaborators regarding product sales.

Significant management judgment is used in the determination of revenue to be recognized and the period in which it is recognized.

Inventory

Inventory is stated at standard cost, which approximates actual cost, determined on a first-in first-out basis, not in excess of market value. Inventory includes the direct costs incurred to manufacture products combined with allocated manufacturing overhead, which consists of indirect costs, including labor and facility overhead. The Company is in the early stages of commercialization and has incurred significantly higher than normal indirect costs in the production of its inventory due to start-up manufacturing costs and low production volumes. The carrying cost of inventory is reduced so as to not be in excess of the market value of the inventory as determined by the contractual transfer prices to Ferrer and Teva. The excess over the market value is expensed to cost of goods sold. All costs associated with the ADASUVE manufacturing process incurred prior to the beginning of commercial manufacturing were expensed as a component of research and development expense. If information becomes available that suggests that all or certain of the inventory may not be realizable, the Company may be required to expense a portion, or all, of the capitalized inventory into cost of goods sold. Inventory, which is stated at the lower of cost or estimated market value, consists of the following at September 30, 2013 (in thousands):

Raw materials	$	1,476
Work in process		407
Finished goods		178
Inventory	$	2,061

3. Equity Transactions

Reverse Stock Split

On June 12, 2012, the Company effected a 1-for-10 reverse stock split of the Company’s outstanding common stock resulting in a reduction of the Company’s total common stock issued and outstanding from 119.6 million shares to 12.0 million shares. The reverse stock split affected all stockholders of the Company’s common stock uniformly, and did not materially affect any stockholder’s percentage of ownership interest. The par value of the Company’s common stock remained unchanged at $0.0001 per share and the number of authorized shares of common stock remained the same after the reverse stock split.

As the par value per share of the Company’s common stock remained unchanged at $0.0001 per share, a total of $11,000 was reclassified from common stock to additional paid-in capital. In connection with this reverse stock split, the number of shares of common stock reserved for issuance under the Company’s equity incentive, stock option and employee stock purchase plans (see Note 4) as well as the shares of common stock underlying outstanding stock options, restricted stock units and warrants were also proportionately reduced while the exercise prices of such stock options and warrants were proportionately increased. All references to shares of common stock and per share data for all periods presented in the accompanying financial statements and notes thereto have been adjusted to reflect the reverse stock split on a retroactive basis.

Equity Line of Credit

In July 2012, the Company entered into a committed equity line of credit with Azimuth Opportunity, L.P. (“Azimuth”) pursuant to which the Company was granted the ability to sell up to $20 million of its common stock over an approximately 24-month period pursuant to the terms of a Common Stock Purchase Agreement (the “Purchase

8

Agreement”). In addition to the foregoing amounts, in consideration for the performance of Azimuth’s obligations under the Purchase Agreement, the Company issued to Azimuth 80,429 shares of its common stock on July 23, 2012. In August and September 2012, the Company utilized $13.6 million under the facility by issuing 3,489,860 shares of its common stock to Azimuth at an average price of $3.88 per share, which resulted in $13.4 million in net proceeds to the Company. In May 2013, the Company utilized the remaining $6.4 million available under the facility by issuing 1,437,481 shares of its common stock to Azimuth at an average price of $4.48 per share, which resulted in $6.3 million of net proceeds to the Company. Shares were issued to Azimuth at a discount of 5% to the volume-weighted average price of the Company’s common stock over a preceding period of trading days. Shares sold under this facility were sold pursuant to a shelf registration statement declared effective by the SEC on July 3, 2012.

4. Fair Value Accounting

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Three levels of inputs, of which the first two are considered observable and the last unobservable, may be used to measure fair value. The three levels are:

• Level 1 — Quoted prices in active markets for identical assets or liabilities.

• Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents, and marketable securities) by major security type and liability measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 (in thousands):

September 30, 2013	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	19,869	$	—	$	—	$	19,869
Corporate debt securities		—		11,304		—		11,304
Total assets	$	19,869	$	11,304	$	—	$	31,173
Liabilities
Contingent consideration liability	$	—	$	—	$	43,300	$	43,300
Total liabilities	$	—	$	—	$	43,300	$	43,300
December 31, 2012	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	17,307	$	—	$	—	$	17,307
Total assets	$	17,307	$	—	$	—	$	17,307
Liabilities
Contingent consideration liability	$	—	$	—	$	9,600	$	9,600
Total liabilities	$	—	$	—	$	9,600	$	9,600

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Cash equivalents and marketable securities

The following table outlines the amortized cost, fair value and unrealized gain/(loss) for the Company’s financial assets by major security type as of September 30, 2013 (in thousands):

September 30, 2013	Amortized Cost			Fair Value			Unrealized Gain/(Loss)
Money market funds	$	19,869		$	19,869		$	—
Corporate debt securities		11,302			11,304			2
Total		31,171			31,173			2
Less amounts classified as cash equivalents		(22,523	)		(22,523	)		—
Total marketable securities	$	8,648		$	8,650		$	2

The Company did not have any unrealized gains or losses at December 31, 2012. The Company had no sales of marketable securities during the three and nine months ended September 30, 2013 or 2012. As of September 30, 2013, all of the Company’s marketable securities had original maturity dates of less than one year.

The Company’s available-for-sale debt securities are valued utilizing a multi-dimensional relational model. Inputs, listed in approximate order of priority for use when available, include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.

Contingent Consideration Liability

In connection with the exercise of the Company’s option to purchase all of the outstanding equity of Symphony Allegro, Inc. (“Allegro”) in 2009, the Company is obligated to make contingent cash payments to the former Allegro stockholders related to certain payments received by the Company from future collaboration agreements pertaining to ADASUVE/AZ-104 (Staccatoloxapine) or AZ-002 (Staccato alprazolam). In order to estimate the fair value of the liability associated with the contingent cash payments, the Company prepared several cash flow scenarios for ADASUVE, AZ-104 and AZ-002, which are subject to the contingent payment obligation. Each potential cash flow scenario consisted of assumptions of the range of estimated milestone and license payments potentially receivable from such collaborations and assumed royalties received from future product sales. Based on these estimates, the Company computed the estimated payments to be made to the former Allegro stockholders. Payments were assumed to terminate upon the expiration of the related patents.

The projected cash flow assumptions for ADASUVE in the United States are based on the Teva Agreement (see Note 10) and on internally and externally developed product sales forecasts. The timing and extent of the projected cash flows for ADASUVE for the territories licensed to Ferrer are based on the Ferrer Agreement (see Note 10). The timing and extent of the projected cash flows for the remaining territories for ADASUVE and worldwide territories for AZ-002 and AZ-104 were based on internal estimates for potential milestones and multiple product royalty scenarios and are also consistent in structure to the most recently negotiated collaboration agreements.

The Company then assigned a probability to each of the cash flow scenarios based on several factors, including: the product candidate’s stage of development, preclinical and clinical results, technological risk related to the successful development of the different drug candidates, estimated market size, market risk and potential collaboration interest to determine a risk adjusted weighted average cash flow based on all of these scenarios. These probability and risk adjusted weighted average cash flows were then discounted utilizing the Company’s estimated weighted average cost of capital (“WACC”). The Company’s WACC considered the Company’s cash position, competition, risk of substitute products, and risk associated with the financing of the development projects. During the nine months ended September 30, 2013, the Company reduced the discount rate from 18.0% to 16.5% to reflect the Company’s current estimated WACC. The change in discount rate increased the net loss for the nine months ended September 30, 2013 by approximately $3,600,000 or $0.22 per share.

This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Level 3 measurements are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s assumptions in measuring fair value.

The Company records any changes in the fair value of the contingent consideration liability in earnings in the period of the change. Certain events including, but not limited to, the timing and terms of any collaboration agreement, clinical trial results, approval or non-approval of any future regulatory submissions and the commercial success of ADASUVE, AZ-104 or AZ-002 could have a material impact on the fair value of the contingent consideration liability, and as a result, the Company’s results of operations and financial position for the impacted period.

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During the nine months ended September 30, 2013, the Company modified the assumptions regarding the timing and amount of certain cash flows primarily to reflect the increased probability that the Company would license the U.S. commercialization rights to ADASUVE to a third party in the first quarter of 2013 and the impact of the actual licensing and the terms of the Teva Agreement in the second quarter of 2013. These changes in assumptions, the change in the WACC in the nine months ended September 30, 2013 described above, the change in the projected U.S. ADASUVE launch date to the first quarter of 2014 and the effects of the passage of three and nine months, respectively, on the present value computation resulted in an increase to the net loss of $1,613,000 and $44,013,000, or $0.09 and $2.67 per share, for the three and nine months ended September 30, 2013, respectively.

During the three and nine months ended September 30, 2012, the Company modified the assumptions regarding the timing and extent of certain cash flows primarily to reflect the three month extension of the review by the U.S. Food and Drug Administration (“FDA”) of the Company’s ADASUVE New Drug Application (“NDA”) from February 4, 2012 to May 4, 2012 and the receipt of the Complete Response Letter for the ADASUVE NDA in May 2012. This change in assumptions and the effects of the passage of time on the present value computation resulted in an increase to the net loss of $200,000, or $0.02 per share, for the three months ended September 30, 2012 and a decrease to the net loss of $1,000,000 or $0.09 per share for the nine months ended September 30, 2012.

The following table represents a reconciliation of the change in the fair value measurement of the contingent consideration liability for the three and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Beginning balance	$	42,000		$	10,300	$	9,600		$	16,500
Payments made		(313	)		—		(10,313	)		(5,000	)
Adjustments to fair value measurement		1,613			200		44,013			(1,000	)
Ending balance	$	43,300		$	10,500	$	43,300		$	10,500

Financing Obligations

The Company has estimated the fair value of its financing obligations (see Note 8) using the net present value of the payments discounted at an interest rate that is consistent with its estimated current borrowing rate for similar long-term debt. The Company believes the estimates used to measure the fair value of the financing obligations constitute Level 3 inputs.

At September 30, 2013 and December 31, 2012, the estimated fair value of the Company’s financing obligations was $6,127,000 and $6,254,000, respectively and had book values of $8,173,000 and $6,461,000, respectively. The Company’s payment commitments associated with these debt instruments are comprised of interest payments and principal payments. The fair value of the Company’s debt will fluctuate with movements of interest rates, increasing in periods of declining rates of interest, and declining in periods of increasing rates of interest.

5. Share-Based Compensation Plans

2005 Equity Incentive Plan

In December 2005, the Company’s Board of Directors adopted the 2005 Equity Incentive Plan (the “2005 Plan”) and authorized for issuance thereunder 108,879 shares of common stock. The 2005 Plan is an amendment and restatement of the Company’s previous stock option plans. Stock options issued under the 2005 Plan generally vest over four years, vesting is generally based on service time, and have a maximum contractual term of 10 years. Prior to vesting, restricted stock units do not have dividend equivalent rights, do not have voting rights and the shares underlying the restricted units are not considered issued and outstanding. Shares are issued on the date the restricted stock units vest.

The 2005 Plan provides for annual reserve increases on the first day of each fiscal year commencing on January 1, 2007 and ending on January 1, 2015. The annual reserve increases will be equal to the lesser of (i) 2% of the total number of shares of the Company’s common stock outstanding on December 31^st of the preceding calendar year, or (ii) 100,000 shares of common stock. The Company’s Board of Directors has the authority to designate a smaller number

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of shares by which the authorized number of shares of common stock will be increased prior to the last day of any calendar year. On each of January 1, 2013 and 2012 an additional 100,000 shares of the Company’s common stock were reserved for issuance under this provision. In May 2013, the Company’s stockholders approved an amendment to the 2005 Plan to increase the shares reserved by an additional 2,200,000 shares.

2005 Non-Employee Directors’ Stock Option Plan

In December 2005, the Company’s Board of Directors adopted the 2005 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”) and authorized for issuance thereunder 25,000 shares of common stock. The Directors’ Plan provides for the automatic grant of non-statutory stock options to purchase shares of common stock to the Company’s non-employee directors, which vest over four years, and have a term of 10 years. The Directors’ Plan provides for an annual reserve increase to be added on the first day of each fiscal year, commencing on January 1, 2007 and ending on January 1, 2015. The annual reserve increases will be equal to the number of shares subject to options granted during the preceding fiscal year less the number of shares that revert back to the share reserve during the preceding fiscal year. The Company’s Board of Directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock will be increased prior to the last day of any calendar year. On each of January 1, 2013 and 2012 an additional 19,812 and 20,000 shares, respectively, of the Company’s common stock were reserved for issuance under this provision. In May 2013, the Company’s stockholders approved an amendment to the Directors’ Plan to increase the shares reserved by an additional 200,000 shares.

The following table sets forth the summary of option activity under the Company’s share-based compensation plans for the nine months ended September 30, 2013:

	Outstanding Options
	Number of Shares			Weighted Average Exercise Price
Outstanding at January 1, 2013		1,038,245		$	12.24
Options granted		1,308,430			4.46
Options exercised		(8,525	)		3.48
Options canceled		(264,425	)		10.52
Outstanding at September 30, 2013		2,073,725			7.59

The intrinsic value of options exercised during the nine months ended September 30, 2013 was $11,000.

The following table sets forth the summary of restricted stock unit activity under the Company’s share-based compensation plans for the nine months ended September 30, 2013:

	Number Of Shares			Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2013		—		$	—
Granted		590,495			4.67
Released		(17,795	)		4.20
Forfeited		(45,750	)		4.68
Outstanding at September 30, 2013		526,950			4.68

As of September 30, 2013, 994,067 and 166,249 shares remained available for issuance under the 2005 Plan and the Directors’ Plan, respectively.

2005 Employee Stock Purchase Plan

In December 2005, the Company’s Board of Directors adopted the 2005 Employee Stock Purchase Plan (“ESPP”). The ESPP allows eligible employee participants to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP consists of fixed offering periods of six months. Purchases are generally made on the last trading day of each October and April. Employees purchase shares at each purchase date at 85% of the market value of the Company’s common stock on their enrollment date or the end of the offering period, whichever price is lower.

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The ESPP provides for annual reserve increases on the first day of each fiscal year commencing on January 1, 2007 and ending on January 1, 2015. The annual reserve increases are equal to the least of (i) 1% of the total number of shares of the Company’s common stock outstanding on December 31^st of the preceding calendar year, (ii) 75,000 shares of common stock, or (iii) a lesser amount determined by the Company’s Board of Directors.

Pursuant to the ESPP, an additional 75,000 and 72,136 shares were reserved for issuance on January 1, 2013 and 2012, respectively. The Company issued 18,843 shares at a weighted average price of $3.65 under the ESPP during the nine months ended September 30, 2013 and 2,978 shares at a weighted average price of $5.30 under the ESPP during the nine months ended September 30, 2012. The Company did not issue shares under the ESPP during the three months ended September 30, 2013 or 2012. At September 30, 2013, 110,283 shares were available for issuance under the ESPP.

6. Share-Based Compensation

Employee Share-Based Awards

Compensation cost for employee share-based awards is based on the grant-date fair value and is recognized over the vesting period of the applicable award on a straight-line basis. The Company issues employee share-based awards in the form of stock options and restricted stock units under the Company’s equity incentive plans, and stock purchase rights under the ESPP.

Valuation of Stock Options, Restricted Stock Units and Stock Purchase Rights

During the three and nine months ended September 30, 2013 and 2012, the per share weighted average fair value of employee stock options, restricted stock units and stock purchase rights granted were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Stock Options	$	3.43	$	2.57	$	3.46	$	2.58
Restricted Stock Units		—		—		4.67		4.90
Stock Purchase Rights		1.41		3.31		1.53		4.23

The estimated grant date fair values of the stock options and stock purchase rights were calculated using the Black-Scholes valuation model with the following weighted average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Stock Option Plans
Expected term		5.0 years			5.0 years			5.0 years			5.0 years
Expected volatility		98	%		98	%		100	%		98	%
Risk-free interest rate		1.47	%		0.62	%		0.83	%		0.63	%
Dividend yield		0	%		0	%		0	%		0	%
Employee Stock Purchase Plan
Expected term		0.5 years			0.5 years			0.5 years			0.6 years
Expected volatility		63	%		135	%		70	%		96	%
Risk-free interest rate		0.12	%		0.15	%		0.13	%		0.13	%
Dividend yield		0	%		0	%		0	%		0	%

The estimated fair value of restricted stock units awards is calculated based on the market price of the Company’s common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company’s common stock prior to vesting of the restricted stock unit. The Company’s estimate assumes no dividends will be paid prior to the vesting of the restricted stock unit.

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As of September 30, 2013, there was $4,470,000, $1,974,000 and $12,000 of total unrecognized compensation expense related to unvested stock option awards, restricted stock units and stock purchase rights, respectively, which are expected to be recognized over a weighted average period of 2.1 years, 3.5 years, and 0.1 years, respectively.

7. Net Loss per Share

Basic and diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period. The following items were excluded in the net loss per share calculation for the three and nine months ended September 30, 2013 and 2012 because the inclusion of such items would have had an anti-dilutive effect:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Stock options		2,031,155		834,463		1,541,034		790,892
Restricted stock units		526,950		150,274		263,475		150,609
Warrants to purchase common stock		6,462,066		6,462,066		6,462,066		5,362,082
Convertible debt		1,115,250		—		557,625		—

8. Financing Obligations

Hercules Technology Growth Capital

In May 2010, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Hercules Technology Growth Capital, Inc. (“Hercules”). Under the terms of the Loan Agreement, the Company borrowed $15,000,000 at an interest rate of the higher of (i) 10.75% or (ii) 6.5% plus the prime rate as reported in the Wall Street Journal, with a maximum interest rate of 14% and issued to Hercules a secured term promissory note evidencing the loan. The Company made interest-only payments through January 2011 and beginning in February 2011 the loan was repaid in 33 equal monthly installments. The loan was paid in full in October 2013.

In conjunction with the loan, the Company issued to Hercules a five-year warrant to purchase 37,639 shares of the Company’s common stock at a price of $26.90 per share. The warrant was immediately exercisable and expires in May 2015. The Company estimated the fair value of this warrant as of the issuance date to be $921,000 which was recorded as a debt discount to the loan and consequently a reduction to the carrying value of the loan. The fair value of the warrant was calculated using the Black-Scholes option valuation model, and was based on the contractual term of the warrant of five years, a risk-free interest rate of 2.31%, expected volatility of 84% and a 0% expected dividend yield. The Company also recorded fees paid to Hercules as a debt discount, which further reduced the carrying value of the loan. The debt discount is being amortized to interest expense.

In January 2012, the Company and Hercules amended the Loan Agreement to require the Company to maintain an amount equal to the outstanding principal balance of the loan in a restricted account. On January 3, 2013, Hercules removed the requirement to maintain the restricted account and the funds were no longer classified as restricted cash.

Autoliv ASP, Inc.

In June 2010, in return for transfer to the Company of all right, title and interest in a production line for the commercial manufacture of chemical heat packages completed or to be completed by Autoliv ASP, Inc. (“Autoliv”) on behalf of the Company, the Company paid Autoliv $4 million in cash and issued Autoliv a $4 million unsecured promissory note. In February 2011, the Company entered into an agreement to amend the terms of the unsecured promissory note. Under the terms of that amendment, the original $4 million note was cancelled and a new unsecured promissory note was issued with a reduced principal amount of $2.8 million (the “New Note”).

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The New Note bears interest beginning on January 1, 2011 at 8% per annum and is being paid in 48 consecutive and equal monthly installments of approximately $68,000.

In October 2013, Autoliv notified the Company of their intent to terminate, effective October 2016, the Manufacturing and Supply Agreement (the “Manufacture Agreement”). Prior to October 2016, Autoliv and the Company remain fully obligated to perform pursuant to the terms of both the Manufacture Agreement and the New Note.

Teva Pharmaceuticals USA, Inc.

In May 2013, concurrent with the Teva Agreement, the Company entered into the Teva Note. Under the terms of the Teva Note, the Company may, upon written notice to Teva, draw upon the Teva Note to fund agreed operating budgets related to ADASUVE. The aggregate drawdowns may total up to $25 million and will be due and payable on the fifth anniversary of the signing of the Teva Note. The Company may prepay, from time to time, up to one-half of the total amounts advanced plus the related interest outstanding at any time prior to the maturity date. At the maturity date, Teva will have the right to convert the then outstanding amounts into shares of the Company’s common stock at a conversion price of $4.4833 per share. The Teva Note bears simple interest of 4% per year. The Company has two years from the effective date of the Teva Note to receive advances.

In the three months ended September 30, 2013, the Company drew down $10,000,000 against the Teva Note. Because the contractual conversion price was less than the market value of the Company’s common stock at the time of the drawdown, the Company calculated the value of the beneficial conversion feature of the convertible note and recorded an increase to additional paid-in-capital and a discount on the Teva Note of $2,455,000 which will be amortized to interest expense over the life of the borrowing. Additionally, the Company reclassified the relative portion of the unamortized right-to-borrow (see Note 10) against the Teva Note in the amount of $901,000 which will also be amortized to interest expense over the life of the borrowing. The effective interest rate of the Teva Note, which takes into consideration the beneficial conversion feature and the right-to-borrow discounts, is 13.9%.

Future scheduled principal payments under the debt obligations as of September 30, 2013 are as follows (in thousands):

	Total
2013 - remaining 3 months	$	747
2014		781
2015		—
2016		—
Thereafter		10,000
Total	$	11,528

9. Facility Leases

The Company leased two buildings, at 2023 Stierlin Court and 2091 Stierlin Court, in Mountain View, California, referred to herein as the “2023 Building” and the “2091 Building”, respectively, which the Company began to occupy in the fourth quarter of 2007. The Company recognizes rental expense on the facilities on a straight line basis over the initial term of the lease. Differences between the straight line rent expense and rent payments are classified as deferred rent liability on the balance sheet. The lease for the 2091 Building expires on March 31, 2018, and the Company has two options to extend the lease for five years each.

Effective March 30, 2012, the Company terminated the lease for the 2023 Building, totaling 41,290 square feet, and concurrently cancelled the two subleases associated with the 2023 Building. At the time of the termination, the Company recorded a non-cash contra-expense of $1,421,000 in general and administrative expenses, which is the net effect of reversing the deferred rent liability associated with the 2023 Building lease and subleases and the accelerated depreciation of fixed assets associated with the 2023 Building.

10. License Agreements

Cypress Bioscience, Inc.

In August 2010, the Company entered into a license and development agreement with Cypress Bioscience, Inc. (“Cypress”) forStaccatonicotine (the “Cypress Agreement”). According to the terms of the Cypress Agreement, Cypress

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paid the Company a non-refundable upfront payment of $5 million to acquire the worldwide license for theStaccatonicotine technology. In January 2011, Cypress was acquired by Ramius Value and Opportunity Advisors LLC; Royalty Pharma, U.S. Partner, LP; Royalty Pharma U.S. Partners 2008, LP; and RP Investment Corporation (collectively, “Royalty Pharma”), at which time Royalty Pharma became Cypress’ successor in interest to the Cypress Agreement.

Following the completion of certain preclinical and clinical milestones relating to theStaccatonicotine technology, if Royalty Pharma elects to continue the development ofStaccatonicotine, Royalty Pharma will be obligated to pay the Company an additional technology transfer payment of $1 million. The Company has a carried interest of 50% prior to the technology transfer payment, and 10% after the completion of certain development activities and receipt of the technology transfer payment, subject to adjustment in certain circumstances, in the net proceeds of any sale or license by Royalty Pharma of theStaccatonicotine assets and the carried interest will be subject to put and call rights in certain circumstances.

Royalty Pharma has the responsibility for preclinical, clinical and regulatory aspects of the development ofStaccatonicotine, along with the commercialization of the product. Royalty Pharma paid the Company a total of $3.9 million in research and development funding for the Company’s efforts to execute a development plan culminating with the delivery of clinical trial materials for a Phase 1 study withStaccatonicotine.

For revenue recognition purposes, the Company viewed the Cypress Agreement as a multiple element arrangement. Multiple element arrangements are analyzed to determine whether the various performance obligations, or elements, can be separated or whether they must be accounted for as a single unit of accounting. The Company evaluated whether the delivered elements under the arrangement have value on a stand-alone basis and whether objective and reliable evidence of fair value of the undelivered items exist. Deliverables that do not meet these criteria are not evaluated separately for the purpose of revenue recognition. For a single unit of accounting, payments received are recognized in a manner consistent with the final deliverable. The Company was unable to allocate a fair value to each of the deliverables outlined in the Cypress Agreement and therefore accounted for the deliverables as a single unit of accounting. The Company has not recognized revenues under the Cypress Agreement in 2013 and recognized $0 and $1,259,000 of revenue under the Cypress Agreement in the three and nine months ended September 30, 2012, respectively. At September 30, 2013, the Company had no deferred revenues related to the Cypress Agreement.

In January 2013, the Company and Royalty Pharma amended the Cypress Agreement. Under the amended terms, Royalty Pharma will use commercially reasonable efforts to sell or license theStaccato nicotine technology and the Company will use commercially reasonable efforts to support Royalty Pharma’s efforts. If Royalty Pharma does not sell or license theStaccato nicotine technology by December 31, 2013, the Cypress Agreement will automatically terminate, at which time all rights to the Staccato nicotine technology will revert back to the Company.

Grupo Ferrer Internacional, S.A.

On October 5, 2011, the Company and Ferrer entered into the Ferrer Agreement to commercialize ADASUVE in Europe, Latin America, Russia and the Commonwealth of Independent States countries (the “Ferrer Territories”). Under the terms of the Ferrer Agreement, the Company received an upfront cash payment of $10 million, of which $5 million was paid to the former Allegro stockholders (see above in Note 4). The Ferrer Agreement provided for up to an additional $51 million in additional milestone payments, contingent on Marketing Authorization Application (“MAA”) approval, individual country commercial sales initiation and royalty payments based on cumulative net sales targets in the Ferrer Territories. The Company was responsible for filing and obtaining approval of the ADASUVE MAA submitted to the European Medicines Agency (“EMA”) for an opinion regarding the potential approval of ADASUVE and subsequent decision by the European Commission (“EC”). The Company is also responsible for all post-approval clinical studies required to be performed by the EMA and EC. Ferrer will be responsible for satisfaction of all other regulatory and pricing requirements to market and sell ADASUVE in the Ferrer Territories. Ferrer will have the exclusive rights to commercialize the product in the Ferrer Territories. The Company will supply ADASUVE to Ferrer for all of its commercial sales, and will receive a specified per-unit transfer price paid in Euros. Either party may terminate the Ferrer Agreement for the other party’s uncured material breach or bankruptcy. The Ferrer Agreement continues in effect on a country-by-country basis until the later of the last to expire patent covering ADASUVE in such country or 12 years after first commercial sale. The Ferrer Agreement is subject to earlier termination in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy or insolvency of either party.

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In March 2012, the Company entered into an amendment to the Ferrer Agreement. Ferrer and the Company agreed to eliminate the potential MAA approval milestone payment in exchange for Ferrer’s purchase of 241,936 shares ($3 million) of the Company’s common stock for $12.40 per share, which reflected a premium on the fair value of the Company’s common stock of approximately $1,452,000.

The Company evaluated whether the delivered elements under the Ferrer Agreement have value on a stand-alone basis and allocated revenue to the identified units of accounting based on relative fair value. The Company determined that the license and the development and regulatory services are a single unit of accounting as the licenses were determined to not have stand-alone value. The Company has begun to deliver all elements of the arrangement and is recognizing the $10 million upfront payment as revenue ratably over the estimated performance period of the agreement of four years. The $1,452,000 premium received from the sale of common stock to Ferrer is additional consideration received pursuant to the Ferrer Agreement and does not pertain to a separate deliverable or element of the arrangement, and thus is being deferred and recognized as revenue in a manner consistent with the $10 million upfront payment.

The Ferrer Agreement provides for the Company to receive up to $48 million of additional payments related to first commercial sales in nine (9) identified countries and to cumulative net sales targets in the Ferrer Territories. The cumulative net sales targets will be recognized as royalty revenue when each target is earned and payable to the Company. The first commercial sales payments will be recognized utilizing the milestone method of revenue recognition. The Company believes each of these milestones is substantive as there is uncertainty that the milestones will be met, the milestone can only be achieved as a result of the Company’s past performance and the achievement of the milestone will result in additional payment to the Company. The Company will recognize milestone revenue upon first commercial sales in each of these identified countries. In the third quarter of 2013, the Company received and recognized revenue on the first milestone in the amount of $1,250,000, of which $312,500 was paid to the former stockholders of Allegro.

During the three and nine months ended September 30, 2013, the Company recognized $729,000 and $2,187,000, respectively, of license revenue related to the Ferrer Agreement, and license revenue of $729,000 and $2,082,000, respectively, in the same periods of 2012. At September 30, 2013 the Company had deferred revenue of $5,829,000 related to the Ferrer Agreement.

Teva Pharmaceuticals USA, Inc.

In May 2013, the Company entered into the Teva Agreement to provide Teva with an exclusive license to develop and commercialize ADASUVE in the U.S. Under the terms of the Teva Agreement, Teva will be responsible for all U.S. development, regulatory and commercialization activities for ADASUVE, including the U.S. post-approval clinical studies and any additional clinical trials for new indications. Teva has the full right to sublicense its rights and obligations under the Teva Agreement. The Company is responsible for manufacturing and supplying ADASUVE to Teva for clinical trials and commercial sales. Teva has the exclusive rights to commercialize ADASUVE in the U.S. and the co-exclusive rights (with the Company and its affiliates) to manufacture the product.

The Company received an upfront cash payment of $40 million from Teva, $10 million of which was paid to the former stockholders of Allegro. The Company is eligible to receive up to $195 million in additional payments contingent on Teva’s successful completion of the ADASUVE post-approval studies in the U.S. and Teva achieving specified net sales targets. In addition to these payments, the Company will supply ADASUVE to Teva for all of its clinical trials and commercial sales, and the Company will receive a specified per-unit transfer price in an amount of the greater of the Company’s costs of commercial production or a specified per-unit price. Teva will make tiered royalty payments based on net commercial sales of ADASUVE in the U.S.

Unless earlier terminated, the Teva Agreement continues in effect until the later of the last to expire patent covering ADASUVE in the U.S. or a specified number of years after first commercial sale. The Agreement is subject to earlier termination in the event the parties mutually agree, by a party in the event of an uncured material breach by the other party or upon the bankruptcy or insolvency of either party. Teva may also terminate the Teva Agreement in the event the FDA requires withdrawal or suspension of ADASUVE from the market due to safety reasons or, subject to a specified period of notice, for Teva’s convenience at any time following the first anniversary of the Teva Agreement.

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The Company evaluated whether the delivered elements under the Teva Agreement have value on a stand-alone basis and allocated revenue to the identified units of accounting based on relative fair value. The Company determined that the license fees are a single unit of accounting and valued the license based on its best estimate of selling price, as VSOE and TPE of the selling price could not be determined. The selling price was estimated using discounted projected cash flows related to the licensed territory. The Company has delivered the license to Teva and recognized the $40 million non-refundable upfront payment as revenue.

As described in Note 8, in connection with the Teva Agreement, the Company received a right-to-borrow under the Teva Note. The Company has the ability to draw on the Teva Note in amounts not to exceed $25 million, over a two year period. As outlined in Note 8, the Teva Note has a fixed conversion price and interest rate. This right-to-borrow was considered additional consideration provided by Teva to the Company pursuant to the Teva Agreement. The Company performed an analysis using a Monte Carlo simulation model with a volatility rate of 70% and an estimated debt yield of 15%. Based on this analysis, the Company determined that the fair value of this right-to-borrow was $2.8 million. The Company recorded this amount as revenue and as an other asset upon entering into the Teva Note. The asset is being amortized to interest expense over the two year period during which the Company is able to exercise the right-to-borrow. As the Company draws on the Teva Note, the relative portion of the unamortized right-to-borrow will be accounted for as a cost of borrowing and will be amortized to interest expense over the life of the borrowing. In the third quarter of 2013, the Company drew down $10,000,000 against the Teva Note and reclassified $901,000 of the unamortized right-to-borrow as a cost of borrowing to be amortized to interest expense over the life of the borrowing. The Company recorded $348,000 and $555,000 in interest expense related to the right-to-borrow in the three and nine months ended September 30, 2013, respectively.

As noted above, the Company is eligible to receive up to $195 million of additional payments from Teva related to the successful completion of the ADASUVE post-approval studies in the U.S. and Teva achieving specified net sales targets. The payments related to net sales targets will be recognized as royalty revenue when each target is earned and payable to the Company. The payment related to the completion of the ADASUVE post-approval studies will be recognized upon completion of the studies when the payment is earned and payable to the Company.

11. Autoliv Manufacturing and Supply Agreement

In November 2007, the Company entered into a Manufacturing and Supply Agreement (the “Manufacture Agreement”) with Autoliv relating to the commercial supply of chemical heat packages that can be incorporated into the Company’sStaccatodevice (the “Chemical Heat Packages”). Autoliv had developed these Chemical Heat Packages for the Company pursuant to a development agreement between Autoliv and the Company. Under the terms of the Manufacture Agreement, Autoliv agreed to develop a manufacturing line capable of producing 10 million Chemical Heat Packages a year.

In June 2010 and February 2011, the Company entered into agreements to amend the terms of the Manufacture Agreement (together the “Amendments”). Under the terms of the first Amendment, the Company paid Autoliv $4 million and issued Autoliv a $4 million unsecured promissory note in return for a production line for the commercial manufacture of Chemical Heat Packages. Each production line is comprised of two identical and self-sustaining “cells,” and the first such cell was completed, installed and qualified in connection with such Amendment. Under the terms of the second Amendment, the original $4 million note was cancelled and a new note was issued with a reduced principal amount of $2.8 million (the “New Note”), and production on the second cell ceased. The New Note is payable in 48 equal monthly installments of approximately $68,000. In the event that the Company requests completion of the second cell of the first production line for the commercial manufacture of Chemical Heat Packages, Autoliv will complete, install and fully qualify such second cell for a cost to the Company of $1.2 million and Autoliv will transfer ownership of such cell to the Company upon the payment in full of such $1.2 million and the New Note.

The provisions of the Amendments supersede (a) the Company’s obligation set forth in the Manufacture Agreement to reimburse Autoliv for certain expenses related to the equipment and tooling used in production and testing of the Chemical Heat Packages in an amount of up to $12 million upon the earliest of December 31, 2011, 60 days after the termination of the Manufacture Agreement or 60 days after approval by the FDA of an NDA filed by the Company, and (b) the obligation of Autoliv to transfer possession of such equipment and tooling.

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Subject to certain exceptions, Autoliv has agreed to manufacture, assemble and test the Chemical Heat Packages solely for the Company in conformance with the Company’s specifications. The Company will pay Autoliv a specified purchase price, which varies based on annual quantities ordered by the Company, per Chemical Heat Package delivered. In October 2013, Autoliv notified the Company of their intent to terminate, effective October 2016, the Manufacture Agreement. Prior to October 2016, Autoliv and the Company remain fully obligated to perform pursuant to the terms of both the Manufacture Agreement and the New Note. The Manufacture Agreement provides that during the term of the Manufacture Agreement, Autoliv will be the Company’s exclusive supplier of the Chemical Heat Packages. In addition, the Manufacture Agreement grants Autoliv the right to negotiate for the right to supply commercially any second generation Chemical Heat Package (a “Second Generation Product”) and provides that the Company will pay Autoliv certain royalty payments if the Company manufactures Second Generation Products itself or if the Company obtains Second Generation Products from a third party manufacturer. Upon the termination of the Manufacture Agreement, the Company will be required, on an ongoing basis, to pay Autoliv certain royalty payments related to the manufacture of the Chemical Heat Packages by the Company or third party manufacturers.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Examples of these statements include, but are not limited to, statements regarding: the ability of us and our collaborators to effectively and profitably commercialize ADASUVE, the timing of the commercial launch of ADASUVE in various countries, our collaborators’ and our ability to implement and assess the ADASUVE REMS program, the adequacy of our capital to support our operations, our ability to raise additional funds and the potential terms of such potential financings, the timing and outcome of the ADASUVE post-marketing studies, the prospects of us receiving approval to market ADASUVE in Latin America, Russia, the Commonwealth of Independent States countries and other countries, the implications of interim or final results of our clinical trials, the progress and timing of our research programs, including clinical testing, the extent to which our issued and pending patents may protect our products and technology, the potential of our product candidates to lead to the development of safe or effective therapies, our ability to enter into collaborations, our future operating expenses, our future losses, our future expenditures and the sufficiency of our cash resources. Our actual results could differ materially from those discussed in our forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A of this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission, or SEC. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The names “Alexza Pharmaceuticals,” “Alexza,”“Staccato” and “ADASUVE” are trademarks of Alexza Pharmaceuticals, Inc. We have registered these trademarks with the U.S. Patent and Trademark Office and other international trademark offices. All other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

We are a pharmaceutical company focused on the research, development and commercialization of novel proprietary products for the acute treatment of central nervous system conditions. ADASUVE^®, or ADASUVE orStaccato loxapine, and our product candidates are based on our proprietary technology, the Staccato^® system, or theStaccato system. TheStaccatosystem vaporizes an excipient-free drug to form a condensation aerosol that, when inhaled, allows for rapid systemic drug delivery. Because of the particle size of the aerosol, the drug is quickly absorbed through the deep lung into the bloodstream, providing speed of therapeutic onset that is comparable to intravenous, or IV, administration but with greater ease, patient comfort and convenience.

Our lead program,Staccato loxapine, has been developed for the treatment of agitation and is known commercially as ADASUVE. ADASUVE has been approved for marketing in the United States by the U.S. Food and Drug Administration, or FDA, and in the European Union, or EU, by the European Commission, or EC. In the United States and the EU, ADASUVE has been approved for similar indications, but is commercially available with a different number of dose strengths, and has different risk mitigation and management plans in the U.S. and the EU. ADASUVE is our only approved product.

For the U.S. market, Teva Pharmaceuticals USA, Inc., or Teva, is our exclusive commercial collaborator for ADASUVE. Grupo Ferrer Internacional S.A., or Ferrer, is our exclusive commercial collaborator for ADASUVE in Europe, Latin America, Russia and the Commonwealth of Independent States countries, or the Ferrer Territories. In July 2013, Ferrer launched ADASUVE in the EU with the first commercial sale in Germany and, in October 2013, Ferrer sold the first commercial units of ADASUVE in Austria. We expect Ferrer to launch ADASUVE in additional EU countries

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before year-end and to continue the EU launch into 2014. We are projecting ADASUVE to be launched by Teva in the U.S. no earlier than the first quarter of 2014. We continue to seek additional strategic collaborations to commercialize ADASUVE in the territories outside of the U.S. and the Ferrer Territories.

We have one product candidate in active development, AZ-002(Staccato alprazolam), which is being developed for the treatment of acute repetitive seizures. We anticipate initiating a Phase 2a proof-of-concept clinical trial of AZ-002 in the first quarter of 2014.

Our development pipeline not currently in active development includes: (i) AZ-007 (Staccatozaleplon) for the treatment of insomnia in patients who have difficulties falling asleep, including patients who awake in the middle of the night and have difficulty falling back asleep, (ii) AZ-104 (Staccatoloxapine, low-dose) for the treatment of patients suffering from acute migraine headaches, (iii) AZ-003 (Staccatofentanyl) for the treatment of patients with acute pain, including patients with breakthrough cancer pain and postoperative patients with acute pain episodes and (iv) Staccatonicotine which is designed to help smokers quit by addressing both the chemical and behavioral components of nicotine addiction by delivering nicotine replacement via inhalation.Staccato nicotine is licensed to Ramius Value and Opportunity Advisors LLC; Royalty Pharma, U.S. Partner, LP; Royalty Pharma U.S. Partners 2008, LP; and RP Investment Corporation, or collectively, Royalty Pharma. We expect to conduct a review of our current development pipeline, as well as new product candidates and indications, to identify, evaluate and prioritize potential additional product candidates for development.

We have retained all rights to theStaccato system and to our product candidates other than ADASUVE. We intend to develop certain product candidates internally and to identify external resources to develop and commercialize other product candidates.

We believe that, based on our cash, cash equivalents and marketable securities balance at September 30, 2013, remaining proceeds available under the Teva Convertible Promissory Note and Agreement to Lend, or the Teva Note, estimated product revenues, royalties and milestone payments associated with the sale of ADASUVE and our current projected cash usage, we have sufficient capital resources to meet our anticipated cash needs into the third quarter of 2014. We may not be able to raise additional sufficient capital on acceptable terms, or at all, to commercially manufacture ADASUVE profitably or continue development of our other product candidates or to continue operations and we may not be able to execute any strategic transaction.

ADASUVE Commercialization Strategy

Our global commercialization strategy for ADASUVE is to secure strategic collaborations to commercialize ADASUVE while maintaining control and primary responsibility for manufacturing internally. We currently have two commercialization collaborations, the Teva Agreement and the Ferrer Agreement. We are continuing to seek additional commercialization collaborations to commercialize ADASUVE in territories outside the Teva and the Ferrer Territories. We have primary responsibility for certain post-approval commitments related to the ADASUVE approval in the EU, as outlined in the Ferrer Agreement. We plan to manufacture our commercial product for the United States, the Ferrer Territories and for any potential future territories in our Good Manufacturing Practice, or GMP, facility in Mountain View, California.

In December 2012, the FDA approved our New Drug Application, or NDA, forStaccato loxapine, as ADASUVE (loxapine) Inhalation Powder 10 mg for the acute treatment of agitation associated with schizophrenia or bipolar I disorder in adults.

As a condition of the approval of ADASUVE in the U.S., a Risk Evaluation and Mitigation Strategy, or REMS, program including an “elements to assure safe use” is required to be implemented and periodically assessed. ADASUVE will only be available in healthcare facilities/hospitals enrolled in the ADASUVE REMS program. As an additional condition of U.S. ADASUVE approval, there are several additional post-approval commitments and requirements, including a 10,000 patient observational clinical trial that is designed to gather patient safety data based on the “real-world” use of ADASUVE in the hospital setting and a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients. The data derived from any post-approval study or trial could result in additional restrictions on the commercialization of ADASUVE through changes to the approved ADASUVE label, changes to the approved REMS, the imposition of additional post-approval studies or trials, or even the withdrawal of the approval of ADASUVE from the market. We have transferred the ADASUVE NDA and related regulatory documents to Teva, and Teva has primary responsibility for post-approval commitments and conditions related to the U.S. ADASUVE approval.

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In February 2013, the EC granted marketing authorization for ADASUVE. In the EU, ADASUVE, 4.5 mg and 9.1 mg inhalation powder loxapine, pre-dispensed, is authorized for the rapid control of mild-to-moderate agitation in adult patients with schizophrenia or bipolar disorder. The ADASUVE marketing authorization requires that patients receive regular treatment immediately after control of acute agitation symptoms, and that ADASUVE is administered only in a hospital setting under the supervision of a healthcare professional. The ADASUVE marketing authorization also recommends that a short-acting beta-agonist bronchodilator treatment be available for treatment of possible severe respiratory side-effects, such as bronchospasm.The EC delivered the marketing authorization for ADASUVE on the basis of the positive opinion issued by the European Medicines Agency, or EMA, in December 2012 and is valid in all 28 EU Member States, plus Iceland, Liechtenstein and Norway.

As a condition of the ADASUVE marketing authorization in the EU, we have several post-approval commitments including, (i) a benzodiazepine interaction study, (ii) a controlled study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, (iii) an observational clinical trial, and (iv) a drug utilization clinical trial.

We began manufacturing commercial quantities of ADASUVE for the EU in the second quarter of 2013 at our Mountain View, California facility and will continue to manufacture commercial product for both Ferrer and Teva. In the second quarter of 2013, we shipped 13,370 units of ADASUVE and in the third quarter of 2013, we shipped 14,405 units of ADASUVE. Because our current license and supply agreements provide our collaborators with an acceptance period during which they may reject any product which does not conform to agreed-upon specifications, revenue for units shipped may be recognized in a period subsequent to the period in which the units are shipped.

We have initiated and completed two of the post-approval commitments from the EU approval; the benzodiazepine interaction study and the thorough QTc study with two doses of ADASUVE.

The benzodiazepine interaction study was a drug-drug interaction study with ADASUVE and lorazepam. The objective of this study was to compare the safety and pharmacodynamic profiles of concurrent administration of a single dose of ADASUVE and intramuscular lorazepam, compared to that of each drug administered alone. The study enrolled 22 subjects.

The primary endpoints of the study were the maximum effect and area under the concentration-time curve, or AUC, from baseline to two hours post-treatment value, in respirations per minute and pulse oximetry between the treatment groups. The three treatment groups were (a) ADASUVE and lorazepam, (b) ADASUVE alone and (c) lorazepam alone. There were no statistically significant differences observed between the three treatment groups on the two primary endpoints.

Secondary endpoints of the study included sitting blood pressure, heart rate, sedation visual analogue scale, and psychomotor measures of attention, information processing speed, reaction time, and coordination. With the exception of sedation and psychomotor measures, there were no statistically significant differences observed on these secondary measures.

The controlled study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, thorough QTc study was a QT/QTc study of two doses. It has been shown in a pre-marketing clinical study that clinically relevant QT prolongation does not appear to be associated with a single dose of ADASUVE. The potential risk of QTc prolongation following repeat dosing was unknown. The objective of this study was to assess the potential effects on the QT interval of two consecutive doses of ADASUVE administered two hours apart, in relation to placebo and an active control in healthy volunteers. The study enrolled 60 subjects.

ADASUVE given as two 10 mg doses, two hours apart, did not cause significant electrocardiogram changes defined by the individual-corrected QTci. Results for Fridericia’s and Bazett’s corrections, formulas used to analyze the QT interval, were confirmatory, as were findings for absolute values and change from baseline values. Heart rate and other standard measures were also unaffected. Assay sensitivity was confirmed with significant effects observed for moxyfloxicin, the active control in the study. The Company believes that ADASUVE is not associated with cardiac repolarization liability under the dosing conditions studied.

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ADASUVE U.S. Commercialization

In May 2013, we entered into a License and Supply Agreement with Teva, or the Teva Agreement, to provide Teva with an exclusive license to develop and commercialize ADASUVE in the U.S. Under the terms of the Teva Agreement, Teva is responsible for all U.S. development, regulatory and commercialization activities for ADASUVE, including the U.S. post-approval clinical studies. Teva also has rights to conduct additional clinical trials of ADASUVE for potential new indications in neurological disorders. The ADASUVE NDA was transferred to Teva on June 17th, 2013.

Alexza is responsible for manufacturing and supplying ADASUVE to Teva for clinical trials and commercial sales. Teva has the exclusive rights to commercialize ADASUVE in the U.S. and the co-exclusive rights, with Alexza and its affiliates, to manufacture the product.

The protocol for the post-approval Phase 4 observational study is currently under review by the FDA, with plans to initiate enrollment in the second half of 2014.

Commercial launch for ADASUVE is scheduled for the first quarter of 2014, which we believe will allow the FDA to review the resubmission of labeling and REMS program materials that reflect administrative changes associated with the NDA transfer to Teva, such as Teva National Drug Code numbers and Teva company contact information. Once appropriate FDA requirements for REMS and labeling are met and implemented, the product may be commercially launched.

ADASUVE is being marketed in Teva’s U.S. Specialty Pharmaceuticals business by the Teva Select Brands, or TSB, team, which is a subsidiary of Teva Pharmaceutical Industries, Ltd. Over 50 people at Teva are involved in launch preparation activities that include preparing for direct sales, education programs, promotional campaigns and a field medical presence. We estimate that the Teva sales team will grow to cover targeted hospitals believed to be most likely to use ADASUVE, and the field medical presence will be scaled to meet estimated medical inquiries. Teva has participated in several professional conferences related to ADASUVE. Promotional materials are under review at the FDA, with feedback anticipated by the end of the year.

ADASUVE Ferrer Territories Commercialization

In October 2011, we entered into a commercial collaboration with Ferrer pursuant to a Collaboration, License and Supply Agreement, or the Ferrer Agreement, to commercialize ADASUVE in the Ferrer Territories. We will supply ADASUVE to Ferrer for all of its commercial sales, and will receive a specified per-unit transfer price. We were responsible for gaining initial EU approval for ADASUVE and are responsible for specific EU post-approval commitments following approval. Ferrer is responsible for satisfying all other regulatory and pricing reimbursement requirements to market and sell ADASUVE in the EU countries and the non-EU countries of the Ferrer Territories.

The Ferrer Territories include countries within the EU and countries outside of the EU. In the EU, Ferrer has initiated a launch plan based on estimated market opportunity, timing of pricing and projected reimbursement, and coordination with distribution partners. ADASUVE is now available in Germany and Austria, and Ferrer anticipates additional EU country launches in 2013 and 2014. In the non-EU Ferrer countries, Ferrer is interacting with various regulatory agencies and working on the required independent regulatory submissions.

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In countries where Ferrer does not have a direct commercial presence, they are seeking to establish distribution agreements with companies that are believed to have sales capabilities in the hospital and/or psychiatry markets. As of November 6, 2013, Ferrer had announced distribution agreements with Medivir AB and AOP Orphan Pharmaceuticals AG.

As a part of its education, market conditioning and commercialization strategy, Ferrer is, among other activities:

• seeking to build awareness about agitation and ADASUVE at national and regional medical conferences;

• developing medical symposia, hosting regional educational events, exhibiting with a branded ADASUVE booth; and

• working with clinicians in the field.

Also, in each Ferrer country, a combination of medical science liaisons and sales representatives is expected to target hospitals and medical settings that are believed to treat a high volume of agitated patients.

Financing update

On July 20, 2012, we entered into a committed equity line of credit with Azimuth Opportunity, L.P., or Azimuth, pursuant to which we were granted the ability to sell up to $20 million of our common stock over an approximately 24-month period pursuant to the terms of a Common Stock Purchase Agreement, or the Purchase Agreement, at a discount of 5% to the volume-weighted average price of our common stock over a preceding period of trading days. In addition to the foregoing amounts, in consideration for the performance of Azimuth’s obligations under the Purchase Agreement, we issued to Azimuth 80,429 shares of our common stock on July 23, 2012. In August and September 2012, we utilized $13.6 million under the facility by issuing 3,489,860 shares of our common stock to Azimuth at an average price of $3.88 per share, which resulted in $13.4 million in net proceeds. In May 2013, we utilized the remaining $6.4 million available under the facility by issuing 1,437,481 shares of our common stock to Azimuth at an average price of $4.48 per share, which resulted in $6.3 million of net proceeds to us. Shares sold under this facility were sold pursuant to a shelf registration statement declared effective by the Securities and Exchange Commission, or SEC, on July 3, 2012.

In May 2013, concurrent with the Teva Agreement, we entered into the Teva Note. Under the terms of the Teva Note, we may, upon written notice to Teva, draw upon the Teva Note to fund agreed operating budgets related to ADASUVE. The aggregate draw-downs may total up to $25 million and will be due and payable on the fifth anniversary of the signing of the Teva Note. We may prepay, from time to time, up to one-half of the total amounts advanced plus the related interest outstanding at any time prior to the maturity date. At the maturity date, Teva will have the right to convert the then outstanding amounts into shares of Alexza common stock at a conversion price of $4.4833 per share. The Teva Note bears simple interest of 4% per year. The effective interest rate of the Teva Note, which takes into consideration the beneficial conversion feature and the right-to-borrow discounts, is 13.9%. We have two years from the effective date of the Teva Note to receive advances. In September 2013, we drew down $10 million against the Teva Note and we anticipate drawing additional advances in the future.

We have retained all rights to theStaccato system and our product candidates other than those for ADASUVE. We intend to capitalize on our internal resources to develop certain product candidates and to identify routes to utilize external resources to develop and commercialize other product candidates.

We were incorporated December 19, 2000. We have funded our operations primarily through the sale of equity securities, equipment financings, debt financings and government grants. We have incurred significant losses since our inception. As of September 30, 2013, our accumulated deficit was $368.5 million and total stockholders’ deficit was $19.9 million. We recognized net losses of $33.9 million, $28.0 million, $40.5 million, and $1.5 million in the nine months ended September 30, 2013 and in the years ended December 31, 2012, 2011 and 2010, respectively. We began recognizing ADASUVE product revenues in the second quarter of 2013 in the EU and expect to earn product and royalty revenues related to sales of ADASUVE in the U.S beginning no earlier than the first quarter of 2014. We expect our expenses to increase in the fourth quarter of 2013 and the first half of 2014 as we continue to ramp up our commercial manufacturing of ADASUVE, continue to undertake the required efforts to meet our post-approval commitments to the EC and develop our product candidate pipeline.

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ADASUVE is our only product approved for commercialization. In the United States, ADASUVE must be administered only in healthcare facilities enrolled in the ADASUVE REMS program that have immediate access on-site to equipment and personnel trained to manage acute bronchospasm, including advanced airway management (intubation and mechanical ventilation). If Teva is not able to successfully commercialize ADASUVE in the U.S., or if Ferrer is not able to successfully commercialize ADASUVE in the Ferrer Territories, our ability to generate revenue will be jeopardized and, consequently, our business will be seriously harmed.

The process of conducting preclinical studies and clinical trials necessary to obtain FDA approval is costly and time consuming. We consider the development of our product candidates to be crucial to our long-term success. The probability of success for each product candidate may be impacted by numerous factors, including preclinical data, clinical data, competition, device development, manufacturing capability, regulatory approval and commercial viability. We plan to seek additional collaborators for the worldwide development and commercialization for all of our product candidates. If we enter into additional collaboration agreements, third parties could have control over preclinical development, clinical trials or the regulatory process for some of our product candidates. Accordingly, the progress of such product candidate would not be under our control. We cannot forecast with any degree of certainty which of our product candidates, if any, will be subject to any future collaboration arrangements or how such arrangements would affect our development plans or capital requirements. We anticipate that we and any collaborators will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, as well as an ongoing assessment as to the product candidate’s commercial potential.

As a result of the uncertainties discussed above, the uncertainty associated with clinical trial enrollments, and the risks inherent in the development process, we are unable to determine the duration and completion costs of the current or future clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development timelines, probability of success and development costs vary widely. While we are currently focused on developing our product candidates, we anticipate that we and our collaborators will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, as well as an ongoing assessment as to the product candidate’s commercial potential.

Results of Operations

Comparison of Three and Nine Months Ended September 30, 2013 and 2012

Revenue

Revenues for the periods presented were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Product revenues	$	188	$	—	$	294	$	—
Amortization of upfront payments		728		729		2,186		3,341
Milestone revenue		1,250		—		1,250		—
Teva upfront payment		—		—		40,000		—
Teva right-to-borrow asset		—		—		2,800		—
Total Revenues	$	2,166	$	729	$	46,530	$	3,341

We began shipping commercial units and recognizing revenue on ADASUVE in the second quarter of 2013. Amortization of upfront payments is from our Ferrer Agreement in 2013 and 2012 and amounts from our commercial license and development agreement with Cypress Bioscience, Inc., or Cypress, now Royalty Pharma, signed in August 2010 through the first quarter of 2012. Milestone revenue in the three and nine months ended September 30, 2013 resulted from the achievement of a milestone under the Ferrer Agreement. We expect product revenues to increase in the fourth quarter of 2013 and in 2014 and to begin to recognize royalty revenues from Teva beginning no earlier than the first quarter of 2014.

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Cost of Goods Sold

Costs of Goods Sold include the direct costs incurred to manufacture products sold combined with allocated manufacturing overhead, which consists of indirect costs, including labor and facility overhead. We are in the early stages of commercialization and have incurred significantly higher than normal indirect costs in the production of our inventory due to manufacturing start-up costs and low production volumes and expect to continue to incur higher than normal indirect costs until we get closer to our normal manufacturing capacity. The carrying cost of inventory is reduced so as to not be in excess of market value as determined by the contractual transfer prices to Ferrer and Teva. These amounts are expensed to cost of goods sold. All costs associated with the manufacturing process incurred prior to the first commercial product produced in the second quarter of 2013 were expensed as a component of research and development expense. Cost of goods sold for the three and nine months ended September 30, 2013 consist mainly of start-up and excess manufacturing costs during the period in addition to the cost of the units shipped to Ferrer. We expect our costs of goods sold to decrease as a percentage of product sales in the fourth quarter of 2013 and in 2014 as we anticipate increased units shipped to Ferrer and Teva. However, we will continue to incur high unabsorbed production costs until we achieve higher consistent production levels.

Research and Development Expenses

Research and development expenses are identified as costs directly attributable to the development of our product and product candidates or as general research. Direct costs consist of personnel costs directly associated with a candidate, preclinical study costs, clinical trial costs, related clinical drug and device development and manufacturing costs, contract services and other research expenditures. Overhead, facility costs and other support service expenses are allocated to each product or candidate or to general research, and the allocation is based on employee time spent on each program.

The following table allocates our expenditures between product and product candidate costs or general research, based on our internal records and estimated allocations of employee time and related expenses (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Product and product candidate expenses	$	2,845	$	4,254	$	10,825	$	12,864
General research		2,612		530		5,650		1,962
Total research and development expenses	$	5,457	$	4,784	$	16,475	$	14,826

The increase in research and development expenses in the three and nine months ended September 30, 2013 as compared to the same periods in 2012 is primarily a result of our additional regulatory expenses related to the approval of the Marketing Authorization Application, or MAA, and costs associated with our post-approval commitments related to the MAA approval, partially offset by expenses related to quality and manufacturing being classified as cost of goods sold in 2013.

We expect research and development expenses will increase in the fourth quarter of 2013 due to higher anticipated clinical expenses related to development of AZ-002 and EU post-commercial expenses.

General and Administrative Expenses

General and administrative expenses were $3,097,000 and $12,016,000 during the three and nine months ended September 30, 2013 and $2,338,000 and $6,487,000 in the same periods in 2012, respectively. The increase was partially due to pre-commercialization efforts such as market research, including pricing and market segmentation studies, during 2013, and an increase in headcount and external expenses to support the increased operational activity as a result of obtaining approval of our ADASUVE NDA in December 2012. Also, during the nine months ended September 30, 2012, we recognized a non-cash contra expense of $1,400,000 related to the termination of our lease and associated subleases of one of our Mountain View facilities. The non-cash contra expense was a result of the reversal of deferred rent liability, net of the accelerated depreciation of the fixed assets, related to the facility.

We expect general and administrative expenses to decrease slightly in the fourth quarter as Teva has assumed responsibility for certain development, pre-commercialization and commercialization efforts.

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Change in the Fair Value of Contingent Consideration Liability

In connection with our acquisition of all of the outstanding equity of Allegro in the third quarter of 2009, we are obligated to pay the former stockholders of Allegro certain percentages of cash receipts that may be generated from future collaboration transactions for ADASUVE, AZ-104 and/or AZ-002. We measure the fair value of this contingent consideration liability on a recurring basis. Any changes in the fair value of this contingent consideration liability are recognized in earnings in the period of the change. Certain events, including, but not limited to, the timing and terms of a collaboration, clinical trial results, regulatory approval or nonapproval of our submissions, and the commercial success of ADASUVE, AZ-104, and/or AZ-002, could have a material impact on the fair value of the contingent consideration liability, and as a result, our results of operations.

During the three months ended September 30, 2013, non-operating loss was a result of the passage of three months on the present value computation of the discounted cash flow model. During the nine months ended September 30, 2013, we updated the contingent liability fair value model primarily to reflect the impact of the terms of the Teva Agreement. We also reduced the discount rate used to compute the fair value of the contingent consideration liability from 18.0% to 16.5% to reflect the reduction in our estimated weighted average cost of capital. These changes resulted in non-operating, non-cash losses of $1,613,000 and $44,013,000 during the three and nine months ended September 30, 2013, respectively.

During the three months ended September 30, 2012, we updated the contingent liability fair value model primarily to reflect the present value impact of the passage of three months on our discounted cash flow model. During the three and nine months ended September 30, 2012, we updated the contingent liability fair value model primarily to reflect the timing of certain cash flows as a result of the delay in our ADASUVE PDUFA goal date and the receipt of the Complete Response Letter for the ADASUVE NDA in May 2012. This update resulted in a non-operating, non-cash loss of $200,000 during the three months ended September 30, 2012 and a non-operating, non-cash gain of $1,000,000 during the nine months ended September 30, 2012.

Interest and Other Income/(Expense), Net

Interest and other income/(expense), net was $1,000 and $18,000 for the three and nine months ended September 30, 2013, respectively, and $5,000 and $413,000 in the same periods in 2012, respectively. The amounts primarily represent income earned on our cash, cash equivalents, marketable securities and restricted cash. We expect interest income to continue to remain nominal through 2013 as we expect the low interest rate environment to continue.

Interest Expense

Interest expense was $461,000 and $1,055,000 for the three and nine months ended September 30, 2013, respectively and $333,000 and $1,146,000 in the same periods in 2012, respectively. The amounts represent interest on our equipment financing obligations and term loan agreements. The amounts for the three and nine months ended September 30, 2013 also include the amortization of the right-to-borrow asset received in connection with the Teva Note. We expect interest expense to increase due to the interest related to the $10,000,000 advance on the Teva Note on September 27, 2013, interest from future anticipated advances on the Teva Note, and the amortization of the right-to-borrow asset and the beneficial conversion feature related to the Teva Note.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through private placements and public offerings of equity securities, revenues primarily from licensing and development agreements, government grants, debt instruments and payments from Allegro. We have received additional funding from financing obligations, interest earned on investments, as described below, and funds received upon exercises of stock options and exercises of purchase rights under our 2005 Employee Stock Purchase Plan, or ESPP. As of September 30, 2013, we had $32.5 million in cash, cash equivalents, and marketable securities. Our cash, cash equivalents and marketable security balances are held in a variety of interest-bearing instruments, including obligations of U.S. government agencies, high credit rating corporate borrowers and money market accounts. Cash in excess of immediate requirements is invested with regard to liquidity, capital preservation and yield.

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Cash Flows from Operating Activities.Net cash provided by (used in) operating activities was $10.0 million and $(11.0) million during the nine months ended September 30, 2013 and 2012, respectively. Cash flows from operating activities in the nine months ended September 30, 2013 primarily reflect the receipt of the $40 million upfront payment related to the Teva Agreement and the overall net loss of $33.9 million adjusted for the $44.0 million non-cash loss related to the increase of the contingent consideration liability, share-based compensation expense of $2.5 million and depreciation and amortization of $2.5 million. Cash flows from operating activities were also impacted by increases in accounts payable of $1.9 million and inventory of $2.1 million as we built inventory for the commercial production of ADASUVE and a decrease in deferred revenues of $2.2 million.

The net cash used in operating activities in the nine months ended September 30, 2012 primarily reflects the net loss of $17.7 million offset by the non-cash charges of: (i) depreciation of $3.5 million; (ii) share-based compensation expense of $2.5 million; and (iii) the change in fair value of the contingent consideration liability of $1.0 million. Cash flows from operating activities were also impacted by the reduction in: (i) other liabilities of $3.7 million; (ii) deferred revenues of $1.9 million; and (iii) accounts payable of $1.8 million partially offset by the collection of the accounts receivables of $10.0 million.

Cash Flows from Investing Activities.Net cash (used in) provided by investing activities was $(10.1) million and $2.4 million during the nine months ended September 30, 2013 and 2012, respectively. Investing activities consist primarily of fixed asset purchases and purchases of marketable securities. During the nine months ended September 30, 2013 and 2012 we had fixed asset purchases of $1.5 million and $0.2 million, respectively. During the nine months ended September 30, 2013, we had purchases of marketable securities of $10.6 million and during both the nine months ended September 30, 2013 and 2012, we had maturities of marketable securities of $2.0 million. During the nine months ended September 30, 2012, we also had proceeds from the disposal of property and equipment of $0.4 million.

Cash Flows from Financing Activities. Net cash provided by financing activities was $6.2 million and $19.2 million during the nine months ended September 30, 2013 and 2012, respectively. Cash flows from financing activities have generally consisted of proceeds from the issuance of our common stock and net cash flows from our financing agreements. In the nine months ended September 30, 2013 and 2012, we raised net proceeds of approximately $6.4 million and $13.4 million from the sale of common stock under our equity line of credit with Azimuth, respectively. In the nine months ended September 30, 2012, we raised net proceeds of approximately $20.2 million from a public offering and approximately $1.5 million from the sale of common stock to Ferrer.

In the nine months ended September 30, 2013 and 2012, we made payments of $10.3 and $5.0 million, respectively, to the former stockholders of Allegro as a result of our receipt of the $40 million upfront payment from Teva and $1.25 million milestone payment from Ferrer in 2013 and the $10 million Ferrer upfront payment in 2012. Our agreement with Hercules Technology Growth Capital, Inc., or Hercules, to establish a restricted cash account resulted in an increase in cash flows of $5.1 million in the nine months ended September 30, 2013 and a decrease in cash flows of $6.5 million in the nine months ended September 30, 2012. In the nine months ended September 30, 2013 and 2012, principal payments on our financing obligations were $5.0 million and $4.5 million, respectively.

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We believe that, based on our cash, cash equivalents and marketable securities balances at September 30, 2013, remaining proceeds available from the Teva Note, estimated product revenues, royalties and milestone payments associated with the sale of ADASUVE and our current expected cash usage, we have sufficient capital resources to meet our anticipated cash needs at least into the third quarter of 2014. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate or to alter our operations. Our forecast of the period of time that our financial resources will be adequate to support operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in “Risk Factors.” In light of the numerous risks and uncertainties associated with the commercialization of ADASUVE, development of our product candidates and the extent to which we enter into additional strategic collaboration agreements with third parties to participate in development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our estimates regarding our future funding requirements are based on assumptions that may prove to be wrong and we could utilize our available financial resources sooner than we currently expect. These estimates and our future funding requirements will depend on many factors, including:

• expenditures related to the ADASUVE post-approval commitments to both the FDA and EC during this period being within budgeted levels or paid for by our collaborators;

• no unexpected costs related to the development of our manufacturing capability or to manufacture ADASUVE;

• no unbudgeted growth in the number of our employees during this period;

• no material shortfall in our budgeted revenues;

• the commercial success of ADASUVE or any other product candidates that are approved for marketing;

• the continuation of our commercial agreements with Teva and Ferrer;

• the cost, timing and outcomes of regulatory approvals or non-approvals for our other product candidates;

• the scope, rate of progress, results and costs of our preclinical studies, clinical trials and other research and development activities;

• the terms and timing of any additional distribution, strategic collaboration or licensing agreements that we may establish;

• the number and characteristics of product candidates that we pursue;

• the cost and timing of establishing manufacturing, marketing and sales capabilities including replacing Autoliv as a provider of the chemical heat packages for ADASUVE and our other product candidates;

• the cost of establishing clinical and commercial supplies of our product candidates;

• the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

• the extent to which we acquire or invest in businesses, products or technologies.

We will need to raise additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may not be able to continue development of our product candidates or we could be required to delay, scale back or eliminate some or all of our development programs, or reduce our efforts to build our commercial manufacturing, marketing and sales capacity, and other operations. We may seek to raise additional funds through public or private financing, strategic collaborations or other arrangements. Any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Applicable listing standards, may affect our ability to consummate certain types of offerings of our securities in the future. If we raise funds through additional collaborative or licensing arrangements, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Our failure to raise capital when needed may harm our business, financial condition, results of operations, and prospects.

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Contractual Obligations

We lease a building with 64,104 square feet of manufacturing, office and laboratory facilities in Mountain View, California. The lease expires on March 31, 2018, and we have two options to extend the lease for five years each. We believe that the Mountain View facility is sufficient for our office, manufacturing and laboratory needs for at least the next two years.

On May 4, 2010, we entered into a Loan and Security Agreement, or the Loan Agreement, with Hercules. Under the terms of the Loan Agreement, we borrowed $15 million at an interest rate equal to the higher of (i) 10.75% or (ii) 6.5% plus the prime rate as reported in the Wall Street Journal, or the Prime Rate, with a maximum interest rate of 14%, and issued to Hercules a secured term promissory note evidencing the loan. We made interest only payments through January 2011 and beginning in February 2011 the loan began to be repaid in 33 equal monthly installments and was paid in full in October 2013.

On November 2, 2007, we entered into a manufacturing and supply agreement, or the manufacture agreement, with Autoliv ASP, Inc., or Autoliv, relating to the commercial supply of chemical heat packages that are incorporated into ourStaccatodevice. Autoliv had developed these chemical heat packages for us pursuant to a development agreement between Autoliv and us executed in October 2005.

In June 2010 and February 2011, we entered into agreements to amend the terms of the manufacture agreement, or the amendments. Under the terms of the first of the amendments, we paid Autoliv $4 million and issued Autoliv a $4 million unsecured promissory note in return for a production line for the commercial manufacture of chemical heat packages. Each production line is comprised of two identical and self-sustaining “cells,” and the first such cell was completed, installed and qualified in connection with such amendment. Under the terms of the second of the amendments, the original $4 million note was cancelled and a new unsecured promissory note was issued with a reduced principal amount of $2.8 million, or the second note, and production on the second cell ceased. The second note is payable in 48 equal monthly installments of approximately $68,000. In the event that we request completion of the second cell of the first production line for the commercial manufacture of chemical heat packages, Autoliv will complete, install and fully qualify such second cell for a cost to us of $1.2 million and Autoliv will transfer ownership of such cell to us upon the payment in full of such $1.2 million and the second note. At our request, Autoliv will manufacture up to two additional production lines for the commercial manufacture of chemical heat packages at a cost not to exceed $2.4 million for each additional line.

We will pay Autoliv a specified purchase price, which varies based on annual quantities ordered by us, per chemical heat package delivered. The initial term of the manufacture agreement expired on December 31, 2012, at which time the manufacture agreement automatically renewed for a five-year renewal term. Unless we or Autoliv notify the other party no less than 36 months prior to the then-current renewal term that such party wishes to terminate the manufacture agreement, the agreement will automatically renew for additional successive five-year terms. In October 2013, Autoliv notified us of their intent to terminate, effective October 2016, the Manufacture Agreement. Prior to October 2016, Autoliv and we remain fully obligated to perform pursuant to the terms of both the Manufacture Agreement and the New Note.

On May 7, 2013, we entered into the Teva Note. Under the terms of the Teva Note, we may, upon written notice to Teva, receive advances to fund agreed operating budgets related to ADASUVE. The aggregate advances may total up to $25 million and will be due and payable on May 7, 2018, or the Maturity Date. The Teva Note bears interest at 4% per annum. Prior to the Maturity Date, we have the option to prepay up to one-half of the outstanding principal and accrued interest amount. On the Maturity Date, Teva has the option to convert the outstanding principal and accrued interest into Alexza common stock at a price of $4.4833 per share. In September 2013, we received an advance of $10 million against the Teva Note, and we anticipate requesting additional advances in the future.

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Our scheduled future minimum contractual payments, net of sublease income, including interest at September 30, 2013, are as follows (in thousands):

	Operating Lease Agreements		Financing Obligations		Total
2013 - remaining three months	$	875	$	770	$	1,645
2014		3,502		815		4,317
2015		3,197		—		3,197
2016		3,287		—		3,287
Thereafter		4,239		11,844		16,083
Total	$	15,100	$	13,429	$	28,529

As part of our purchase of all of the outstanding equity of Allegro in August 2009, we agreed to pay to the former Allegro stockholders certain percentages of cash payments that may be generated from future collaboration transactions pertaining to ADASUVE/AZ-104 (Staccatoloxapine) or AZ-002 (Staccatoalprazolam). In May and August 2013, we made payments to the former Allegro stockholders of $10 million and $312,500 as a result of the $40 million upfront payment we received from Teva and the $1.25 million milestone payment we received from Ferrer, respectively.

Critical Accounting Policies, Estimates and Judgments

Other than the following, there have been no material changes in our critical accounting policies, estimates and judgments during the nine months ended September 30, 2013 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012.

Revenue Recognition

We recognize revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured. Prior to the second quarter of 2013, our revenue consisted primarily of amounts earned from collaboration agreements and under research grants with the National Institutes of Health. Beginning in the second quarter of 2013, we also have revenue from product sales.

For collaboration agreements, revenues for non-refundable upfront license fee payments, where we continue to have performance obligations, are recognized as performance occurs and obligations are completed. Revenues for non-refundable upfront license fee payments where we do not have significant future performance obligations are recognized when the agreement is signed and the payments are due.

For multiple element arrangements, such as collaboration agreements in which a collaborator may purchase several deliverables, we account for each deliverable as a separate unit of accounting if both of the following criteria are met: (i) the delivered item or items have value to the customer on a standalone basis; and (ii) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We evaluate how the consideration should be allocated among the units of accounting and allocate revenue to each non-contingent element based upon the relative selling price of each element. We determine the relative selling price for each deliverable using (i) vendor-specific objective evidence, or VSOE, of selling price if it exists; (ii) third-party evidence, or TPE, of selling price if it exists; or (iii) our best estimated selling price for that deliverable if neither VSOE nor TPE of selling price exists for that deliverable. We then recognize the revenue allocated to each element when the four basic revenue criteria described above are met for each element.

For milestone payments received in connection with our collaboration agreements, we have elected to adopt the milestone method of accounting under Financial Accounting Standards Board Accounting Standards Codification 605-28,Milestone Method. Under the milestone method, revenues for payments which meet the definition of a milestone will be recognized as the respective milestones are achieved.

We recognize product revenue as follows:

• Persuasive Evidence of an Arrangement. We currently sell product through license and supply agreements with our collaborators, Ferrer and Teva. Persuasive evidence of an arrangement is generally determined by the receipt of an approved purchase order from the collaborator in connection with the terms of the license and supply agreements.

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• Delivery. Typically, ownership of the product passes to the collaborator upon shipment. Our current license and supply agreements also provide our collaborators with an acceptance period during which they may reject any product which does not conform to agreed-upon specifications. Because ADASUVE is a new product, a new technology and our first product to be commercialized, and because we do not have a history of producing product to collaborator specifications, we will not consider delivery to have occurred until after the collaborator acceptance period has ended or the collaborator has positively accepted the product. Once we have demonstrated over the course of time an ability to reliably produce the product to collaborator specifications, we will consider delivery to have occurred upon shipment in the absence of any other relevant shipment or acceptance terms.

• Sales Price Fixed or Determinable. Sales prices for product shipments are determined by the license and supply agreements and documented in the purchase orders. After the collaborator acceptance period has ended or the collaborator has positively accepted the product, our collaborators do not have any product return or replacement rights, including for expired products.

• Collectability. Payment for the product is contractually obligated under the license and supply agreements. We will monitor payment histories for our collaborators and specific issues as they arise to determine whether collection is probable for a specific transaction and defer revenue as necessary.

Royalty revenue from our collaboration agreements will be recognized as we receive information from our collaborators regarding product sales.

Significant management judgment is used in the determination of revenue to be recognized and the period in which it is recognized.

Inventory

Inventory is stated at standard cost, which approximates actual cost, determined on a first-in first-out basis, not in excess of market value. Inventory includes the direct costs incurred to manufacture products combined with allocated manufacturing overhead, which consists of indirect costs, including labor and facility overhead. We are in the early stages of commercialization and have incurred significantly higher than normal indirect costs in the production of our inventory due to start-up manufacturing costs and low production volumes and expect to continue to incur higher than normal indirect costs until we get closer to our normal manufacturing capacity. The carrying cost of inventory is reduced so as to not be in excess of market value of the inventory as determined by the contractual transfer prices to Ferrer and Teva. The excess over the market value is written off to cost of goods sold. All costs associated with the manufacturing process incurred prior to the approval of ADASUVE in December 2012 were expensed as a component of research and development expense.

Off Balance Sheet Arrangements

None.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk is confined to our cash, cash equivalents, and marketable securities. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and marketable securities in a variety of securities of high credit quality. As of September 30, 2013, we had cash, cash equivalents and marketable securities of $32.5 million. The securities in our investment portfolio are not leveraged, are classified as available-for-sale and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that an increase in market rates would have a material negative impact on the realized value of our investment portfolio. We actively monitor changes in interest rates. We perform quarterly reviews of our investment portfolio and believe we have minimal exposure related to mortgage and other asset-backed securities. We have no exposure to auction rate securities.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Our management (with the participation of our chief executive officer, chief financial officer and outside counsel) has reviewed our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of September 30, 2013, our internal disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.

PART II. OTHER INFORMATION

Item  1. Legal Proceedings

None

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Quarterly Report, before deciding whether to invest in shares of our common stock. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Relating to Our Business

Our near-term prospects are dependent on ADASUVE. If we or our collaborators are unable to successfully commercialize ADASUVE for the acute treatment of agitation in adults with schizophrenia or bipolar disease, our ability to generate significant revenue or achieve profitability will be adversely affected.

ADASUVE is our only product approved for marketing by the FDA or the EC, and our ability to generate revenue in the near term is entirely dependent upon sales of ADASUVE. We or our collaborators may not be able to successfully commercialize ADASUVE for a number of reasons, including:

• we or our collaborators may not be able to establish or demonstrate in the medical community the safety and efficacy of ADASUVE and any potential advantages over existing therapeutics and products currently in clinical development;

• doctors may be hesitant to prescribe ADASUVE until results from our post-approval studies are available or other long term data regarding efficacy and safety exists;

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• results from our post-approval studies may fail to verify the clinical benefit of ADASUVE for the treatment of agitation in bipolar and schizophrenic patients or may reveal unforeseen safety issues;

• our limited experience in marketing, selling and distributing ADASUVE;

• reimbursement and coverage policies of government and private payers such as Medicare, Medicaid, insurance companies, health maintenance organizations and other plan administrators;

• the relative price of ADASUVE as compared to alternative treatment options;

• the relative infrequency of agitation in many bipolar and schizophrenic patients, including the reliability of our estimates;

• we or our collaborators may not have adequate financial or other resources to successfully commercialize ADASUVE;

• we may be unable to secure a replacement manufacturer for the chemical heat packages in ADASUVE by October 2016 or the costs for such manufacturer to produce the chemical heat packages may be higher than the cost from Autoliv; and

• we may not be able to manufacture ADASUVE in commercial quantities or at acceptable costs.

If we are unable to successfully commercialize ADASUVE for the treatment of agitation in adults with schizophrenia or bipolar disease, our ability to generate revenue from product sales and achieve profitability will be adversely affected and our stock price would likely decline.

We have a history of net losses. We expect to continue to incur substantial and increasing net losses for the foreseeable future, and we may never achieve or maintain profitability.

We are not profitable and have incurred significant net losses in each year since our inception, including net losses of $33.9 million, $28.0 million, $40.5 million, and $1.5 million for the nine months ended September 30, 2013 and for the years ended December 31, 2012, 2011, and 2010, respectively. As of September 30, 2013, we had an accumulated deficit of $368.5 million and a stockholders’ deficit of $19.9 million. We expect to continue to incur substantial net losses and negative cash flow through at least 2015. These losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

Because of the numerous risks and uncertainties associated with the commercialization of ADASUVE by Teva and Ferrer, our ability to manufacture commercial quantities of ADASUVE, and pharmaceutical product development, we are unable to predict accurately the timing or amount of future revenues or expenses, or when, or if, we will be able to achieve or maintain profitability. To date we have not generated any significant product or royalty revenue. We have financed our operations primarily through the sale of equity securities, equipment financing, debt financing, collaboration and licensing agreements, and government grants. The size of our future net losses will depend, in part, on the rate of growth or contraction of our expenses and the level and rate of growth, if any, of our revenues. Revenues from strategic collaborations are uncertain because we may not enter into any additional strategic collaborations. If we or our collaborators are unable to successfully commercialize ADASUVE or one or more of our product candidates or if sales revenue from ADASUVE or any product candidate that receives marketing approval is insufficient, we will not achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.

Our operating results are unpredictable and may fluctuate. If our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.

Our operating results are difficult to predict and will likely fluctuate from quarter to quarter and year to year. Due to the recent approval of ADASUVE for the treatment of agitated bipolar and schizophrenic patients in the United States and the EU and the lack of historical sales data, ADASUVE sales will be difficult to predict from period to period. We believe that our quarterly and annual results of operations may be negatively affected by a variety of factors, including:

• a failure to achieve a sufficient level of demand by patients and care providers for ADASUVE;

• the timing and level of investment in our or our collaborators’ sales and marketing efforts to support ADASUVE sales;

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• the timing and level of investment in our or our collaborators’ research and development activities involving ADASUVE; and

• expenditures we may incur to acquire or develop additional products.

In addition, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the award, and recognize the cost as an expense over the employee’s requisite service period. As the variables that we use as a basis for valuing these awards change over time, including our underlying stock price, the magnitude of the expense that we must recognize may vary significantly. Any such variance from one period to the next could cause a significant fluctuation in our operating results.

For these reasons, it is difficult for us to accurately forecast future profits or losses. As a result, it is possible that in some quarters our operating results could be below the expectations of securities analysts or investors, which could cause the trading price of our common stock to decline, perhaps substantially.

We will need substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.

We will need to raise additional capital to fund our operations, to develop our product candidates and to develop and expand our commercial manufacturing capabilities. Our future capital requirements will be substantial and will depend on many factors including:

• the terms and success of any future licensing arrangement that we may enter into for the commercial rights for ADASUVE;

• Teva’s success in commercializing ADASUVE in the United States;

• Teva’s executing the ADASUVE REMS program to the satisfaction of the FDA;

• Ferrer’s success in commercializing ADASUVE in the Ferrer Territories;

• the development costs for our other product candidates;

• the cost and timing of complying with our post-approval commitments;

• the cost and timing of complying with the process for renewal of marketing authorization in the EU;

• the scope, rate of progress, results and costs of our preclinical studies, clinical trials and other research and development activities;

• the scope, rate of progress, results and costs of our commercial manufacturing development and commercial manufacturing activities;

• payments received under our collaborations with Ferrer and Teva and any future strategic collaborations;

• the continuation of the Ferrer and Teva collaborations under their agreed terms;

• the filing, prosecution and enforcement of patent claims; and

• the costs associated with commercializing our other product candidates, if they receive regulatory approval.

We believe that, based on our cash, cash equivalents and marketable securities balance at September 30, 2013, remaining proceeds available under the Teva Note, estimated product revenues, royalties and milestone payments associated with the sale of ADASUVE and our current expected cash usage, we have sufficient capital resources to meet our anticipated cash needs into the third quarter of 2014. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate, or to alter our operations. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently expect. The key assumptions underlying these estimates include:

• continuation of our Teva and Ferrer collaborations;

• no unexpected costs related to the development of our commercial manufacturing capability; and

• no unbudgeted growth in the number of our employees during this period.

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We may never be able to generate a sufficient amount of product or royalty revenue to cover our expenses and we do not expect to generate any material product revenues until at least the fourth quarter of 2013 or royalty revenues until at least the first quarter of 2014. Until we do, we expect to finance our future cash needs through public or private equity offerings, debt financings, strategic collaborations or licensing arrangements. Any financing transaction may contain unfavorable terms. For example, the terms of certain warrants we have issued in previous financings could require us to pay warrant holders a significant portion of the proceeds in a change of control transaction, potentially materially reducing the proceeds available to holders of our common stock. If we raise additional funds by issuing equity securities our stockholders’ equity will be diluted and debt financing, if available, may involve restrictive covenants. If we raise additional funds through strategic collaborations, we may be required to relinquish rights to ADASUVE, our product candidates or our technologies, or to grant licenses on terms that are not favorable to us. Complying with the terms of the foregoing rights and restrictions may make it more difficult to complete certain types of transactions and result in delays to our fundraising efforts.

We do not have sales and marketing capabilities, and consequently must rely on commercial collaborations to sell our products, and we and our collaborators may be unable to generate significant product revenue.

In December 2012, the FDA granted marketing approval for the commercial sale of ADASUVE in the United States for the acute treatment of agitation associated with schizophrenia or bipolar I disorder in adults. The approval of ADASUVE is our first regulatory approval. ADASUVE must be administered only in healthcare facilities enrolled in the ADASUVE REMS program that have immediate on-site access to equipment and personnel trained to manage acute bronchospasm, including advanced airway management (intubation and mechanical ventilation). We do not have a sales and marketing organization and as a company, we do not have significant experience in the sales and distribution of pharmaceutical products.

We project ADASUVE to be launched in the U.S. no earlier than the first quarter of 2014. We have exclusively licensed the ADASUVE U.S. commercialization rights to Teva, which we believe will have a significant impact on the ultimate success of ADASUVE in the U.S. If the launch of commercial sales of ADASUVE in the United States is delayed or prevented, our revenue will suffer and our stock price may decline. Teva’s commercialization efforts could also have an effect on investors’ perception of potential sales of ADASUVE outside the United States, which could also cause a decline in our stock price and may make it more difficult for us to enter into additional strategic collaborations.

In February 2013, the EC delivered a marketing authorization for ADASUVE, as ADASUVE (Staccato loxapine) 4.5 mg or 9.1 mg, inhalation powder, pre-dispensed. In October 2011, we entered into a commercial collaboration with Ferrer pursuant to the Ferrer Agreement, to commercialize ADASUVE in the Ferrer Territories. In July 2013, Ferrer launched ADASUVE in the EU, with the first commercial sale in Germany and had the first commercial sale in Austria in October 2013. We expect Ferrer to launch ADASUVE in additional EU countries before year end and to continue the EU launch into 2014. If Ferrer is unable to commercialize ADASUVE successfully in the various Ferrer Territories or we are unable to fulfill the post-marketing authorization obligations that were imposed as part of the marketing authorization granted for ADASUVE in the EU, our revenue will suffer and our stock price may decline.

There are risks involved with utilizing Teva to sell our product and increase our marketing capabilities. By licensing the U.S. commercialization rights to Teva, we may generate fewer revenues from the royalties and milestone payments under the Teva Agreement than if we commercialized ADASUVE on our own. Additionally, Teva may not fulfill its obligations or carry out selling and marketing activities as diligently as we would like. We could also become involved in disputes with Teva, which could lead to delays in or termination of commercialization programs and time-consuming and expensive litigation or arbitration. If Teva terminates or breaches its agreement, or otherwise fails to complete its obligations in a timely manner, the chances of successfully selling or marketing ADASUVE would be materially and adversely affected. After one year, Teva has the right to terminate the Teva Agreement with or without cause, upon 120 days notice. If Teva exercises this right, our business and operations and stock price may be negatively affected.

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We also intend to seek international distribution collaborators in addition to Ferrer for ADASUVE and our product candidates. If we are unable to enter into an international distribution collaboration, we will be unable to generate revenues from countries outside the U.S. and the Ferrer Territories.

If we enter into additional strategic collaborations, we may be required to relinquish important rights to and control over the development of ADASUVE or our product candidates or otherwise be subject to terms unfavorable to us.

Our relationships with Royalty Pharma, Teva, and Ferrer are, and any other strategic collaborations with pharmaceutical or biotechnology companies we may establish will be, subject to a number of risks including:

• business combinations or significant changes in a strategic collaborator’s business strategy may adversely affect a strategic collaborator’s willingness or ability to complete its obligations under any arrangement;

• we may not be able to control the amount and timing of resources that our strategic collaborators devote to the development or commercialization of ADASUVE or our product candidates;

• strategic collaborators may delay clinical trials, provide insufficient funding, terminate a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new version of a product candidate for clinical testing;

• strategic collaborators may not pursue further development and commercialization of products resulting from the strategic collaboration arrangement or may elect to discontinue research and development programs;

• strategic collaborators may not commit adequate resources to the marketing and distribution of any future products, limiting our potential revenues from these products;

• disputes may arise between us and our strategic collaborators that result in the delay or termination of the research, development or commercialization of ADASUVE or our product candidates or that result in costly litigation or arbitration that diverts management’s attention and consumes resources;

• strategic collaborators may experience financial difficulties;

• strategic collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in a manner that could jeopardize or invalidate our proprietary information or expose us to potential litigation;

• strategic collaborators could independently move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors; and

• strategic collaborators, including Teva, Ferrer or Royalty Pharma, could terminate the arrangement or allow it to expire, which would delay and may increase the cost of developing our product candidates or commercializing ADASUVE.

The REMS program for ADASUVE imposes, and any REMS on any other approved products may impose, regulatory burdens on the distribution and sales of ADASUVE or any other approved products and also on healthcare providers that may make the products commercially unattractive or impractical.

As a condition of FDA approval, we and Teva are required to have a REMS program for ADASUVE, and may be required to have REMS for any other product candidates we may develop. A REMS may include various elements, such as distribution of a medication guide or a patient package insert; implementation of a communication plan to educate healthcare providers of the drug’s risks; imposition of limitations on who may prescribe or dispense the drug, including training and certification requirements; or other measures that the FDA deems necessary to assure the safe use of the drug. The FDA has a wide degree of discretion in deciding which elements are necessary for the safe use of a product, and it may impose elements that significantly burden our ability to commercialize the product, or that burden healthcare providers to the extent that use of the product is severely curtailed.

For ADASUVE, the REMS contains measures to ensure that the product is only available in enrolled healthcare facilities that have immediate on-site access to equipment and personnel trained to manage acute bronchospasm, including advanced airway management (intubation and mechanical ventilation). The REMS may not allow commercialization and use of ADASUVE in a commercially feasible manner. In the future, the FDA could impose additional REMS elements, such as if the REMS proves inadequate in managing the risk of bronchospasm associated with ADASUVE or if new safety risks emerge, and such additional elements could substantially burden or even eliminate our ability to commercialize ADASUVE in a feasible manner.

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If we or our collaborators are unable to successfully complete the ADASUVE post-approval commitments required by the FDA and EC or if data generated from the post-approval studies indicate safety concerns, our sales could be diminished and our ability to generate a profit could be negatively affected.

As a condition of U.S. ADASUVE approval, there are several additional post-approval commitments and requirements, including a 10,000 patient observational clinical trial that is designed to gather patient safety data based on the “real-world” use of ADASUVE in the hospital setting and a clinical program designed to evaluate the safety and efficacy of ADASUVE in agitated adolescent patients. The data derived from any post-approval study or trial could result in additional restrictions on the commercialization of ADASUVE through changes to the approved ADASUVE label, a REMS, the imposition of additional post-approval studies or trials, or even the withdrawal of the approval of ADASUVE from the market. Our business, operations and stock price may be negatively affected if any of these or similar events occur.

As a condition of the ADASUVE marketing authorization in the EU, we have several post-approval commitments including, (i) a benzodiazepine interaction study, (ii) a controlled study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, (iii) an observational clinical trial, and (iv) a drug utilization clinical trial.

If we or our collaborators are unable to fulfill the U.S. or EC post-approval obligations, or do not fulfill these obligations within an appropriate time limit, the NDA or MAA could be suspended, terminated or limited and our business, operations and stock price may be negatively affected.

If we do not produce our commercial devices cost effectively, we will never be profitable.

ADASUVE and ourStaccatosystem-based product candidates contain electronic and other components in addition to the active pharmaceutical ingredients. The cost to produce ADASUVE and our product candidates, and any additional approved products, will likely be higher per dose than the cost to produce intravenous or oral tablet products. This higher cost of goods may prevent us or our collaborators from ever selling any products at a profit. The development and production of our technology entail a number of technical challenges, including achieving adequate dependability in our production, that may be expensive or time consuming to solve. Any delay in or failure to develop and manufacture any future products in a cost effective way could prevent us from generating any meaningful revenues and prevent us from becoming profitable.

In October 2011, we committed to sell ADASUVE to Ferrer for a fixed transfer price, which is below our current production costs, and in May 2013, we committed to supply ADASUVE to Teva at a price based on costs of commercial production, which transfer price will convert to a fixed price upon achievement of costs equal to a specified per-unit price. Our future manufacturing costs per unit will be dependent on future demand of ADASUVE. If we and our collaborators do not generate sufficient demand, our manufacturing costs will exceed the fixed transfer price and will result in losses. In October 2013, Autoliv notified us of their intent to terminate, effective October 2016, the Manufacture Agreement. Prior to October 2016, Autoliv and we remain fully obligated to perform pursuant to the terms of both the Manufacture Agreement and the New Note. However, Autoliv may not continue to perform its obligations in the same manner during the termination period. If we are unable to secure a replacement manufacturer for the chemical heat packages in ADASUVE by October 2016 or if the costs for such manufacturer to produce the chemical heat packages are higher than the cost from Autoliv, it will significantly impact our ability to produce our commercial devices or to produce them at quantities or at a cost to allow us to become profitable.

If our products do not receive adequate coverage and reimbursement from third-party payors, our sales could be diminished and our ability to sell our products profitably could be negatively affected.

Our sales of ADASUVE will be dependent on the availability and extent of coverage and reimbursement from third-party payers, including government healthcare programs and private insurance plans. We will rely in large part on the reimbursement and coverage by federal and state sponsored government programs, such as Medicare and Medicaid in the United States and equivalent programs in other countries. Medicare, the dominant federal health insurance program for the elderly in the United States, may limit coverage of ADASUVE for beneficiaries in accordance with the boxed warning

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against use of the drug in elderly patients with dementia-related psychosis. Governments and private payors may regulate prices, reimbursement levels and/or access to ADASUVE and any other products we may market to control costs or to affect levels of use of our products.

Third-party payors are increasingly challenging the prices charged for medical products and services and examining their cost effectiveness, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost effectiveness of ADASUVE and any future products. Even with studies, ADASUVE and our product candidates may be considered less safe, less effective or less cost effective than existing products, and third-party payors therefore may not provide coverage and reimbursement for our product candidates, in whole or in part. We cannot predict actions third party payors may take, or whether they will limit the coverage and level of reimbursement for our products or refuse to provide any coverage at all.

We cannot predict the availability or level of coverage and reimbursement for ADASUVE or our product candidates. A reduction in coverage and/or reimbursement for our products could have a material adverse effect on our product sales and results of operations.

The availability and amount of reimbursement for ADASUVE and our product candidates and the manner in which government and private payors may reimburse for our potential products is uncertain.

Many of the patients in the U.S. who seek treatment with ADASUVE or any other of our products that are approved for marketing will be eligible for Medicare benefits. Other patients may be covered by private health plans. The Medicare program is administered by the Centers for Medicare & Medicaid Services, or CMS, and coverage and reimbursement for products and services under Medicare are determined pursuant to statute, regulations promulgated by CMS, and CMS’s subregulatory coverage and reimbursement determinations. CMS’s regulations and interpretive determinations are subject to change, as are the procedures and criteria by which CMS makes coverage and reimbursement determinations and the reimbursement amounts established by statute, particularly because of budgetary pressures facing the Medicare program. For example, we anticipate that ADASUVE will be used only in the hospital inpatient and hospital outpatient settings. In the hospital inpatient setting, Medicare does not provide separate reimbursement for drugs but pays for them as part of the payment for the hospital stay. In the hospital outpatient setting, the statute establishes the payment rate for new drugs and biologicals administered incident to a physician’s service that are granted “pass-through status” at the rate applicable in physicians’ offices (i.e., ASP plus six percent) for two to three years after FDA approval. For drugs and biologicals that do not have pass-through status, CMS establishes the payment rates by regulation. For 2013, these drugs are reimbursed at ASP plus six percent if they have an average cost per day exceeding $80; drugs with an average cost per day of less than $80 are not separately reimbursed. In future years, CMS could change both the payment rate and the average cost threshold, and these changes could adversely affect payment for ADASUVE. In addition, the President has proposed and Congress has considered amending the statute to reduce Medicare’s payment rates for drugs and biologicals, and if such legislation is enacted, it could adversely affect payment for ADASUVE. Moreover, ADASUVE is different from many drugs covered by Medicare Part B because it is administered by a healthcare professional through a disposable inhaler. Any delays in recognition of ADASUVE as a covered drug or delays in assignment of a Healthcare Common Procedure Coding System, or HCPCS, code to facilitate reimbursement could adversely affect payment for ADASUVE.

Effective April 1, 2013, Medicare payments for all items and services, including drugs and biologicals, were reduced by up to 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, Pub. L. No. 112-25, or BCA, as amended by the American Taxpayer Relief Act of 2012, Pub. L. 112-240, or ATRA. The BCA requires sequestration for most federal programs, excluding Medicaid, Social Security, and certain other programs, because Congress failed to enact legislation by January 15, 2012, to reduce federal deficits by $1.2 trillion over ten years. The BCA caps the cuts to Medicare payments or items and services at 2%, and requires the cuts to be implemented on the first day of the first month following the issuance of a sequestration order. The ATRA delayed implementation of sequestration from January 2, 2013, to March 1, 2013, and as a result, the Medicare cuts took effect April 1, 2013, and will remain in effect unless Congress enacts legislation to cancel the cuts. These cuts could adversely impact payment for ADASUVE and related procedures.

Once Teva commercializes ADASUVE in the U.S., we expect ADASUVE to experience pricing pressures due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals. We cannot be sure that reimbursement amounts, or the lack of reimbursement, will not reduce the demand for,

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or the price of, ADASUVE or any future products. If reimbursement is not available or is available only to limited levels, we or any collaborator may not be able to effectively commercialize ADASUVE or any future products, In addition, if we or any collaborator fail to successfully secure and maintain reimbursement coverage for ADASUVE or any future products or are significantly delayed in doing so, we or any collaborator will have difficulty achieving market acceptance of our products and our business will be harmed.

Payors also are increasingly considering new metrics as the basis for reimbursement rates, such as ASP, AMP and Actual Acquisition Cost. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates, and CMS has begun making pharmacy National Average Drug Acquisition Cost and National Average Retail Price data publicly available on at least a monthly basis. Therefore, it may be difficult to project the impact of these evolving reimbursement mechanics on the willingness of payors to cover ADASUVE or any future products. As discussed above, once we or any collaborator begin to participate in government pricing programs, recent legislative changes to the 340B drug pricing program, and the Medicaid Drug Rebate program also could impact our revenues. We anticipate that a significant portion of our revenue from sales of ADASUVE will be obtained through government payors, including Medicaid, and any failure to qualify for reimbursement for ADASUVE under those programs would have a material negative effect on revenues from sales of ADASUVE.

The EU Member States are free to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices and/or reimbursement levels of medicinal products for human use. An EU Member State may approve a specific price or level of reimbursement for the medicinal product, or alternatively adopt a system of direct or indirect controls on the profitability of the company responsible for placing the medicinal product on the market, including volume-based arrangements and reference pricing mechanisms. We anticipate that pricing and reimbursement decisions concerning ADASUVE in the EU will have a significant impact on the sales of the product in the EU. Failure to obtain pricing and reimbursement for ADASUVE at an appropriate level in any of the EU Member States would, in part due to EU parallel trade rules, have a material adverse effect on revenues from sales of ADASUVE.

Healthcare law and policy changes, including those based on recently enacted legislation, may impact our business in ways that we cannot currently predict and these changes could have a material adverse effect on our business and financial condition.

Healthcare costs have risen significantly over the past decade. The Healthcare Reform Act substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the pharmaceutical industry. The Healthcare Reform Act contains a number of provisions that are expected to impact our business and operations, in some cases in ways we cannot currently predict. Changes that may affect our business include those governing enrollment in federal and private healthcare programs, new Medicare reimbursement methods and rates, increased rebates and taxes on pharmaceutical products, and revised fraud and abuse and enforcement requirements. These changes will impact existing government healthcare programs and will result in the development of new programs.

We anticipate that when Teva commercializes ADASUVE in the U.S. or we obtain approval for our other product candidates, some of our revenue and the revenue from our collaborators may be derived from U.S. government healthcare programs, including Medicare. Additionally, in 2009, the Department of Defense implemented a program pursuant to the National Defense Authorization Act for Fiscal Year 2008 that requires rebates, based on Federal statutory pricing, from manufacturers of innovator drugs, such as ADASUVE, and biologics. Furthermore, the Healthcare Reform Act imposes a non-deductible fee treated as an excise tax on pharmaceutical manufacturers or importers who sell “branded prescription drugs,” which includes innovator drugs and biologics (excluding generics, over-the-counter drugs, and certain orphan drugs) to U.S. government programs. We expect that the Healthcare Reform Act and other healthcare reform measures that may be adopted in the future could have an adverse effect on our industry generally and the ability to successfully commercialize ADASUVE or our product candidates or could limit or eliminate our spending on development projects.

Additional provisions of the Healthcare Reform Act, some of which became effective in 2011, may negatively affect our future revenues. For example, the Healthcare Reform Act also makes changes to the Medicaid Drug Rebate Program, discussed further herein, including increasing the minimum rebate from 15.1% to 23.1% of the AMP for most innovator products and from 11% to 13% for non-innovator products. We expect that the increased minimum rebate of 23.1% will apply to ADASUVE following its commercialization in the U.S.

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Many of the Healthcare Reform Act’s most significant reforms do not take effect until 2014 and thereafter, and their details will be shaped significantly by implementing regulations that have yet to be finalized. In 2012, the Supreme Court of the United States heard challenges to the constitutionality of the individual mandate and the viability of certain provisions of the Healthcare Reform Act. The Supreme Court’s decision upheld most of the Healthcare Reform Act and determined that requiring individuals to maintain “minimum essential” health insurance coverage or pay a penalty to the Internal Revenue Service was within Congress’s constitutional taxing authority. However, the Supreme Court struck down a provision in the Healthcare Reform Act that penalized states that choose not to expand their Medicaid programs through an increase in the Medicaid eligibility income limit from a state’s current eligibility levels to 133% of the federal poverty limit. As a result of the Supreme Court’s ruling, it is unclear whether states will expand their Medicaid programs by raising the income limit to 133% of the federal poverty level and whether there will be more uninsured patients in 2014 than anticipated when Congress passed the Healthcare Reform Act. For each state that does not choose to expand its Medicaid program, there will be fewer insured patients overall. The reduction in the number of insured patients could impact the sales, business and financial condition following the commercialization of ADASUVE in the U.S.

While the constitutionality of key provisions of the Healthcare Reform Act were recently upheld by the Supreme Court, legislative changes to it remain possible. We expect that the Healthcare Reform Act, as currently enacted or as it may be amended in the future, and other healthcare reform measures that may be adopted in the future could have a material adverse effect on our industry generally and on our ability to successfully commercialize our product candidates or could limit or eliminate our future spending on development projects.

In addition to the Healthcare Reform Act, there will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payors to keep these costs down while expanding individual healthcare benefits. Certain of these changes could impose limitations on the prices we will be able to charge for ADASUVE or any other product candidates that are approved or the amounts of reimbursement available for these products from governmental agencies or third-party payors, or may increase the tax obligations on life sciences companies such as ours. While it is too early to predict specifically what effect the Health Reform Act and its implementation or any future legislation or policies will have on our business, we believe that healthcare reform may have an adverse effect on our business and financial condition.

If we or any collaborator fail to comply with reporting and payment obligations under the Medicaid Drug Rebate program or other governmental pricing programs after we or any collaborator begin to participate in such programs, we or any collaborator could be subject to additional reimbursement requirements, penalties, sanctions and fines which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We expect to participate, or any collaborator to participate, in the Medicaid Drug Rebate program, established by the Omnibus Budget Reconciliation Act of 1990 and amended by the Veterans Health Care Act of 1992 as well as subsequent legislation. We also expect to participate, or any collaborator to participate, in and have certain price reporting obligations to several state Medicaid supplemental rebate programs, and we anticipate that we will have obligations to report average sales price, or ASP, for the Medicare program. Under the Medicaid Drug Rebate program, we will be required to pay a rebate to each state Medicaid program for our covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having federal funds being made available to the states for our drugs under Medicaid and Medicare Part B. Those rebates will be based on pricing data that we will report on a monthly and quarterly basis to the Centers for Medicare & Medicaid Services, or CMS, the federal agency that administers the Medicaid Drug Rebate program. These data will include the average manufacturer price, or AMP, and, in the case of innovator products, such as ADASUVE, the best price, or BP, for each drug. The rebate liability resulting from this reporting will negatively impact our financial results.

The PPACA made significant changes to the Medicaid Drug Rebate program. Effective March 23, 2010, rebates are also due on the utilization of Medicaid managed care organizations. With regard to the amount of the rebates owed, the PPACA increased the minimum Medicaid rebate for all drugs; changed the calculation of the rebate for certain innovator products that qualify as line extensions of existing drugs; and capped the total rebate amount for innovator drugs at 100% of the average manufacturer price. In addition, the PPACA and subsequent legislation changed the definition of AMP. Finally, the PPACA requires pharmaceutical manufacturers of branded prescription drugs to pay a new branded prescription drug fee to the federal government beginning in 2011. Each individual pharmaceutical manufacturer will pay a prorated share of the branded prescription drug fee of $2.8 billion in 2013 (and set to increase in ensuing years) based on the dollar value of its branded prescription drug sales to certain federal programs identified in the law.

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CMS has issued proposed regulations to implement the changes to the Medicaid Drug Rebate program under PPACA and subsequent legislation but has not yet issued final regulations. Moreover, in the future, Congress could enact legislation that further increases Medicaid drug rebates or other costs and charges associated with participating in the Medicaid Drug Rebate program. Once we begin participating in the Medicaid Drug Rebate program, the issuance of regulations and coverage expansion by various governmental agencies relating to the Medicaid Drug Rebate program will increase our costs and the complexity of compliance, will be time-consuming, and could have a material adverse effect on our results of operations.

Federal law requires that any company that participates in the Medicaid Drug Rebate Program also participate in the Public Health Service’s 340B drug pricing discount program in order for federal funds to be available for the manufacturer’s drugs under Medicaid and Medicare Part B. The 340B pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. The 340B ceiling price is calculated using a statutory formula, which is based on the average manufacturer price and rebate amount for the covered outpatient drug as calculated under the Medicaid rebate program. Changes to the definition of average manufacturer price and the Medicaid rebate amount under PPACA and CMS’s issuance of final regulations implementing those changes also could affect our 340B ceiling price calculations and negatively impact our results of operations once we or any collaborator begin to participate in the 340B program.

These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients. The PPACA expanded the 340B program to include additional entity types: certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by the PPACA. Compliance with the regulations associated with the 340B program will increase our costs and the complexity of compliance, will be time-consuming, and could have a material adverse effect on our results of operations once we or any collaborator begin to participate in the 340B program.

Federal law also requires that a company that participates in the Medicaid Drug Rebate Program report average sales price, or ASP, information to CMS for certain categories of drugs that are paid under Part B of the Medicare program. We anticipate that ADASUVE will fall into that category. Manufacturers calculate ASP based on a statutorily defined formula and interpretations of the statute by CMS as to what should or should not be considered in computing ASP. An ASP for each National Drug Code for a product that is subject to the ASP reporting requirement must be submitted to CMS no later than 30 days after the end of each calendar quarter. CMS uses these submissions to determine payment rates for drugs under Medicare Part B. Once we or any collaborator begin to participate in the Medicare program, changes affecting the calculation of ASP could affect the ASP calculations for our products and the resulting Medicare payment rate, and could negatively impact our results of operations.

Pricing and rebate calculations vary among products and programs. The calculations are complex and are often subject to interpretation by governmental or regulatory agencies and the courts. Once we or any collaborator begin to participate in the Medicaid program, the Medicaid Drug Rebate Program amount will be computed each quarter based on our submission to the CMS of our current AMP and best price, or BP, for the quarter. If we become aware that our reporting for prior quarters was incorrect, or has changed as a result of recalculation of the pricing data, we or any collaborator will be obligated to resubmit the corrected data for a period not to exceed 12 quarters from the quarter in which the data originally were due. Such restatements and recalculations would serve to increase our costs for complying with the laws and regulations governing the Medicaid rebate program. Once we begin to participate in the Medicaid program, any corrections to our rebate calculations could result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction. Price recalculations also may affect the price that we or any collaborator will be required to charge certain safety-net providers under the Public Health Service 340B drug discount program.

Once we or any collaborator begin to participate in government pricing programs, we or any collaborator will be liable for errors associated with our submission of pricing data. In addition to retroactive rebates and the potential for 340B program refunds, if we or any collaborator are found to have knowingly submitted false average manufacturer price, average sales price, or best price information to the government, we or any collaborator may be liable for civil monetary

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penalties in the amount of $100,000 per item of false information. Failure to submit monthly/quarterly average manufacturer price, average sales price, and best price data on a timely basis could result in a civil monetary penalty of $10,000 per day for each day the submission is late beyond the due date. In the event that CMS were to terminate our rebate agreement after we or any collaborator begin to participate in the Medicaid program, no federal payments would be available under Medicaid or Medicare Part B for our covered outpatient drugs.

In September 2010, CMS and the Office of the Inspector General indicated that they intend more aggressively to pursue companies who fail to report these data to the government in a timely manner. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. We cannot assure you that our or any collaborator’s submissions, once we or any collaborator begin to submit pricing data to CMS, will not be found by CMS to be incomplete or incorrect.

The PPACA also obligates the Secretary of the Department of Health and Human Services to create regulations and processes to improve the integrity of the program and to update the agreement that manufacturers must sign to participate in the program to obligate manufacturers to sell to covered entities if they sell to any other purchaser and to report to the government the ceiling prices for its drugs. In addition, legislation may be introduced that, if passed, would further expand the 340B program to additional covered entities or would require participating manufacturers to agree to provide 340B discounted pricing on drugs used in the inpatient setting.

Federal law requires that for a company to be eligible to have its products paid for with federal funds under the Medicaid and Medicare Part B programs, as well as to be purchased by certain federal agencies and grantees, it also must participate in the Department of Veterans Affairs (VA) Federal Supply Schedule, or FSS, pricing program. To participate, we or any collaborator will be required to enter into an FSS contract with the VA, under which we must make our innovator “covered drugs,” such as ADASUVE, available to the “Big Four” federal agencies — the VA, the Department of Defense, or DoD, the Public Health Service, and the Coast Guard — at pricing that is capped pursuant to a statutory federal ceiling price, or FCP, formula set forth in Section 603 of the Veterans Health Care Act of 1992, or VHCA. The FCP is based on a weighted average wholesaler price known as the “non-federal average manufacturer price,” or Non-FAMP, which manufacturers are required to report on a quarterly and annual basis to the VA. If a company misstates Non-FAMPs or FCPs it must restate these figures. Pursuant to the VHCA, knowing provision of false information in connection with a Non-FAMP filing can subject a manufacturer to penalties of $100,000 for each item of false information.

FSS contracts are federal procurement contracts that include standard government terms and conditions, separate pricing for each product, and extensive disclosure and certification requirements. All items on FSS contracts are subject to a standard FSS contract clause that requires FSS contract price reductions under certain circumstances where pricing is reduced to an agreed “tracking customer.” Further, in addition to the “Big Four” agencies, all other federal agencies and some non-federal entities are authorized to access FSS contracts. FSS contractors are permitted to charge FSS purchasers other than the Big Four agencies “negotiated pricing” for covered drugs that is not capped by the FCP; instead, such pricing is negotiated based on a mandatory disclosure of the contractor’s commercial “most favored customer” pricing. We cannot anticipate the pricing structure we will enter into with respect to our products. The FSS contract price may have a material adverse effect on future revenues from sales of ADASUVE.

Once we or any collaborator enter into an FSS contract, if we or any collaborator overcharge the government in connection with the FSS contract, whether due to a misstated FCP or otherwise, we or any collaborator will be required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges could result in allegations under the Federal False Claims Act and other laws and regulations. Unexpected refunds to the government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

If we or any collaborators fail to gain market acceptance among physicians, patients, third-party payors and the medical community, we will not become profitable.

TheStaccatosystem is a fundamentally new method of drug delivery. ADASUVE or any future product based on ourStaccatosystem may not gain market acceptance among physicians, patients, third-party payors and the medical

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community. If these products do not achieve an adequate level of acceptance, we will not meet our revenue guidance nor will we generate sufficient product or royalty revenues to become profitable. The degree of market acceptance of ADASUVE or any of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

• the ability of our collaborators’ sales forces to convince potential purchasers of ADASUVE’s advantages over other treatments;

• demonstration of acceptable quality, safety and efficacy in clinical trials and meeting applicable regulatory standards for approval;

• the existence, prevalence and severity of any side effects;

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

• therapeutic or other improvements of ADASUVE over existing or future drugs used to treat the same or similar conditions;

• perceptions about the relationship or similarity between ADASUVE or our product candidates and the parent drug compound upon which ADASUVE or our product candidate is based;

• the timing of market entry relative to competitive treatments;

• the ability to produce ADASUVE or any future products in commercial quantities at an acceptable cost, or at all;

• the ability to offer ADASUVE or any future products for sale at competitive prices;

• relative convenience, product dependability and ease of administration;

• the restrictions imposed on ADASUVE by the REMS program and labeling requirements;

• the strength of marketing and distribution support;

• acceptance by patients, the medical community or third-party payors;

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

• the product labeling, including the package insert, and the marketing restrictions required by the FDA or regulatory authorities in other countries.

We are subject to significant ongoing regulatory obligations and oversight, which may result in significant additional expense and limit our and our collaborators’ ability to commercialize our products.

We and our collaborators are subject to significant ongoing regulatory obligations, such as safety reporting requirements, periodic and annual reporting requirements, and additional post-marketing obligations, including regulatory oversight of the promotion and marketing of our products. In addition, the manufacture, labeling, packaging, distribution, import, export, adverse event reporting, storage, advertising, promotion and recordkeeping for ADASUVE and any of our product candidates that may be approved by the FDA or foreign regulatory authorities will be subject to extensive and ongoing regulatory requirements. Teva has agreed to take responsibility at its expense to complete several post-approval commitments and requirements that were a condition to FDA approval of ADASUVE, including the responsibility for conducting a 10,000 patient observational clinical trial designed to gather patient safety data based on the real-world use of ADASUVE, as well as a clinical program addressing the safety and efficacy of ADASUVE in agitated adolescent patients. As a condition of grant of EU marketing authorization for ADASUVE by the EC, we must fulfill several post-approval commitments including, (i) a benzodiazepine interaction study, (ii) a study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, (iii) an observational clinical study, and (iv) a drug utilization study.

The FDA and foreign regulatory authorities may also impose significant restrictions on the indicated uses or marketing of our future products, or impose requirements for burdensome post-approval study commitments. For example, ADASUVE’s U.S. labeling contains a “boxed warning” regarding the risks of bronchospasm caused by the product and the increased risk of death for elderly patients with dementia-related psychosis. Boxed warnings are used to highlight warning information that is especially important to the prescriber. Products with boxed warnings are subject to more restrictive advertising regulations than products without such warnings. The terms of any product approval,

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including labeling, may be more restrictive than we desire and could affect the commercial potential of the product. If we become aware of previously unknown problems with any of our products in the United States or overseas or at our contract manufacturers’ facilities, a regulatory agency may impose labeling changes or restrictions on our products, our strategic collaborators, our manufacturers or on us. In such an instance, we could experience a significant drop in the sales of the affected products, our product revenues and reputation in the marketplace may suffer, and we could become the target of lawsuits.

The FDA and other governmental authorities, including foreign regulatory authorities, also actively enforce regulations prohibiting off-label promotion, and governments have levied large civil and criminal fines against companies for alleged improper promotion. Governments have also required companies to enter into complex corporate integrity agreements and/or non-prosecution agreements that impose significant reporting and other burdens on the affected companies.

We and our commercial collaborators are also subject to regulation by regional, national, state and local agencies, including the DEA, the Department of Justice, the Federal Trade Commission, the Office of Inspector General of the U.S. Department of Health and Human Services and other regulatory bodies, as well as governmental authorities in those foreign countries in which we may in the future commercialize our products. The FDCA, the Public Health Service Act, the Social Security Act, and other federal and state statutes and regulations govern to varying degrees the research, development, manufacturing and commercial activities relating to prescription pharmaceutical products, including preclinical testing, approval, production, labeling, sale, distribution, import, export, post-market surveillance, advertising, dissemination of information, promotion, marketing, and pricing to government purchasers and government healthcare programs. Any manufacturing, licensing, or commercialization collaborators we have or may in the future have, including Teva and Ferrer, will be subject to many of the same requirements.

The Federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical companies on one hand and prescribers, purchasers and formulary managers on the other. Further, the Healthcare Reform Act, among other things, amends the intent requirement of the Federal Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Healthcare Reform Act provides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common manufacturer business arrangements and activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration may be subject to scrutiny if they do not qualify for an exemption or safe harbor. We intend to comply with the exemptions and safe harbors whenever possible, but our practices or those of our commercial collaborators may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability and may be subject to scrutiny.

The Federal False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Many pharmaceutical and other healthcare companies have been investigated and have reached substantial financial settlements with the federal government under these laws for a variety of alleged marketing activities, including providing free product to customers with the expectation that the customers would bill federal programs for the product; providing consulting fees, grants, free travel, and other benefits to physicians to induce them to prescribe the company’s products; and inflating prices reported to private price publication services, which are used to set drug payment rates under government healthcare programs. Companies have been prosecuted for causing false claims to be submitted because of the marketing of their products for unapproved uses. Pharmaceutical and other healthcare companies have also been prosecuted on other legal theories of Medicare and Medicaid fraud.

The majority of states also have statutes or regulations similar to the Federal Anti-Kickback Statue and Federal False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Several states now require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products in those states and to report gifts and payments to individual health care providers in those states. Some of these states also prohibit certain marketing related activities including the provision of gifts, meals, or other items to certain health care providers. In addition, California, Connecticut, Nevada and Massachusetts require pharmaceutical companies to implement compliance programs or marketing codes.

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Compliance with various federal and state laws is difficult and time consuming, and companies that violate them may face substantial penalties. The potential sanctions include civil monetary penalties, exclusion of a company’s products from reimbursement under government programs, criminal fines and imprisonment. Because of the breadth of these laws and the lack of extensive legal guidance in the form of regulations or court decisions, it is possible that some of our business activities or those of our commercial collaborators could be subject to challenge under one or more of these laws. Such a challenge could have a material adverse effect on our business and financial condition and growth prospects.

We or our commercial collaborators could become subject to government investigations and related subpoenas. Such subpoenas are often associated with previously filed qui tam actions, or lawsuits filed under seal under the Federal False Claims Act. Qui tam actions are brought by private plaintiffs suing on behalf of the federal government for alleged Federal False Claims Act violations. The time and expense associated with responding to such subpoenas, and any related qui tam or other actions, may be extensive, and we cannot predict the results of our review of the responsive documents and underlying facts or the results of such actions. Responding to government investigations, defending any claims raised, and any resulting fines, restitution, damages and penalties, settlement payments or administrative actions, as well as any related actions brought by stockholders or other third parties, could have a material impact on our reputation, business and financial condition and divert the attention of our management from operating our business.

The number and complexity of both federal and state laws continues to increase, and additional governmental resources are being added to enforce these laws and to prosecute companies and individuals who are believed to be violating them. In particular, the Healthcare Reform Act includes a number of provisions aimed at strengthening the government’s ability to pursue anti-kickback and false claims cases against pharmaceutical manufacturers and other healthcare entities, including substantially increased funding for healthcare fraud enforcement activities, enhanced investigative powers, amendments to the False Claims Act that make it easier for the government and whistleblowers to pursue cases for alleged kickback and false claim violations and, beginning in March 2014 for payments made on or after August 1, 2013, public reporting of payments by pharmaceutical manufacturers to physicians and teaching hospitals nationwide. While it is too early to predict what effect these changes will have on our business, we anticipate that government scrutiny of pharmaceutical sales and marketing practices will continue for the foreseeable future and subject us and our commercial collaborators to the risk of government investigations and enforcement actions. Responding to a government investigation or enforcement action would be expensive and time-consuming, and could have a material adverse effect on our business and financial condition and growth prospects.

Similar restrictions are imposed on the promotion and marketing of medicinal products in the EU and other third countries. The applicable laws at EU level and in the individual EU Member States require promotional materials and advertising concerning medicinal products to comply with the product’s Summary of Product Characteristics, or SmPC, as approved by the competent authorities. The SmPC is the document that provides information to physicians concerning the safe and effective use of a medicinal product. Promotion of a medicinal product which does not comply with the SmPC is considered to constitute off-label promotion. The off-label promotion of medicinal products is prohibited in the EU. The applicable laws at both EU level and in the individual EU Member States also prohibit the direct-to-consumer advertising of prescription-only medicinal products. Violations of the rules governing the promotion of medicinal products in the EU could be penalized by administrative measures, fines and imprisonment.

Interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations, industry self-regulation codes of conduct and Physicians’ codes of professional conduct in the individual EU Member States. The provision of any inducement to physicians to prescribe, recommend, endorse, order, purchase, supply, use or administer a medicinal product is prohibited. A number of EU Member States have introduced additional rules requiring pharmaceutical companies to publically disclose their interactions with physicians and to obtain approval from employers, professional organizations and/or competent authorities before entering into agreements with physicians. Violations of these rules could lead to the imposition of fines or imprisonment.

Laws, including those governing promotion, marketing and anti-kickback provisions, industry regulations and professional codes of conduct are often strictly enforced. Increasing regulatory scrutiny of the promotional activities of pharmaceutical companies has been observed in a number of EU Member States. The Bribery Act in the United Kingdom entered into force on 1 July 2011. This Act applies to any company incorporated in or “carrying on business” in the UK, irrespective of where in the world the alleged bribery activity occurs. Even though we strive for complete and continuous

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adherence to all laws and rules during our promotion and marketing activities this Act could have implications for our interactions with physicians both in and outside the UK. Even in those countries where we are not directly responsible for the promotion and marketing of our products, inappropriate activity by our international distribution collaborators can have implications for us.

If we or any collaborators fail to comply with applicable federal, state, local, or foreign regulatory requirements, we or they could be subject to a range of regulatory actions that could affect our or any collaborators’ ability to commercialize our products and could harm or prevent sales of the affected products, or could substantially increase the costs and expenses of commercializing and marketing our products. Any threatened or actual government enforcement action could also generate adverse publicity and require that we devote substantial resources that could otherwise be used in other aspects of our business.

We could be adversely affected by violations of applicable anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010.

Anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010, generally prohibit directly or indirectly giving, offering, or promising anything of value to improperly induce the recipient to act, or refrain from acting, in a manner that would confer a commercial advantage. The anti-bribery provisions of the U.S. Foreign Corrupt Practices Act generally prohibit directly or indirectly giving, offering or promising an inducement to a public official (broadly interpreted) to corruptly influence the official’s actions in order to obtain a commercial advantage. The U.K. Bribery Act of 2010 prohibits both domestic and international bribery, as well as bribery in both the private and public sectors. In addition, an organization that “fails to prevent bribery” by anyone associated with the organization may be charged under the U.K. Bribery Act unless the organization can establish the defense of having implemented “adequate procedures” to prevent bribery. In 2012, the U.S. Government brought enforcement actions that resulted in significant monetary penalties against several multinational healthcare companies for violations of the U.S. Foreign Corrupt Practices Act stemming from illegal payments made to non-U.S. healthcare professionals. We plan to adopt and implement policies and procedures to ensure that those involved in the marketing, sale, and distribution of our products are both aware of these legal requirements and committed to complying therewith. However, we cannot assure that these policies and procedures will protect us from potentially illegal acts committed by individual employees or agents. If we were found to be liable for anti-bribery law violations, we could be subject to criminal or civil penalties or other sanctions that could have a material adverse effect on our business and financial condition.

If we do not establish additional strategic collaborations, we will have to undertake additional development and future commercialization efforts on our own, which would be costly and delay our ability to commercialize any future products.

An element of our business strategy is our intent to selectively collaborate with pharmaceutical, biotechnology and other companies to obtain assistance for the development and commercialization of ADASUVE and our product candidates. In August 2010, we entered into a license and development agreement with Cypress, now Royalty Pharma, forStaccatonicotine. In October 2011, we entered into the Ferrer Agreement with Ferrer for the commercialization of ADASUVE in the Ferrer Territories. In May 2013, we entered into a commercial collaboration with Teva, granting Teva an exclusive license to develop and commercialize ADASUVE in the U.S. We may never enter into additional strategic collaborations with third parties to develop and commercialize ADASUVE or our product candidates. Other than Royalty Pharma, Teva, and Ferrer, we do not currently have any strategic collaborations for ADASUVE or any of our product candidates.

We face significant competition in seeking appropriate strategic collaborators, and these strategic collaborations can be intricate and time consuming to negotiate and document. We may not be able to negotiate additional strategic collaborations on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any additional strategic collaborations because of the numerous risks and uncertainties associated with establishing strategic collaborations. We are currently seeking collaborations to commercialize ADASUVE outside of the U.S. and the Ferrer Territories. If we are unable to negotiate additional strategic collaborations for ADASUVE outside of the U.S. and the Ferrer Territories, we may be unable to maximize ADASUVE’s commercial potential.

If we are unable to negotiate additional collaborations for ADASUVE or our product candidates we may be forced to curtail the development of a particular candidate, reduce or delay its development program, or one or more of our other development programs, delay its commercialization, reduce the scope of our sales or marketing activities or undertake

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development or commercialization activities at our own expense. In addition, we will bear all the risk related to the development of a product candidate. If we elect to increase our expenditures to fund development or commercialization activities on our own, we will need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we will not be able to bring ADASUVE or our product candidates to market successfully and generate revenue or profit.

ADASUVE and any of our product candidates approved for marketing remain subject to ongoing regulatory review in the U.S., the EU or in other countries. If we or any collaborators fail to comply with the regulations, we could lose these approvals, and the sale of any future products could be suspended. If approval is denied or limited in a country, or if a country imposes post-marketing requirements, that decision could negatively affect our ability to market our product in such countries.

Even with regulatory approval to market a particular product candidate, the FDA, the EC or another foreign regulatory authority could condition approval on conducting additional costly post-approval studies or trials or could limit the scope of our approved labeling or could impose burdensome post-approval obligations, such as those required in the United States under a REMS and in the EU. Moreover, the product may later cause adverse effects that limit or prevent its widespread use, force us to withdraw it from the market, cause the FDA, the EC or another foreign regulatory authority to impose additional obligations or restriction on marketing, or impede or delay our ability to obtain regulatory approvals in additional countries. In addition, we will continue to be subject to FDA, EMA, EC and other foreign regulatory authority regulations, as well as periodic inspections to ensure adherence to applicable regulations. After receiving marketing approval, the FDA, the EC and other foreign regulatory authorities could impose extensive regulatory requirements on the manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution, and record keeping related to the product. The approval of the ADASUVE NDA requires us to implement, administer and assess at regular intervals a REMS program that, among other things, limits the use of ADASUVE to healthcare facilities enrolled in the ADASUVE REMS program.

As a condition to FDA approval of ADASUVE, we also have several post-approval commitments and requirements, including a 10,000 patient observational clinical trial designed to gather patient safety data based on the real-world use of ADASUVE, as well as a clinical program addressing the safety and efficacy of ADASUVE in agitated adolescent patients.

As a condition to EC approval of ADASUVE, we have several post-approval commitments including, (i) a benzodiazepine interaction study, (ii) a controlled study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, (iii) an observational clinical study, and (iv) a drug utilization study.

The costs associated with development and approval of study protocols and the completion of studies and clinical trials are significant. There are risks involved with relying on our own capabilities to perform the tasks required by the post-market studies and trials for ADASUVE, as well as with entering into an arrangement with third parties to perform these services. If we enter into an arrangement with a third party or parties to perform the tasks required for the ADASUVE post-market studies and trials, the expense of such outsourcing could be significant, decreasing the profitability of ADASUVE. Additionally, any third party with whom we may collaborate may not fulfill its obligations or carry out activities sufficiently to satisfy FDA standards, which could result in increased expenses needed to remediate any deficiencies or could even result in an FDA enforcement action. Finally, the data derived from any post-market study or trial could result in additional restrictions on the commercialization of ADASUVE through changes to the approved ADASUVE label, a more burdensome REMS, the imposition of additional post-market studies or trials, or could even lead to the withdrawal of the approval of the product.

If we or any collaborators fail to comply with the regulatory requirements of the FDA, the EMA, the EC or other applicable U.S. and foreign regulatory authorities, or previously unknown problems with any future products, suppliers or manufacturing processes are discovered, we or our collaborators could be subject to administrative or judicially imposed sanctions, including:

• restrictions on the products, suppliers or manufacturing processes;

• warning letters or untitled letters;

• injunctions, consent decrees, or the imposition of civil or criminal penalties against us;

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• fines against us;

• product seizures, detentions or import or export bans;

• voluntary or mandatory product recalls and publicity requirements;

• suspension or withdrawal of regulatory approvals;

• required variations of the clinical trial protocol

• suspension or termination of any clinical trials of the products;

• total or partial suspension of production;

• refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications; and

• denial of permission to file an application or supplement in a jurisdiction.

If we or our collaborators were subject to administrative or judicially-imposed sanctions arising out of enforcement of the FDA, EMA, EC or other applicable U.S. and foreign laws, it could impair the ability of our collaborators to manufacture or successfully market ADASUVE, even if such an enforcement action does not relate specifically to ADASUVE. Such enforcement would have a significant impact on our financial condition and results.

Problems with the third parties that manufacture the API in ADASUVE or our product candidates may delay our clinical trials or subject us to liability.

We do not currently own or operate manufacturing facilities for clinical or commercial production of the active pharmaceutical ingredient, or API, used in ADASUVE or any of our product candidates. We have no experience in drug manufacturing, and we lack the resources and the capability to manufacture any of the APIs used in ADASUVE and our product candidates, on either a clinical or commercial scale. As a result, we rely on third parties to supply the API used in ADASUVE and each of our product candidates. We expect to continue to depend on third parties to supply the API for ADASUVE and our product candidates and any additional product candidates we develop in the foreseeable future.

An API manufacturer must meet high precision and quality standards for that API to meet regulatory specifications and comply with regulatory requirements. A contract manufacturer is subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure strict compliance with current Good Manufacturing Practice, or cGMP, and other applicable government regulations and corresponding foreign standards. Additionally, a contract manufacturer must pass a pre-approval inspection by the FDA to ensure strict compliance with cGMP prior to the FDA’s approval of any product candidate for marketing. A contract manufacturer’s failure to conform to cGMP could result in the FDA’s refusal to approve or a delay in the FDA’s approval of a product candidate for marketing. We are ultimately responsible for confirming that the APIs used in ADASUVE and our product candidates are manufactured in accordance with applicable regulations.

Our third-party suppliers may not carry out their contractual obligations or meet our deadlines. In addition, the API they supply to us may not meet our specifications and quality policies and procedures. If we need to find alternative suppliers of the API used in ADASUVE or any of our product candidates, we may not be able to contract for such supplies on acceptable terms, if at all. Any such failure to supply or delay caused by such contract manufacturers would have an adverse effect on our ability to continue clinical development of our product candidates or commercialize ADASUVE.

If our third-party drug suppliers fail to achieve and maintain high manufacturing standards in compliance with cGMP regulations, we could be subject to certain product liability claims in the event such failure to comply resulted in defective products that caused injury or harm.

Unstable market conditions may have serious adverse consequences on our business.

The current economic situation and market instability has made the business climate more volatile and more costly. Our general business strategy may be adversely affected by unpredictable and unstable market conditions. If the current equity and credit markets deteriorate further, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. While we believe that, based on our cash, cash equivalents and marketable

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securities balance at September 30, 2013, the remaining proceeds available under the Teva Note, product revenues, royalties and our current expected cash usage, we have sufficient capital resources to meet our anticipated cash needs into the third quarter of 2014, we may obtain additional financing on less than attractive rates or on terms that are extremely dilutive to existing stockholders. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our business, financial condition and stock price and could require us to delay or abandon clinical development plans or alter our operations. There is a risk that one or more of our current component manufacturers and collaborators may encounter difficulties during challenging economic times, which would directly affect our ability to attain our operating goals on schedule and on budget.

Unless our preclinical studies demonstrate the safety of our product candidates, we will not be able to commercialize our product candidates.

To obtain regulatory approval to market and sell any of our product candidates in development, we must satisfy the FDA and other regulatory authorities abroad, through extensive preclinical studies, that our product candidates are safe. OurStaccatosystem creates condensation aerosol from drug compounds, and there currently are no approved products that use a similar method of drug delivery other than ADASUVE. Companies developing other inhalation products have not defined or successfully completed the types of preclinical studies we believe will be required for submission to regulatory authorities as we seek approval to conduct our clinical trials. We may not have conducted or may not conduct in the future the types of preclinical testing ultimately required by regulatory authorities, or future preclinical tests may indicate that our product candidates are not safe for use in humans. Preclinical testing is expensive, can take many years and have an uncertain outcome. In addition, success in initial preclinical testing does not ensure that later preclinical testing will be successful.

We may experience numerous unforeseen events during, or as a result of, the preclinical testing process, which could delay or prevent our ability to develop or commercialize our product candidates, including:

• our preclinical testing may produce inconclusive or negative safety results, which may require us to conduct additional preclinical testing or to abandon product candidates that we believed to be promising;

• our product candidates may have unfavorable pharmacology, toxicology or carcinogenicity; and

• our product candidates may cause undesirable side effects.

Any such events would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

Failure or delay in commencing or completing clinical trials for our product candidates could harm our business.

We have not completed all the clinical trials necessary to support an application with the FDA or other regulatory authorities abroad for approval to market any of our product candidates other than for ADASUVE in the United States and the European Union. As a condition of our ADASUVE NDA approval, the FDA is requiring us to conduct two post-approval clinical trials for ADASUVE, including a Phase 4 safety observation study and a study in adolescent patients. As a condition of the grant of marketing authorization by the EC for ADASUVE, we are required to perform: (i) a benzodiazepine interaction study, (ii) a thorough QTc study with two doses of ADASUVE, (iii) an observational clinical study, and (iv) a drug utilization study. Future clinical trials may be delayed or terminated as a result of many factors, including:

• insufficient financial resources to fund such trials;

• delays or failure in reaching agreement on acceptable clinical trial contracts or clinical trial protocols with prospective sites;

• regulators or institutional review boards may not authorize us to commence a clinical trial;

• regulators or institutional review boards may suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or concerns about patient safety;

• we may suspend or terminate our clinical trials if we believe that they expose the participating patients to unacceptable health risks;

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• we may experience slower than expected patient enrollment or lack of a sufficient number of patients that meet the enrollment criteria for our clinical trials;

• patients may not complete clinical trials due to safety issues, side effects, dissatisfaction with the product candidate, or other reasons;

• we may have difficulty in maintaining contact with patients after treatment, preventing us from collecting the data required by our study protocol;

• product candidates may demonstrate a lack of efficacy during clinical trials;

• we may experience governmental or regulatory delays, failure to obtain regulatory approval or changes in regulatory requirements, policy and guidelines; and

• we may experience delays in our ability to manufacture clinical trial materials in a timely manner as a result of ongoing process and design enhancements to ourStaccatosystem.

Any delay in commencing or completing clinical trials for our product candidates would delay commercialization of our product candidates and harm our business, financial condition and results of operations. It is possible that none of our product candidates other than ADASUVE will successfully complete clinical trials or receive regulatory approval, which would severely harm our business, financial condition and results of operations.

If our product candidates do not meet safety and efficacy endpoints in clinical trials, they will not receive regulatory approval, and we will be unable to market them.

The clinical development and regulatory approval process is extremely expensive and takes many years. The timing of any approval cannot be accurately predicted. If we fail to obtain regulatory approval for ADASUVE in markets outside of the U.S. and the Ferrer Territories or for our other product candidates in any markets where we seek regulatory approval, we will be unable to market and sell them in those locations and therefore we may never be profitable.

As part of the regulatory process, we must conduct clinical trials for each product candidate to demonstrate safety and efficacy to the satisfaction of the FDA, the EMA, the EC and other regulatory authorities abroad. The number and design of clinical trials that will be required varies depending on the product candidate, the condition being evaluated, the trial results and regulations applicable to any particular product candidate. In June 2008, we announced that our Phase 2a proof-of-concept clinical trial of AZ-002 (Staccatoalprazolam) did not meet either of its two primary endpoints. In September 2009, we announced that our Phase 2b clinical trial of AZ-104 (Staccatoloxapine, low-dose) for the treatment of migraine did not meet its primary endpoint.

Prior clinical trial program designs and results are not necessarily predictive of future clinical trial designs or results. Initial results may not be confirmed upon full analysis of the detailed results of a trial. Product candidates in later stage clinical trials may fail to show the desired safety and efficacy despite having progressed through initial clinical trials with acceptable endpoints.

If our product candidates fail to show a clinically significant benefit compared to placebo, they will not be approved for marketing.

The design of our clinical trials is based on many assumptions about the expected effect of our product candidates, and if those assumptions prove incorrect, the clinical trials may not produce statistically significant results. OurStaccatosystem is not similar to other approved drug delivery methods, and there is no precedent for the application of detailed regulatory requirements to our product candidates. We cannot assure you that the design of, or data collected from, the clinical trials of our product candidates will be sufficient to support the FDA, the EC and other foreign regulatory approvals.

Regulatory authorities may not approve our product candidates even if they meet safety and efficacy endpoints in clinical trials.

The FDA, the EC and other foreign regulatory agencies can delay, limit or deny marketing approval for many reasons, including:

• a product candidate may not be considered safe or effective;

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• the manufacturing processes or facilities we have selected may not meet the applicable requirements; and

• changes in their approval policies or adoption of new regulations may require additional work on our part.

Part of the regulatory approval process includes compliance inspections of manufacturing facilities to ensure adherence to applicable regulations and guidelines. The regulatory agency may delay, limit or deny marketing approval of our other product candidates as a result of such inspections. Any delay in, or failure to receive or maintain, approval for any of our product candidates could prevent us from ever generating meaningful revenues or achieving profitability.

Our product candidates may not be approved even if they achieve their endpoints in clinical trials. Regulatory agencies, including the FDA, the EMA, the EC or their advisors may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Regulatory agencies may change requirements for approval even after a clinical trial design has been approved. For example, ADASUVE and our other product candidates combine drug and device components in a manner that the FDA considers to meet the definition of a combination product under FDA regulations. The FDA exercises significant discretion over the regulation of combination products, including the discretion to require separate marketing applications for the drug and device components in a combination product. ADASUVE and our product candidates are being regulated as drug products under the new drug application process administered by the FDA. The FDA could in the future require additional regulation of ADASUVE or our product candidates under the medical device provisions of the FDCA. Our systems are designed to comply with the Quality Systems Regulation, or QSR, which sets forth the FDA’s current Good Manufacturing Practice requirements for medical devices, and other applicable government regulations and corresponding foreign standards. If we fail to comply with these regulations, it could have a material adverse effect on our business and financial condition.

Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing studies, such as the FDA’s requirement that we perform a Phase 4 safety observation study and a study in adolescent patients for ADASUVE. Similarly, the marketing authorization granted for ADASUVE in the EU includes a requirement for us to conduct, (i) a benzodiazepine interaction study, (ii) a study to determine ADASUVE’s effect on cardiac rhythms, or a thorough QTc study, with two doses of ADASUVE, (iii) an observational clinical study, and (iv) a drug utilization study. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates.

We rely on third parties to conduct our preclinical studies and our clinical trials. If these third parties do not perform as contractually required or expected, we may not be able to obtain regulatory approval for our product candidates, or we may be delayed in doing so.

We do not have the ability to conduct preclinical studies or clinical trials independently for our product candidates. We must rely on third parties, such as contract research organizations, medical institutions, academic institutions, clinical investigators and contract laboratories, to conduct our preclinical studies and clinical trials. We are responsible for confirming that our preclinical studies are conducted in accordance with applicable regulations and that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. The FDA requires us to comply with regulations and standards, commonly referred to as good laboratory practices for conducting and recording the results of our preclinical studies and good clinical practices for conducting, monitoring, recording and reporting the results of clinical trials, to assure that data and reported results are accurate and that the clinical trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines, fail to comply with the FDA’s good clinical practice regulations, do not adhere to our clinical trial protocols or otherwise fail to generate reliable clinical data, we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated or may need to be repeated, and we may not be able to obtain regulatory approval for or commercialize the product candidate being tested in such trials.

If we experience problems with the manufacturers of components of ADASUVE or our product candidates, our ability to supply ADASUVE and our other product candidates will be impaired, our sales may be lower than expected and our development programs may be delayed and we may be subject to liability.

We outsource the manufacturing of the components of ourStaccatosystem, including the printed circuit boards, the plastic airways, and the chemical heat packages to be used in our commercial single dose device. We have no experience

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in the manufacturing of components, other than our chemical heat packages, and we currently lack the resources and the capability to manufacture them, on either a clinical or commercial scale. As a result, we rely on third parties to supply these components. We expect to continue to depend on third parties to supply these components for ADASUVE and our current product candidates and any devices based on the Staccato system we develop in the foreseeable future.

The third-party suppliers of the components of ourStaccatosystem must meet high precision and quality standards for our finished devices to comply with regulatory requirements. A contract manufacturer is subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure that our finished devices remain in strict compliance with the QSR, which sets forth the FDA’s cGMP for medical devices, and other applicable government regulations and corresponding foreign standards. We are ultimately responsible for confirming that the components used in theStaccatosystem are manufactured in accordance with specifications, standards and procedures necessary to ensure that our finished devices comply with the QSR or other applicable regulations.

Our third party suppliers may not comply with their contractual obligations or meet our deadlines, or the components they supply to us may not meet our specifications and quality policies and procedures. If we need to find alternative suppliers of the components used in the Staccato system, we may not be able to contract for such components on acceptable terms, if at all. Any such failure to supply or delay caused by such contract manufacturers would have an adverse effect on our ability to manufacture commercial quantities of ADASUVE and on our ability to continue clinical development of our product candidates or commercialize ADASUVE.

In addition, the heat packages used in the single dose version of ourStaccatosystem are manufactured using certain energetic, or highly combustible, materials that are used to generate the rapid heating necessary for vaporizing the drug compound while avoiding degradation. Manufacture of products containing energetic materials is regulated by the U.S. government. We have entered into a manufacture agreement with Autoliv for the manufacture of the heat packages in the commercial design of our single dose version of ourStaccatosystem. If Autoliv fails to manufacture the heat packages to the necessary specifications, or does not carry out its contractual obligations to supply our heat packages to us, or if the FDA requires different manufacturing or quality standards than those set forth in our manufacture agreement, our clinical trials or commercialization efforts may be delayed, suspended or terminated while we seek additional suitable manufacturers of our heat packages, which may prevent us from commercializing ADASUVE or our product candidates that utilize the single dose version of theStaccatosystem. In October 2013, Autoliv notified us of their intent to terminate, effective October 2016, the Manufacture Agreement. Prior to October 2016, Autoliv and we remain fully obligated to perform pursuant to the terms of both the Manufacture Agreement and the New Note. However, Autoliv may not continue to perform its obligations in the same manner during the termination period. If we are unable to secure a replacement manufacturer for the chemical heat packages in ADASUVE or if the costs for such manufacturer to produce the chemical heat packages are higher than the cost from Autoliv, it will significantly impact our ability to produce our commercial devices or to produce them at quantities or at a cost to allow us to become profitable.

Product candidates that we may develop may require expensive carcinogenicity tests.

We combine small molecule drugs with ourStaccatosystem to create proprietary product candidates. Some of these drugs may not have previously undergone carcinogenicity testing that is now generally required for marketing approval. We may be required to perform carcinogenicity testing with product candidates incorporating drugs that have not undergone carcinogenicity testing or may be required to do additional carcinogenicity testing for drugs that have undergone such testing. Any carcinogenicity testing we are required to complete will increase the costs to develop a particular product candidate and may delay or halt the development of such product candidate.

If some or all of our patents expire, are invalidated or are unenforceable, or if some or all of our patent applications do not yield issued patents or yield patents with narrow claims, competitors may develop competing products using our or similar intellectual property and our business will suffer.

Our success will depend in part on our ability to obtain and maintain patent and trade secret protection for our technologies, ADASUVE and our product candidates both in the United States and other countries. We do not know whether any patents will issue from any of our pending or future patent applications. In addition, a third party may successfully circumvent our patents. Our rights under any issued patents may not provide us with sufficient protection against competitive products or otherwise cover commercially valuable products or processes.

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The degree of protection for our proprietary technologies, ADASUVE and our product candidates is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

• we might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;

• we might not have been the first to file patent applications for these inventions;

• others may independently develop similar or alternative technologies or duplicate any of our technologies;

• the claims of our issued patents may be narrower than as filed and not sufficiently broad to prevent third parties from circumventing them;

• it is possible that none of our pending patent applications will result in issued patents;

• we may not develop additional proprietary technologies or drug candidates that are patentable;

• our patent applications or patents may be subject to interference, opposition or similar administrative proceedings;

• any patents issued to us or our potential strategic collaborators may not provide a basis for commercially viable products or may be challenged by third parties in the course of litigation or administrative proceedings such as reexaminations or interferences; and

• the patents of others may have an adverse effect on our ability to do business.

On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The United States Patent and Trademark Office has developed regulations and procedures to govern administration of the Leahy-Smith Act, but many of the substantive changes to patent law associated with the Leahy-Smith Act, particularly the first inventor to file provisions, only became effective 18 months after its enactment. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

Even if valid and enforceable patents cover ADASUVE, our product candidates and our technologies, the patents will provide protection only for a limited amount of time.

The Teva Agreement provides Teva with the first right to enforce certain of the Alexza patents listed in the FDA “Orange Book” as well as product-specific patents related to ADASUVE that may be identified and prosecuted during the term of the Teva Agreement. While Teva may not settle any such enforcement action without our consent, there can be no assurance that Teva would enforce the ADASUVE patents in the same manner or with the same strategy as we might if we maintained the sole right to control litigation against potential third-party infringers. Our current patents or any future patents that may be issued regarding ADASUVE or our product candidates or methods of using them, can be challenged by our competitors who can argue that our patents are invalid and/or unenforceable. Third parties may challenge our rights to, or the scope or validity of, our patents. Patents also may not protect ADASUVE or our product candidates if competitors devise ways of making these or similar product candidates without legally infringing our patents. The FDCA and the FDA regulations and policies provide incentives to manufacturers to challenge patent validity or create modified, non-infringing versions of a drug or device in order to facilitate the approval of generic substitutes. These same types of incentives encourage manufacturers to submit new drug applications that rely on literature and clinical data not prepared for or by the drug sponsor.

Our potential strategic collaborators’ ability to obtain patents is uncertain because, to date, some legal principles remain unresolved, there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States, and the specific content of patents and patent applications that are necessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific and factual issues. Furthermore, the policies governing pharmaceutical and medical device patents outside the United States may be even more uncertain. Changes in either patent laws or interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

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We also rely on trade secrets to protect our technology, especially where we do not believe that patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. The employees, consultants, contractors, outside scientific collaborators and other advisors of our company and our strategic collaborators may unintentionally or willfully disclose our confidential information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming and the outcome is unpredictable. Failure to protect or maintain trade secret protection could adversely affect our competitive business position.

Our research and development collaborators may have rights to publish data and other information in which we have rights. In addition, we sometimes engage individuals or entities to conduct research that may be relevant to our business. The ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated during the course of their research is subject to certain contractual limitations. These contractual provisions may be insufficient or inadequate to protect our trade secrets and may impair our patent rights. If we do not apply for patent protection prior to such publication or if we cannot otherwise maintain the confidentiality of our technology and other confidential information, then our ability to receive patent protection or protect our proprietary information may be jeopardized.

Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend time and money and could shut down some of our operations.

Our commercial success depends in part on not infringing patents and proprietary rights of third parties. Others have filed, and in the future are likely to file, patent applications covering products that are similar to ADASUVE or our product candidates, as well as methods of making or using similar or identical products. If these patent applications result in issued patents and we wish to use the claimed technology, we would need to obtain a license from the third party. We may not be able to obtain these licenses at a reasonable cost, if at all.

In addition, administrative proceedings, such as interferences and reexaminations before the U.S. Patent and Trademark Office, could limit the scope of our patent rights. We may incur substantial costs and diversion of management and technical personnel as a result of our involvement in such proceedings. In particular, our patents and patent applications may be subject to interferences in which the priority of invention may be awarded to a third party. We do not know whether our patents and patent applications would be entitled to priority over patents or patent applications held by such a third party. Our issued patents may also be subject to reexamination proceedings. We do not know whether our patents would survive reexamination in light of new questions of patentability that may be raised following their issuance.

Third parties may assert that we are employing their proprietary technology or their proprietary products without authorization. In addition, third parties may already have or may obtain patents in the future and claim that use of our technologies or our products infringes these patents. We could incur substantial costs and diversion of management and technical personnel in defending against any of these claims. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief, which could effectively block our ability to further develop, commercialize and sell any future products and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products. In the event we cannot develop alternative methods or products, we may be effectively blocked from developing, commercializing or selling any future products. Defense of any lawsuit or failure to obtain any of these licenses would be expensive and could prevent us from commercializing any future products.

We review from time to time publicly available information concerning the technological development efforts of other companies in our industry. If we determine that these efforts violate our intellectual property or other rights, we intend to take appropriate action, which could include litigation. Any action we take could result in substantial costs and diversion of management and technical personnel in enforcing our patents or other intellectual property rights against others. Furthermore, the outcome of any action we take to protect our rights may not be resolved in our favor.

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Competition in the pharmaceutical industry is intense. If our competitors are able to develop and market products that are more effective, safer or less costly than ADASUVE or any future products that we may develop, our commercial opportunity will be reduced or eliminated.

We face competition from established as well as emerging pharmaceutical and biotechnology companies, academic institutions, government agencies and private and public research institutions. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects or are less expensive than ADASUVE or any future products that we may develop and commercialize. In addition, significant delays in the development or commercialization of ADASUVE or our product candidates could allow our competitors to bring products to market before us and impair our ability to commercialize ADASUVE or our product candidates.

We anticipate that ADASUVE will compete with other available antipsychotic drugs for the treatment of agitation, such as intramuscular formulations, which are approved for the treatment of agitation, and oral tablets and oral solutions, which are not approved for the treatment of agitation.

We anticipate that, if approved, AZ-002 would compete with the oral tablet forms of alprazolam and possibly IV, oral and rectal forms of other benzodiazepines. We are also aware of at least one product in Phase 3 development for the treatment of Acute Repetitive Seizures.

We anticipate that, if approved, AZ-007 would compete with non-benzodiazepine GABA-A receptor agonists. We are aware of more than 13 approved generic versions of zolpidem, or zaleplon, oral tablets, as well as at least one insomnia product, a version of zolpidem intended to treat middle of the night awakening, that is approved by the FDA. Additionally, we are aware of one product in Phase 3 development for the treatment of insomnia.

We anticipate that, if approved, AZ-104 would compete with currently marketed triptan drugs and with other migraine headache treatments. In addition, we are aware of at least one new migraine product under review by the FDA, which is an inhaled formulation, and at least four new product candidates in late-phase development for the treatment of migraines.

We anticipate that, if approved, AZ-003 would compete with some of the available forms of fentanyl, including injectable fentanyl, oral transmucosal and nasal fentanyl formulations and ionophoretic transdermal delivery of fentanyl. We are also aware of two fentanyl products approved by regulatory agencies in the United States or abroad, and at least four products in Phase 3 clinical trial development for acute pain. In addition, if approved, AZ-003 would compete with various generic opioid drugs, such as oxycodone, hydrocodone and morphine, or combination products including one or more of such drugs.

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Established pharmaceutical companies may invest heavily to discover quickly and develop novel compounds or drug delivery technology that could make ADASUVE or our product candidates obsolete. Smaller or early stage companies may also prove to be significant competitors, particularly through strategic collaborations with large and established companies. In addition, these third parties compete with us in recruiting and retaining qualified scientific, sales, marketing, and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business. Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or discovering, developing and commercializing products before we do. If we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition will suffer.

If we lose our key personnel or are unable to attract and retain additional personnel, we may be unable to develop or commercialize ADASUVE or our product candidates.

We are highly dependent on our President and Chief Executive Officer, Thomas B. King, the loss of whose services might adversely impact the achievement of our objectives. In addition, recruiting and retaining qualified clinical, scientific and engineering personnel to manage clinical trials of our product candidates and to perform future research and development work will be critical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. Although

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we believe we will be successful in attracting and retaining qualified personnel, competition for experienced management and clinical, scientific and engineering personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. In addition, we do not have employment agreements with any of our employees, and they could leave our employment at will. We have change of control agreements with our executive officers and vice presidents that provide for certain benefits upon termination or a change in role or responsibility in connection with a change of control of our company. We do not maintain life insurance policies on any employees. Failure to attract and retain personnel would prevent us from developing and commercializing ADASUVE and our product candidates.

If plaintiffs bring product liability claims or lawsuits against us or our collaborators, we may incur substantial liabilities and may be required to limit commercialization of ADASUVE or product candidates that we may develop.

As the supplier of ADASUVE to Teva, we are obligated to deliver commercial supply from a qualified manufacturing facility in accordance with certain specifications. In addition, we are obligated to supply ADASUVE free from product defects or manufacturing defects from our manufacture of ADASUVE. The development, manufacture, testing, marketing and sale of combination pharmaceutical and medical device products, like ADASUVE, entail significant risk of product liability claims, lawsuits, safety alerts or recalls. We may be held liable if any product we develop or manufacture causes injury or is found otherwise unsuitable or unsafe during product testing, manufacturing, marketing or sale, including, but not limited to quality issues, component failures, manufacturing flaws, unanticipated or improper uses of our ADASUVE or any future products, design defects, inadequate disclosure of product-related risks or product-related information. Side effects of, or design or manufacturing defects in, the products tested or commercialized by us or any collaborator could result in exacerbation of a clinical trial participant or patient’s condition, serious injury or impairment or even death. This could result in product liability claims, lawsuits, safety alerts and/or recalls for ADASUVE or any future products, including those in clinical testing, to be commercialized, or already commercialized. Product liability claims may be brought by individuals seeking relief for themselves, by persons seeking to represent a class of claimants/plaintiffs, or by a large number of individual claimants in a coordinated or mass litigation. We cannot predict the frequency, outcome, or cost to defend or resolve product liability claims or lawsuits.

While we have not had to defend against any product liability claims or lawsuits to date, we face greater risk of product liability as we or any collaborator commercialize ADASUVE or other future products. As ADASUVE or any future product is more widely prescribed, we believe it is likely that product liability claims will eventually be brought against us. Regardless of merit or eventual outcome, liability claims may result in decreased demand for any products or product candidates that we may develop, injury to our reputation, withdrawal of clinical trials, issuance of safety alerts, recall of products under investigation or already commercialized, costs to defend and resolve litigation, substantial monetary awards to clinical trial participants or patients, loss of revenue, and the inability to commercialize any products we develop. Safety alerts or recalls could result in the FDA or similar government agencies in the United States, or abroad, investigating or bringing enforcement actions regarding any products and/or practices, with resulting significant costs and negative publicity, all of which could materially adversely affect us.

Product liability insurance is expensive, can be difficult to obtain and may not be available in the future on acceptable terms, if at all. We currently have product liability insurance that covers commercial product and clinical trials. Partly as a result of product liability lawsuits related to pharmaceutical and medical device products, product liability and other types of insurance have become more difficult and costly for pharmaceutical and medical device companies to obtain. Insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to maintain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could impede or negatively affect the commercialization of ADASUVE or our product candidates. If we are sued for any injury caused by any product, our liability could exceed our insurance coverage and total assets. In addition, there is no guarantee that insurers will pay for defense and indemnity of claims or that coverage will be adequate or otherwise available.

A successful claim or claims brought against us in excess of available insurance coverage could subject us to significant liabilities and could have a materially adverse effect on our business, financial condition, results of operations and growth prospects. Such claims could also harm our reputation and the reputation of ADASUVE or any future products, adversely affecting our ability to develop and market any products successfully. In addition, defending a product liability lawsuit is expensive and can divert the attention of key employees from operating our business.

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Product recalls and safety alerts may be issued at our discretion or at the discretion of our suppliers, collaborators, government agencies, and other entities that have regulatory authority for medical device and pharmaceutical sales. Any recall of ADASUVE could materially adversely affect our business by rendering us unable to sell ADASUVE for some time, causing us to incur significant recall costs and by adversely affecting our reputation. A recall could also result in product liability claims.

Our product candidates AZ-002, AZ-003 and AZ-007 contain drug substances that are regulated by the U.S. Drug Enforcement Administration. Failure to comply with applicable regulations and requirements could harm our business.

The Controlled Substances Act imposes various registration, recordkeeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical products. A principal factor in determining the particular requirements, if any, applicable to a product is its actual or potential abuse profile. The DEA regulates chemical compounds as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Alprazolam, the API in AZ-002, is regulated as a Schedule IV substance, fentanyl, the API in AZ-003, is regulated as a Schedule II substance, and zaleplon, the API in AZ-007, is regulated as a Schedule IV substance. Each of these product candidates is subject to DEA regulations relating to manufacture, storage, record keeping and reporting, distribution and physician prescription procedures, and DEA regulations may impact the amount of the scheduled substance that would be available for clinical trials and commercial distribution. As a Schedule II substance, fentanyl is subject to more stringent controls, including quotas on the amount of product that can be manufactured as well as a prohibition on the refilling of prescriptions without a new prescription from the physician. The DEA periodically inspects facilities for compliance with its rules and regulations. Failure to comply with current and future regulations of the DEA could lead to a variety of sanctions, including revocation, or denial of renewal, of DEA registrations, injunctions, or civil or criminal penalties and could harm our business, financial condition and results of operations.

The single dose version of our Staccato system contains materials that are regulated by the U.S. government, and failure to comply with applicable regulations could harm our business.

The single dose version of ourStaccatosystem uses energetic materials to generate the rapid heating necessary for vaporizing the drug, while avoiding degradation. Manufacture of products containing energetic materials is controlled by the ATF. Technically, the energetic materials used in ourStaccatosystem are classified as “low explosives,” and the ATF has granted us a license/permit for the manufacture of such low explosives. Additionally, due to inclusion of the energetic materials in ourStaccatosystem, the DOT, might regulate shipments of the single dose version of ourStaccatosystem. However, the DOT has granted the single dose version of ourStaccatosystem “Not Regulated as an Explosive” status. Failure to comply with the current and future regulations of the ATF or DOT could subject us to future liabilities and could harm our business, financial condition and results of operations. Furthermore, these regulations could restrict our ability to expand our facilities or construct new facilities or could require us to incur other significant expenses in order to maintain compliance.

We use hazardous chemicals and highly combustible materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

Our research and development processes involve the controlled use of hazardous materials, including chemicals. We also use energetic materials in the manufacture of the chemical heat packages that are used in our single dose devices. Our operations produce hazardous waste. We cannot eliminate the risk of accidental contamination or discharge or injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use of these materials and our liability may exceed our total assets. Compliance with environmental and other laws and regulations may be expensive, and current or future regulations may impair our research, development or production efforts.

Certain of our suppliers are working with these types of hazardous and energetic materials in connection with our component manufacturing agreements. In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these hazardous and energetic materials. Further, under certain circumstances, we have agreed to indemnify our suppliers against damages and other liabilities arising out of development activities or products produced in connection with these agreements.

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We will need to implement additional systems, procedures and controls in the future as we grow and to satisfy new reporting requirements as a commercial entity.

Numerous laws and regulations affect commercial companies, including, but not limited to, the Federal Anti-Kickback, False Claims Act, the Federal Physician Payment Sunshine Act, the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010. The rules make it more difficult and costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage as compared to the polices generally available to public companies. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.

Compliance with the Federal Anti-Kickback, False Claims Act, the Federal Physician Payment Sunshine Act, the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010 and other regulations will continue to increase our costs and require additional management resources. As we grow, we will need to continue to implement additional reporting systems, procedures and controls to satisfy new reporting requirements. We currently do not have an internal audit group. In addition, we may need to hire additional legal and accounting staff with appropriate experience and technical knowledge, and we cannot assure you that if additional staffing is necessary that we will be able to do so in a timely fashion.

Our business is subject to complex corporate governance, public disclosure and accounting requirements that could adversely affect our business and financial results.

We are subject to changing rules and regulations of federal and state governments, the SEC, and the NASDAQ Global Market. These entities have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. The Dodd-Frank Act contains significant corporate governance and executive compensation-related provisions, some of which the SEC, has implemented by adopting additional rules and regulations in areas such as the compensation of executives, referred to as “say-on-pay.” We cannot assure you that we are or will be in compliance with all potentially applicable regulations. If we fail to comply with the Sarbanes Oxley Act of 2002, the Dodd-Frank Act and associated SEC rules, or any other regulations or if our interpretations of these rules and regulations differ from the regulating bodies, we could be subject to a range of consequences, including restrictions on our ability to sell equity securities or otherwise raise capital funds, the de-listing of our common stock from the NASDAQ Global Market, suspension or termination of our clinical trials, restrictions on future products or our manufacturing processes, significant fines, or other sanctions or litigation. Any of such consequences could have a material adverse effect on our business, results of operations and the price of our common stock. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities.

We expect significant growth in our workforce to support our commercialization, manufacturing, quality and infrastructure.

We expect significant growth in our workforce to support our planned launch of ADASUVE, particularly in the areas of commercialization, manufacturing, quality and infrastructure. We operate in a highly competitive location for qualified employees. We may not be able to find or attract individuals with sufficient experience and knowledge, or keep our current employees, to support our anticipated growth in operations. If we are unable to attract and retain qualified employees, our ability to successfully launch ADASUVE will be negatively affected.

Our facility is located near known earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could damage our facility and equipment, which could cause us to curtail or cease operations.

Our facility is located in the San Francisco Bay Area near known earthquake fault zones and, therefore, is vulnerable to damage from earthquakes. We are also vulnerable to damage from other types of disasters, such as power loss, fire, floods and similar events. If any disaster were to occur, our ability to operate our business could be seriously impaired.

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We currently may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions, and we do not plan to purchase additional insurance to cover such losses due to the cost of obtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business, financial condition and results of operations.

Significant disruptions of information technology systems or breaches of data security could adversely affect our business.

We are increasingly dependent on information technology systems and infrastructure, including mobile technologies, to operate our business. In the ordinary course of our business, we collect, store and transmit large amounts of confidential information, including intellectual property, proprietary business information and personal information. It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such confidential information. We have also outsourced elements of our information technology infrastructure, and as a result we manage a number of third party vendors who may or could have access to our confidential information. The size and complexity of our information technology systems, and those of third-party vendors with whom we contract, make such systems potentially vulnerable to breakdown, malicious intrusion, security breaches and other cyber attacks. In addition, the prevalent use of mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss of confidential information, trade secrets or other intellectual property. While we have implemented security measures to protect our data security and information technology systems, such measures may not prevent the adverse effect of such events. Significant disruptions of our information technology systems or breaches of data security could adversely affect our business.

Recent regulations related to conflict minerals could adversely impact our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of tin, tantalum, tungsten and gold, known as conflict minerals, originating from the Democratic Republic of Congo, or the DRC, and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for public companies that use conflict minerals mined from the DRC and adjoining countries in their products. We have determined that we use at least one of these conflict minerals in the manufacture of ADASUVE and our other product candidates, although we have not yet determined the source of the conflict minerals that we use. These new disclosure requirements require us to use diligent efforts to determine which conflict minerals we use and the source of those conflict minerals, and disclose the results of our findings beginning in May 2014. There are and will be costs associated with complying with these disclosure requirements, including those costs incurred in conducting diligent efforts to determine which conflict minerals we use and the sources of conflict minerals used in ADASUVE and our other product candidates. Further, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in ADASUVE and our other product candidates. As there may be only a limited number of suppliers offering conflict free conflict minerals, and we cannot be sure that we will be able to obtain necessary conflict free conflict minerals in sufficient quantities or at competitive prices. In addition, we may face reputational challenges if we determine that ADASUVE and our other product candidates contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in ADASUVE and our other product candidates through the procedures we may implement. If we determine to redesign ADASUVE and our other product candidates to not use conflict minerals, we would incur costs associated with doing so.

Risks Relating to Owning Our Common Stock

Our stock price has been and may continue to be extremely volatile.

Our common stock price has experienced large fluctuations. In addition, the trading prices of life science and biotechnology company stocks in general have experienced extreme price fluctuations in recent years. The valuations of many life science companies without consistent product revenues and earnings are extraordinarily high based on conventional valuation standards, such as price to revenue ratios. These trading prices and valuations may not be sustained. Any negative change in the public’s perception of the prospects of life science or biotechnology companies could depress our stock price regardless of our results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our performance. Market fluctuations, as well as general political and economic conditions such as terrorism, military conflict, recession or interest rate or currency rate

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fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to various factors, including:

• the timing and success of the commercial launch of ADASUVE;

• our and our collaborators’ ability to complete and implement our post-approval commitments for ADASUVE;

• the process and outcome of our post-approval commitments for ADASUVE;

• our ability to manufacture ADASUVE at a cost effective price;

• our lack of experience with managing the obligations of a REMS program;

• actual or anticipated regulatory approvals or non-approvals of our product candidates or competing products;

• actual or anticipated cash depletion of our financial resources;

• actual or anticipated results and timing of our clinical trials;

• changes in laws or regulations applicable to ADASUVE or our product candidates;

• changes in the expected or actual timing of our development programs, including delays or cancellations of clinical trials for our product candidates;

• period to period fluctuations in our operating results;

• announcements of new technological innovations or new products by us or our competitors;

• changes in financial estimates or recommendations by securities analysts;

• conditions or trends in the life science and biotechnology industries;

• changes in the market valuations of other life science or biotechnology companies;

• developments in domestic and international governmental policy or regulations;

• announcements by us or our competitors of significant acquisitions, strategic collaborations, joint ventures or capital commitments;

• additions or departures of key personnel;

• difficulty, or increased costs, associated with replacing Autoliv as the supplier of chemical heat packages for ADASUVE and other product candidates;

• disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

• sales of our common stock (or other securities) by us; and

• sales and distributions of our common stock by our stockholders.

In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities. If a stockholder files a securities class action suit against us, we would incur substantial legal fees, and our management’s attention and resources would be diverted from operating our business in order to respond to the litigation.

If we sell shares of our common stock in future financings, existing common stockholders will experience immediate dilution and, as a result, our stock price may go down.

We will need to raise additional capital to fund our operations to develop our product candidates and to develop our manufacturing capabilities. We may obtain such financing through the sale of our equity securities from time to time. As a result, our existing common stockholders will experience immediate dilution upon any such issuance. For example, in February 2012, we issued 4,400,000 shares of our common stock and warrants to purchase up to an additional 4,400,000 shares of our common stock in an underwritten public offering; in March 2012, we issued 241,936 shares of our common stock in a private placement to Ferrer; in July 2012 we issued 80,429 shares of our common stock to Azimuth in consideration for the performance of its obligations under the Purchase Agreement; in August and September 2012, we issued an aggregate of 3,489,860 shares of our common stock to Azimuth under the Purchase Agreement; and in May 2013, we issued 1,437,481 shares of our common stock to Azimuth under the Purchase Agreement. If we enter into other financing transactions in which we issue equity securities in the future, our existing common stockholders will experience immediate dilution upon any such issuance.

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If we fail to maintain compliance with the listing requirements of The NASDAQ Global Market, we may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.

Our common stock is currently listed on The NASDAQ Global Market. To maintain the listing of our common stock on The NASDAQ Global Market, we are required to meet certain listing requirements, including, among others, either: (i) a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $5 million and stockholders’ equity of at least $10 million; or (ii) a minimum closing bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors, affiliates and 10% or more stockholders) of at least $15 million and a total market value of listed securities of at least $50 million. On January 31, 2012, we received a notice from The NASDAQ Stock Market indicating that our common stock had not met the $1.00 per share minimum closing bid price requirement for 30 consecutive business days and that, if we were unable to demonstrate compliance with this requirement during the applicable grace periods, our common stock would be delisted after that time. We were notified that we had regained compliance with the minimum closing bid requirement on June 27, 2012 after our one for ten reverse stock split.

This reverse stock split may not prevent our common stock from dropping back down below The NASDAQ Global Market minimum closing bid price requirement in the future. It is also possible that we would otherwise fail to satisfy another NASDAQ Global Market requirement for continued listing of our common stock. As of November 1, 2013, the total market value of our publicly held shares of our common stock (excluding shares held by our executive officers, directors, affiliates and 10% or more stockholders) was $85.5 million and the total market value of our listed securities was $86.7 million and the closing bid price of our common stock was $5.02 per share. As of September 30, 2013, we had a stockholders’ deficit of $19.9 million.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Equity Securities

We received an advance of $10 million against the Teva Note on September 27, 2013. We have previously disclosed information related to the sale, including the terms of conversion into our common stock, on Current Reports on Form 8-K, filed with the SEC on May 8, 2013 and September 30, 2013.

Use of Proceeds from the Sale of Registered Securities

Not applicable.

Issuer Purchases of Equity Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not Applicable.

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Item 6. Exhibits

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements 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.

	Alexza Pharmaceuticals, Inc.
	(Registrant)
November 6, 2013	/s/ Thomas B. King
	Thomas B. King
	President and Chief Executive Officer
	(principal executive officer)

November 6, 2013	/s/ Mark K. Oki
	Mark K. Oki
	Senior Vice President, Finance, Chief Financial Officer and Secretary
	(principal financial officer and principal accounting officer)

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EXHIBIT INDEX

3.1	Restated Certificate of Incorporation. (1)
3.2	Certificate of Amendment to Restated Certificate of Incorporation. (1)
3.3	Certificate of Amendment to Restated Certificate of Incorporation. (1)
3.4	Amended and Restated Bylaws. (2)
3.5	Amendment to Amended and Restated Bylaws. (3)
4.1	Specimen Common Stock Certificate. (2)
4.2	Second Amended and Restated Investors’ Right Agreement dated November 5, 2004, by and between Alexza and certain holders of Preferred Stock. (2)
10.1*	Summary of Compensation Arrangements with Non-Employee Directors.
10.2*	2005 Non-Employee Directors’ Stock Option Plan, as amended.
31.1	Certification required by Rule 13a-14(a) or Rule 15d-14(a).
31.2	Certification required by Rule 13a-14(a) or Rule 15d-14(a).
32.1	Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
101.INS	XBRL Instance Document (filed electronically herewith).
101.SCH	XBRL Taxonomy Extension Schema Document (filed electronically herewith).
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (filed electronically herewith).
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (filed electronically herewith).
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (filed electronically herewith).
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (filed electronically herewith).

* Management contract or compensation plan or arrangement.

(1) Incorporated by reference to exhibits to our Registration Statement on Form S-3 filed on June 26, 2012 (File No. 333-182341)

(2) Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on December 22, 2005, as amended (File No. 333-130644).

(3) Incorporated by reference to our Annual Report on Form 10-K (File No. 000-51820) as filed with the SEC on March 17, 2008.

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