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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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 0-22332
INSITE VISION INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3015807
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
965 ATLANTIC AVENUE, ALAMEDA, CALIFORNIA 94501
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (510) 865-8800
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FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Registrant's common stock, $0.01 par value,
outstanding as of October 29, 2001: 24,907,409.
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QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 2001 and December 31, 2000...................................1
Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 2001 and 2000............2
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2001 and 2000......................3
Notes to Condensed Consolidated Financial Statements .....................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................5
Item 3. Quantitative and Qualitative Disclosures About Market Risk................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................................17
Item 2. Changes in Securities and Use of Proceeds.................................17
Item 3. Defaults Upon Senior Securities...........................................17
Item 4. Submission of Matters to a Vote of Security Holders.......................17
Item 5. Other Information.........................................................17
Item 6. Exhibits and Reports on Form 8-K..........................................17
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(in thousands, except share and per share amounts) 2001 2000
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 11,942 $ 18,904
Prepaid expenses and other current assets 853 605
--------- ---------
Total current assets 12,795 19,509
Property and equipment, at cost:
Laboratory and other equipment 947 647
Leasehold improvements 69 9
Furniture & fixtures 3 3
--------- ---------
1,019 659
Accumulated depreciation 282 168
--------- ---------
737 491
--------- ---------
Total assets $ 13,532 $ 20,000
========= =========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 109 $ 181
Accrued liabilities 401 376
Accrued compensation and related expense 822 647
--------- ---------
Total current liabilities 1,332 1,204
Capital lease obligation, less current portion 20 26
Commitments
Common stockholders' equity:
Common stock, $0.01 par value, 60,000,000 shares
authorized; 24,907,409 issued and
outstanding at September 30, 2001;
24,853,767 issued and
outstanding at December 31, 2000 249 248
Additional paid-in-capital 107,167 106,976
Notes receivable from stockholder (257) (257)
Accumulated deficit (94,979) (88,197)
--------- ---------
Common stockholders' equity 12,180 18,770
--------- ---------
Total liabilities and common stockholders' equity $ 13,532 $ 20,000
========= =========
See accompanying notes to condensed consolidated financial statements.
1
INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended September 30, Nine months ended September 30,
2001 2000 2001 2000
(Restated) (Restated)
(in thousands, except per share amounts) * *
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Revenues:
License fees $ -- $ 396 $ -- $ 1,188
Royalties 1 14 4 22
-------- -------- -------- --------
Total 1 410 4 1,210
Operating expenses:
Research and development 1,880 1,839 5,474 4,872
Cost reimbursement 164 978 693 3,704
-------- -------- -------- --------
Research and development, net 1,716 861 4,781 1,168
Selling, general and administrative 847 670 2,510 2,003
-------- -------- -------- --------
Total 2,563 1,531 7,291 3,171
-------- -------- -------- --------
Loss from operations (2,562) (1,121) (7,287) (1,961)
Interest, other income and expense, net 105 272 505 524
-------- -------- -------- --------
Net loss before cumulative effect of change
in accounting principle (2,457) (849) (6,782) (1,437)
Cumulative effect of change in accounting
principle -- -- -- (4,486)
-------- -------- -------- --------
Net loss (2,457) (849) (6,782) (5,923)
Non-cash preferred dividends -- (1) -- (3)
-------- -------- -------- --------
Net loss applicable to common stockholders $ (2,457) $ (850) $ (6,782) $ (5,926)
======== ======== ======== ========
Net loss per share basic and diluted:
Net loss before cumulative effect of
accounting change $ (0.10) $ (0.03) $ (0.27) $ (0.06)
Cumulative effect of accounting change -- -- -- (0.20)
-------- -------- -------- --------
Net loss per share applicable to common
stockholders $ (0.10) $ (0.03) $ (0.27) $ (0.26)
======== ======== ======== ========
Shares used to calculate basic and diluted
net loss per share 24,907 24,795 24,890 23,151
======== ======== ======== ========
No cash dividends were declared or paid during the periods.
See accompanying notes to condensed consolidated financial statements.
* See footnote two.
2
INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
(in thousands) 2001 2000
(Restated)
*
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OPERATING ACTIVITIES
Net loss $ (6,782) $ (5,923)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 308 227
Changes in:
Prepaid expenses and other current assets (248) 179
Accounts payable and accrued liabilities 128 801
Deferred revenue -- 3,298
-------- --------
Net cash used in operating activities (6,594) (1,418)
INVESTING ACTIVITIES
Purchases of property and equipment (409) (423)
-------- --------
Net cash used in investing activities (409) (423)
FINANCING ACTIVITIES
Issuance of common stock 47 15,695
Payment of capital lease obligation (6) (4)
-------- --------
Net cash provided by financing activities 41 15,691
Net increase (decrease) in cash and cash equivalents (6,962) 13,850
Cash and cash equivalents, beginning of period 18,904 6,746
-------- --------
Cash and cash equivalents, end of period $ 11,942 $ 20,596
======== ========
Supplemental disclosures:
Non-cash preferred dividends $ -- $ 3
======== ========
Non-cash conversion of redeemable preferred
stock to common stock $ -- $ 33
======== ========
Capital lease obligation incurred $ -- $ 39
======== ========
See accompanying notes to condensed consolidated financial statements.
* See footnote two.
3
INSITE VISION INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information pursuant to the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation have been included. Operating results for the three and
nine month periods ended September 30, 2001, are not necessarily indicative of
the results that may be expected for any future period.
These financial statements and notes should be read in conjunction with
our audited financial statements and notes thereto included in our Annual Report
on Form 10-K for the year ended December 31, 2000.
NOTE 2 - REVENUE RECOGNITION
Effective January 1, 2000, in accordance with Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements", we changed our method of
accounting for up-front technology license fees when ongoing research and
development services will be performed. Previously, on the only such arrangement
we had executed, we had recognized the up-front fee as revenue upon the
effective date of the arrangement. Under the new accounting method adopted
retroactive to January 1, 2000, we recognized the up-front fee over the expected
term of the research and development services, which was 36 months, using the
straight-line method. As a result of the termination of this arrangement in
December 2000, we recognized the then remaining deferred revenue in the fourth
quarter of 2000. The cumulative effect of the change on prior years resulted in
a charge to operations of $4,486,000, which is included in net loss for the year
ended December 31, 2000. The effect of the change on the year ended December 31,
2000 was to increase income before the cumulative effect of the accounting
change by $4,486,000 ($0.19 per share).
NOTE 3 - LICENSE AGREEMENTS
In April 2001, we signed a licensing agreement with SSP Co., Ltd. of
Tokyo, Japan ("SSP"), for two next generation fluoroquinolones which have
indicated increased sensitivity against gram positive and negative bacteria. We
have exclusive rights to any products we develop using these compounds, with the
exception of Japan, where SSP will retain the rights and the rest of Asia, where
we will share joint rights with SSP. One of the compounds, SS734, is currently
under development under the designation ISV-403.
In May 2001, Pharmacia Corporation terminated the January 1999 licensing
agreement we had entered into that granted Pharmacia an exclusive worldwide
license for ISV-205 for the treatment of glaucoma. All global development and
commercialization rights that had been granted to Pharmacia were returned to us
at the end of a ninety-day termination period.
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto included in this Quarterly Report and in
our Annual Report on Form 10-K for the year ended December 31, 2000.
Except for the historical information contained herein, the discussion
in this Quarterly Report may contain certain forward-looking statements, such as
statements of our plans, objectives, expectations and intentions, that involve
risks and uncertainties. The cautionary statements made in this Quarterly
Report, including those set forth below under the heading "Risk Factors," should
be read as being applicable to all relevant forward-looking statements wherever
they appear in this Quarterly Report. Our actual results could differ materially
from those discussed herein.
OVERVIEW
We are an ophthalmic product development company focused on developing
genetically based tools, for the diagnosis, prognosis and management of
glaucoma, as well as ophthalmic pharmaceutical products based on our proprietary
DuraSite(R) eyedrop-based drug delivery technology. Our retinal programs include
both therapeutic agents and drug delivery technologies.
In September 2001, we announced the launch in the United States of
OcuGene(TM), our first commercial product based on our ISV-900 technology for
the diagnosis, prognosis and management of primary open angle glaucoma (POAG).
The OcuGene glaucoma genetic test is the first commercialized genetic test that
screens for the presence of a promoter region mutation and several coding region
mutations of the TIGR gene.
Primary open angle glaucoma usually affects people over the age of
forty. Current glaucoma tests are generally unable to detect the disease before
substantial damage to the optic nerve has occurred. Gene-based tests may make it
possible to identify patients at risk and initiate treatment before permanent
optic nerve damage and vision loss occurs.
A clinical study published in the September 2001 issue of Clinical
Genetics, showed a correlation between the presence of the promoter region
mutation in individuals with POAG and a more aggressive form of glaucoma
including more visual field damage. Published studies have also shown the
correlation of the coding region mutations included in our test and a high
probability of developing glaucoma.
We are focusing our research and development on the following:
- expanding our ISV-900 technology for the diagnosis, prognosis
and management of glaucoma;
- ISV-205, a DuraSite formulation for the treatment of glaucoma;
- ISV-401, a DuraSite formulation of a novel antibiotic not
currently used in ophthalmology;
- ISV-403, a DuraSite formulation of a next generation
fluoroquinolone;
- ISV-014, a retinal drug delivery device; and
- ISV-616, a DuraSite formulation for the treatment of diabetic
retinopathy and macular degeneration.
We are collaborating with academic researchers to develop new
diagnostic, prognostic and management tools for primary congenital, juvenile and
primary open angle glaucomas, in addition to our OcuGene glaucoma genetic test.
Primary congenital glaucoma is an inherited eye disorder and is one of the
leading causes of blindness and visual impairment affecting infants. A
gene-based diagnostic kit may allow early detection of the disease before
considerable irreversible damage has occurred and may improve the ability to
treat it successfully.
Our glaucoma genetics program is being carried out in collaboration with
academic researchers. This program focuses on discovering genes that are
associated with glaucoma and the mutations on these genes that cause the
disease. The application of this genetic information has led to our OcuGene
glaucoma genetic test and may enable the development of other new glaucoma
diagnostic, prognostic and management tools. To date, our academic
5
collaborators have identified genes associated with primary open-angle glaucoma
(the most prevalent form of the disease in adults), juvenile glaucoma and
primary congenital glaucoma.
The development of our ISV-205 product candidate is another beneficiary
of our glaucoma genetics research. This DuraSite formulation contains a drug
that has been shown in cell and organ culture systems to inhibit the production
of a protein that appears to cause glaucoma. A Phase IIa human clinical trial of
136 subjects demonstrated that, in volunteers treated with a steroid, ISV-205
reduced the number of subjects with clinically significant intraocular pressure
elevations by 75% compared with placebo (p=0.01). A Phase IIb human clinical
trial was conducted in 233 subjects with ocular hypertension. Genetic
information was collected on the subjects using our ISV-900 technology and the
subjects were dosed twice a day for six months with ISV-205. In patients with
the TIGR mt-1 mutation, 0.1% ISV-205 was statistically significantly more
effective than placebo in lowering intraocular pressure (IOP) (p=0.008). These
effects were not seen to the same extent in patients without the TIGR mt-1
mutation. ISV-205 was similar to placebo in ocular safety and comfort in all
patients. We are planning further clinical studies before filing for product
approval with the U.S. Food and Drug Administration (FDA) and there is no
guarantee that similar clinical results will be achieved.
ISV-401 is a DuraSite formulation of an antibiotic that has not
previously been used in ophthalmology. ISV-401 contains an antibiotic that is
effective for gram-negative and gram-positive bacteria and may enable reduced
dosing frequency. ISV-401 may be effective for a broad-spectrum of bacteria and
may enable physicians the ability to use it to treat a variety of ophthalmic
diseases. In September 2001, we entered into a Phase I clinical trial, and
initial results indicate that the formulations tested were safe and well
tolerated. Additional clinical studies are currently being planned.
ISV-403 is a DuraSite formulation of a next generation fluoroquinolone,
which we licensed from SSP in April 2001. We are currently conducting
formulation optimization activities and other pre-clinical testing necessary to
file an Investigational New Drug (IND) Application with the FDA.
ISV-014 is a device designed to provide controlled, non-surgical
delivery of ophthalmic drugs to the retina and surrounding tissues. We are
continuing to enhance the device and are collaborating with various academic
researchers to perform invivo experiments delivering products with a variety of
molecular sizes to retinal tissues. The combination of this device technology
with polymer-based drug platforms may permit long-term delivery of therapeutic
agents to treat several retinal diseases that currently cannot be effectively
treated.
ISV-616 is a DuraSite-based formulation of a compound that may inhibit
the growth of new blood vessels. This compound may be a treatment for such
retinal diseases as diabetic retinopathy or macular degeneration. We are
performing limited formulation and pre-clinical testing of ISV-616 in
collaboration with the pharmaceutical company that developed the compound.
Our DuraSite delivery system is a patented eyedrop formulation
comprising a cross-linked carboxyl-containing polymer which incorporates the
drug to be delivered to the eye and can be customized to deliver a wide variety
of potential drug candidates with a broad range of molecular weights and other
properties. The formulation is instilled in the cul-de-sac of the eye as a small
volume eyedrop and remains in the eye for up to several hours. The active drug
ingredient is gradually released during this time. This increased residence time
is designed to permit lower concentrations of a drug to be administered over a
longer period of time, thereby minimizing the inconvenience of frequent dosing
and reducing potential adverse side effects. Eyedrops delivered in the DuraSite
system are a contrast to conventional eyedrops because conventional eyedrops
typically only last a few minutes in the eye and require delivery of a highly
concentrated burst of drug and frequent administration to sustain therapeutic
levels.
To date, we have not received any revenues from the sale of our
products, although we have received a small amount of royalties from the sale of
products using our licensed technology. With the exception of 1999, we have been
unprofitable since our inception due to continuing research and development
efforts, including preclinical studies, clinical trials and manufacturing of our
product candidates. We have financed our research and development
6
activities and operations primarily through private and public placement of our
equity securities and, to a lesser extent, from collaborative agreements.
In December 2000, Pharmacia terminated our November 1999 ISV-900
licensing agreement. As a result of this termination, we will now be responsible
for all marketing and further development activities related to our ISV-900
program. The launch of our OcuGene glaucoma genetic test is underway and we are
implementing a detailed marketing plan intended to support the launch.
As part of the December 2000 termination of our ISV-900 licensing
agreement with Pharmacia, we also terminated the credit agreement with
Pharmacia. The credit agreement, entered into in November of 1999, provided for
a $4.0 million revolving line of credit to be made available to us on November
11, 2001 for a period of three (3) years.
In May 2001, Pharmacia terminated the January 1999 licensing agreement
we had entered into that granted Pharmacia an exclusive worldwide license for
ISV-205 for the treatment of glaucoma. All global development and
commercialization rights that had been granted to Pharmacia were returned to us
at the end of a ninety-day termination period. We will be seeking a new
corporate partner to assist us in moving this program forward.
As of September 30, 2001, our accumulated deficit was approximately
$95.0 million. While we have announced the launch of our OcuGene glaucoma
genetic test, there can be no assurance that we will ever achieve or be able to
maintain either significant revenues from product sales or profitable
operations.
RESULTS OF OPERATIONS
We earned royalties of $1,000 and $14,000 in the third quarters of 2001
and 2000, respectively, and $4,000 and $22,000 for the nine months ended
September 30, 2001 and September 30, 2000, respectively. These royalties were
from sales of AquaSite(R) by CIBA Vision and Kukje Pharma Ind. Co., Ltd., our
AquaSite manufacturing partner in Korea. We earned $396,000 in the third quarter
of 2000, and $1,188,000 for the nine months ended September 30, 2000, from the
ratable recognition of the upfront licensing fees received from Pharmacia for
ISV-900. To date, we have not relied primarily on such revenues to fund our
activities. The ISV-900 license agreement was terminated in December 2000 and we
no longer receive any payments to support this program.
Research and development expenses were $1.9 million and $1.8 million for
the third quarter of 2001 and 2000, respectively. The increase for the third
quarter of 2001 reflects a 12% increase in R&D headcount, hired in previous
quarters, mainly to support the preparation of an IND application for ISV-401
and the on-going activities required to conduct clinical trials. Also reflected
was a decrease in the costs associated with pre-clinical studies related to
ISV-401, as the IND was filed with the FDA in June 2001 and the Phase I clinical
studies were begun on the program. Cost reimbursement decreased 83% to $164,000
in the third quarter of 2001 from $978,000 in the comparable period of 2000.
This reflects the termination of several programs we had with Pharmacia in 2000,
including our ISV-900 licensing agreement that provided for reimbursement of the
on-going development costs for the program, and ISV-402 that incorporated an
antibiotic developed by Pharmacia in DuraSite. In addition, our ISV-205
agreement was terminated in May 2001 and we no longer receive any payments after
the ninety-day termination period. The cost reimbursement for the third quarter
of 2001 includes amounts related to the ISV-616 collaboration that began in the
second quarter of 2001.
Research and development expenses were $5.5 million and $4.9 million for
the nine months ended September 30, 2001 and September 30, 2000, respectively.
The 12% increase for the nine-month period reflects the 12% increase in R&D
headcount. Additionally, depreciation increased related to equipment purchased
to support pre-clinical testing activities and the cost of filing and
maintaining patents increased consistent with the on-going expansion of our
patent portfolio. Cost reimbursement decreased 81% to $693,000 from $3.7 million
for the nine months ended September 30, 2001 and September 30, 2000,
respectively. This reflects the termination of our ISV-900 licensing agreement
and our ISV-402 program with Pharmacia in 2000, and our ISV-205 licensing
agreement,
7
which was terminated in May 2001 and we no longer received any payments after
the ninety-day termination period. The cost reimbursement in 2001 included
amounts related to our ISV-616 collaboration that was begun in the second
quarter of 2001.
General and administrative expenses increased to $847,000 during the
third quarter of 2001 from $670,000 during the third quarter of 2000, and to
$2.5 million from $2.0 million for the nine months ended September 30, 2001 and
September 30, 2000, respectively. Of this increase, approximately $293,000 and
$506,000 for the quarter and nine months ended September 30, 2001, respectively,
related to the external cost of the initiation of sales and marketing activities
for the OcuGene glaucoma genetic test. In the third quarter of 2001,
approximately 30% of cost of the sales and marketing activities was supported by
a decrease in the cost of other outside services for financial and investor
relations activities incurred in the third quarter of 2000 and not in 2001.
Net interest, other income and expense was $105,000 and $272,000 in the
third quarters of 2001 and 2000, respectively, and $505,000 and $524,000 for the
nine months ended September 30, 2001 and September 30, 2000, respectively. These
fluctuations are due principally to changes in average cash balances. Interest
earned in the future will be dependent on our ability to raise financing and
prevailing interest rates.
We incurred net losses applicable to common stockholders before
cumulative effect of a change in accounting principle of $2.5 million and
$850,000 during the third quarter of 2001 and 2000, respectively, and $6.8
million and $1.4 million for the nine months ended September 30, 2001 and
September 30, 2000, respectively. The increased loss for the third quarter, and
nine month period, of 2001 compared to 2000 was due primarily to the decrease in
reimbursement of research and development expenses by Pharmacia, our increased
R&D expenses related to our ISV-401 and ISV-014 programs and our increased G&A
expenses as we prepared for the launch of the OcuGene glaucoma genetic test. We
may incur substantial additional losses over the next several years. These
losses are expected to fluctuate from period to period based primarily on the
level of our product development and clinical activities, our ability to enter
into a collaboration for our ISV-205 product and the level of third-party
reimbursement and milestone payments received by us, if any.
LIQUIDITY AND CAPITAL RESOURCES
Through 1995, we financed our operations primarily through private
placements of preferred stock, totaling approximately $32 million, and an
October 1993 public offering of Common Stock, which resulted in net proceeds of
approximately $30 million. After 1995, we financed our operations primarily
through a January 1996 private placement of Common Stock and warrants resulting
in net proceeds of approximately $4.7 million and an April 1996 public offering
which raised net proceeds of approximately $8.1 million. In addition, in
accordance with a July 1996 agreement between Bausch & Lomb Pharmaceuticals,
Inc. (B&L) and us, we received a total of $2.0 million from the sale of Common
Stock in August 1996 and 1997. In September 1997, we completed a $7.0 million
private placement of 7,000 shares of Series A Redeemable Convertible Preferred
Stock (Series A preferred stock) for which net proceeds were approximately $6.5
million. In January 1999, we entered into a transaction with Pharmacia from
which we received a total of $3.5 million from the sale of Common Stock in
January 1999 and September 1999. In November 1999, we entered into another
transaction with Pharmacia from which we received a $5.0 million licensing fee
and, in January 2000, received $2.0 million from the sale of shares of Common
Stock. In April 2000, we received $625,000 from the issuance of Common Stock
from the exercise of warrants issued as part of the January 1996 private
placement. In May 2000, we completed a private placement of Common Stock and
warrants resulting in net proceeds of approximately $13.0 million.
At September 30, 2001, we had cash and cash equivalents totaling $11.9
million compared to $18.9 million as of December 31, 2000. It is our policy to
invest these funds in highly liquid securities, such as interest bearing money
market funds, Treasury and federal agency notes and corporate debt.
The net cash used in operating activities of $6.6 million in the nine
months ended September 30, 2001 from December 31, 2000, related primarily to
increased net research and development expenditures as a result of a decrease in
received cost reimbursements.
8
We purchased $409,000 of laboratory and other equipment in the first
nine months of 2001 compared with $423,000 in the first nine months of 2000. We
also entered into a $39,000 capital lease for certain laboratory equipment in
the first nine months of 2000.
We received $47,000 and $213,000 in the first nine months of 2001 and
2000, respectively, from the issuance of Common Stock for the exercise of stock
options by employees and purchases made through our employee stock purchase
plan. In addition to the $13.0 million we received as part of a private
placement in the first nine months of 2000, we received $2.0 million from the
issuance of Common Stock to Pharmacia pursuant to the November 1999 Stock
Purchase Agreement, and $625,000 from the exercise of warrants.
During the third quarter of 2001 we signed an amendment to our building
lease. The new lease has a total lease commitment of $3.6 million over the
five-year lease term, which begins in January 2002.
Our future capital expenditures and requirements will depend on numerous
factors, including the progress of our research and development programs and
preclinical and clinical testing, the time and costs involved in obtaining
regulatory approvals, our ability to establish additional collaborative
arrangements, particularly for our ISV-205 product, the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights, competing technological and market developments, changes in our
existing collaborative and licensing relationships, acquisition of new
businesses, products and technologies, the completion of commercialization
activities and arrangements, and the purchase of additional property and
equipment.
We anticipate no material capital expenditures to be incurred for
environmental compliance in fiscal year 2001. Based on our good environmental
compliance record to date, and our current compliance with applicable
environmental laws and regulations, environmental compliance is not expected to
have a material adverse effect on our operations.
We believe that our cash and cash equivalents will be sufficient to meet
our operating expenses and cash requirements beyond the end of 2001. We believe
we will require substantial additional funds prior to reaching sustained
profitability and we may seek private or public equity or debt investments,
future collaborative agreements, and possibly research funding to meet such
needs. Even if we do not have an immediate need for additional cash, we may seek
access to the private or public equity markets if and when we believe conditions
are favorable. There is no assurance that such additional funds will be
available for us to finance our operations on acceptable terms, or at all.
RISK FACTORS
IT IS DIFFICULT TO EVALUATE OUR BUSINESS BECAUSE WE ARE IN AN EARLY STAGE OF
DEVELOPMENT AND OUR TECHNOLOGY IS UNTESTED
We are in an early stage of developing our business. We have only
received an insignificant amount of royalties from the sale of one of our
products, an over-the-counter dry eye treatment. Before regulatory authorities
grant us marketing approval, we need to conduct significant additional research
and development and preclinical and clinical testing. All of our products are
subject to risks that are inherent to products based upon new technologies.
These risks include the risks that our products:
- are found to be unsafe or ineffective;
- fail to receive necessary marketing clearance from regulatory
authorities;
- even if safe and effective, are too difficult or expensive to
manufacture or market;
- are unmarketable due to the proprietary rights of third parties;
or
- are not able to compete with superior, equivalent or more
cost-effective products offered by competitors.
Therefore, our research and development activities may not result in any
commercially viable products.
9
WE WILL REQUIRE SIGNIFICANT ADDITIONAL FUNDING FOR OUR CAPITAL REQUIREMENTS AND
WE MAY HAVE DIFFICULTY RAISING ADDITIONAL FUNDING
We will require substantial additional funding to develop and conduct
testing on our potential products. We will also require additional funding to
support our sales and marketing efforts for our OcuGene glaucoma genetic test
and if we decide to independently manufacture or market any of our other
products, including our ISV-205 product. Our future capital requirements depend
upon many factors, including:
- the cost of establishing a marketing organization for OcuGene
and the related promotional activities;
- the progress of our research and development programs;
- the progress of preclinical and clinical testing;
- changes in, or termination of, our existing collaboration or
licensing arrangements;
- whether we manufacture and market any of our other products
ourselves;
- our ability to establish additional corporate partnerships to
develop, manufacture and market our potential products,
including our ISV-205 product;
- the time and cost involved in obtaining regulatory approvals;
- the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights;
- competing technological and market developments; and
- the purchase of additional capital equipment.
We may seek additional funding through public or private equity or debt
financing, collaborative or other arrangements, and from other sources. We may
not be able to secure additional funding from these sources, and any funding may
not be on terms acceptable to us. In addition, our board of directors has the
authority to determine the price and terms of any sale of common stock and the
rights, preferences and privileges of any preferred stock or debt or other
security that is convertible into or exercisable for the common stock. The terms
of any securities issued to future investors may be superior to the rights of
our common stockholders, could result in substantial dilution and could
adversely affect the market price for our common stock.
Our stockholders will suffer substantial dilution if we raise additional
funds by issuing equity securities. However, if we cannot raise additional
funding, we may be required to delay, scale back or eliminate one or more of our
research, discovery or development programs, or scale back or cease operations
altogether. In addition, the failure to raise additional funding may force us to
enter into agreements with third parties on terms which are disadvantageous to
us, which may, among other things, require us to relinquish rights to our
technologies, products or potential products.
WE HAVE A HISTORY OF OPERATING LOSSES AND WE EXPECT TO CONTINUE TO HAVE LOSSES
IN THE FUTURE
We have incurred significant operating losses since our inception in
1986 and have pursued numerous drug development candidates that did not prove to
have commercial potential. As of September 30, 2001, our accumulated deficit was
approximately $95.0 million. We expect to incur net losses for the foreseeable
future or until we are able to achieve significant royalties or other revenues
from sales of our products.
Attaining significant revenue or profitability depends upon our ability,
alone or with third parties, to successfully develop our potential products,
conduct clinical trials, obtain required regulatory approvals and successfully
manufacture and market our products. We may not ever achieve or be able to
maintain significant revenue or profitability.
10
WE RELY ON THIRD PARTIES TO DEVELOP, MARKET AND SELL OUR PRODUCTS, WE MAY NOT BE
ABLE TO CONTINUE OR ENTER INTO THIRD PARTY ARRANGEMENTS, AND THESE THIRD
PARTIES' EFFORTS MAY NOT BE SUCCESSFUL
Following the termination of our ISV-900 agreement with Pharmacia in
December 2000, we have begun to develop a marketing organization focused on the
launch of our OcuGene glaucoma genetic test. We do not plan on establishing a
dedicated sales force or a marketing organization for our other product
candidates and plan to primarily use external marketing and sales resources even
for OcuGene. We also rely on third parties for clinical testing or product
development. In addition, in May 2001, Pharmacia terminated the January 1999
licensing agreement we had entered into that granted Pharmacia an exclusive
worldwide license for ISV-205 for the treatment of glaucoma. We now must enter
into another third party collaboration agreement for the development, marketing
and sale of our ISV-205 product or develop, market and sell the product
ourselves. There can be no assurance that we will be successful in finding a new
corporate partner for our ISV-205 program or that any collaboration will be
successful, either of which could significantly harm our business. If we are to
successfully develop and commercialize our product candidates, including
ISV-205, we will be required to enter into arrangements with one or more third
parties that will:
- provide for Phase II and/or Phase III clinical testing;
- obtain or assist us in other activities associated with
obtaining regulatory approvals for our product candidates; and
- market and sell our products, if they are approved.
We plan to market and sell the OcuGene glaucoma genetic test mainly
using external marketing and sales resources that may include:
- marketing consultants;
- contract sales organizations;
- a network of key ophthalmic clinicians; and
- other resources with ophthalmic expertise.
We may not be able to enter into arrangements with third parties with
ophthalmic or diagnostic industry experience on acceptable terms or at all. If
we are not successful in concluding such arrangements on acceptable terms, we
may be required to establish our own sales force and significantly expand our
marketing organization, despite the fact that we have no experience in sales,
marketing or distribution. Even if we do enter into collaborative relationships,
as we have recently experienced with Pharmacia, these relationships can be
terminated forcing us to seek alternatives. We may not be able to build a
marketing staff or sales force and our sales and marketing efforts may not be
cost-effective or successful.
Our strategy for research, development and commercialization of our
products requires us to enter into various arrangements with corporate and
academic collaborators, licensors, licensees and others. Furthermore, we are
dependent on the diligent efforts and subsequent success of these outside
parties in performing their responsibilities.
Even if we, or those working with us, obtain regulatory approvals, to
the extent we have entered into or will enter into co-marketing, co-promotion or
other licensing arrangements for the marketing and sale of our products, any
revenues that we receive will be dependent on the efforts of third parties, such
as our corporate collaborators. These partners may terminate their relationships
with us and may not diligently or successfully market our products. We may not
be able to conclude arrangements with other companies to support the
commercialization of our products on acceptable terms. In addition, our
collaborators may take the position that they are free to compete using our
technology without compensating or entering into agreements with us.
Furthermore, our collaborators may pursue alternative technologies or develop
alternative products either on their own or in collaboration with others,
including our competitors, as a means for developing treatments for the diseases
or disorders targeted by these collaborative programs.
11
OUR BUSINESS DEPENDS UPON OUR PROPRIETARY RIGHTS, AND WE MAY NOT BE ABLE TO
ADEQUATELY PROTECT, ENFORCE OR SECURE OUR INTELLECTUAL PROPERTY RIGHTS
Our success will depend in large part on our ability to obtain patents,
protect trade secrets, obtain and maintain rights to technology developed by
others, and operate without infringing upon the proprietary rights of others. A
substantial number of patents in the field of ophthalmology and genetics have
been issued to pharmaceutical, biotechnology and biopharmaceutical companies.
Moreover, competitors may have filed patent applications, may have been issued
patents or may obtain additional patents and proprietary rights relating to
products or processes competitive with ours. Our patent applications may not be
approved. We may not be able to develop additional proprietary products that are
patentable. Even if we receive patent issuances, those issued patents may not be
able to provide us with adequate protection for our inventions or may be
challenged by others. Furthermore, the patents of others may impair our ability
to commercialize our products. The patent positions of firms in the
pharmaceutical and genetic industries generally are highly uncertain, involve
complex legal and factual questions, and have recently been the subject of much
litigation. Neither the United States Patent and Trademark Office nor the courts
has developed, formulated, or presented a consistent policy regarding the
breadth of claims allowed or the degree of protection afforded under
pharmaceutical and genetic patents. Despite our efforts to protect our
proprietary rights, others may independently develop similar products, duplicate
any of our products or design around any of our patents. In addition, third
parties from which we have licensed or otherwise obtained technology may attempt
to terminate or scale back our rights.
A number of pharmaceutical and biotechnology companies and research and
academic institutions have developed technologies, filed patent applications or
received patents on various technologies that may be related to our business.
Some of these technologies, applications or patents may conflict with our
technologies or patent applications. Such conflicts could limit the scope of the
patents, if any, we may be able to obtain or result in the denial of our patent
applications. In addition, if the United States Patent and Trademark Office or
foreign patent agencies have issued or issue patents that cover our activities
to other companies, we may not be able to obtain licenses to these patents at
all, or at a reasonable cost, or be able to develop or obtain alternative
technology. If we do not obtain such licenses, we could encounter delays in or
be precluded altogether from introducing products to the market.
We may need to litigate in order to defend against or assert claims of
infringement, to enforce patents issued to us or to protect trade secrets or
know-how owned or licensed by us. Litigation could result in substantial cost to
and diversion of effort by us, which may harm our business. We have also agreed
to indemnify our licensees against infringement claims by third parties related
to our technology, which could result in additional litigation costs and
liability for us. In addition, our efforts to protect or defend our proprietary
rights may not be successful or, even if successful, may result in substantial
cost to us.
We also depend upon unpatented trade secrets to maintain our competitive
position. Others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets. Our
trade secrets may also be disclosed, and we may not be able to effectively
protect our rights to unpatented trade secrets. To the extent that we or our
consultants or research collaborators use intellectual property owned by others,
disputes also may arise as to the rights in related or resulting know-how and
inventions.
IF WE ENGAGE IN ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS, AND THE
ANTICIPATED BENEFITS OF THE ACQUISITION MAY NEVER BE REALIZED
At some point in the future we may pursue acquisitions of companies,
product lines, technologies or businesses that our management believes are
complementary or otherwise beneficial to us. Any of these acquisitions could
have negative effects on our business. Future acquisitions may result in
substantial dilution to our stockholders, the incurrence of additional debt and
amortization expenses related to goodwill, research and development and other
intangible assets. Any of these results could harm our financial condition. In
addition, acquisitions would involve several risks for us, including:
- assimilating employees, operations, technologies and products
from the acquired companies with our existing employees,
operation, technologies and products;
- diverting our management's attention from day-to-day operation
of our business;
12
- entering markets in which we have no or limited direct
experience; and
- potentially losing key employees from the acquired companies.
WE HAVE NO EXPERIENCE IN COMMERCIAL MANUFACTURING AND NEED TO ESTABLISH
MANUFACTURING RELATIONSHIPS WITH THIRD PARTIES, AND IF CONTRACT MANUFACTURING IS
NOT AVAILABLE TO US OR DOES NOT SATISFY REGULATORY REQUIREMENTS, WE WILL HAVE TO
ESTABLISH OUR OWN REGULATORY COMPLIANT MANUFACTURING CAPABILITY
We have no experience manufacturing products for commercial purposes. We
have a pilot facility licensed by the State of California to manufacture a
number of our products for Phase I and Phase II clinical trials but not for late
stage clinical trials or commercial purposes. Any delays or difficulties that we
may encounter in establishing and maintaining a relationship with qualified
manufacturers to produce, package and distribute our finished products may harm
our clinical trials, regulatory filings, market introduction and subsequent
sales of our products.
Contract manufacturers must adhere to Good Manufacturing Practices
regulations which are strictly enforced by the FDA on an ongoing basis through
its facilities inspection program. Contract manufacturing facilities must pass a
pre-approval plant inspection before the FDA will approve a new drug
application. Some of the material manufacturing changes that occur after
approval are also subject to FDA review and clearance or approval. The FDA or
other regulatory agencies may not approve the process or the facilities by which
any of our products may be manufactured. Our dependence on third parties to
manufacture our products may harm our ability to develop and deliver products on
a timely and competitive basis. Should we be required to manufacture products
ourselves, we:
- will be required to expend significant amounts of capital to
install a manufacturing capability;
- will be subject to the regulatory requirements described above;
- will be subject to similar risks regarding delays or
difficulties encountered in manufacturing any such products; and
- will require substantial additional capital.
Therefore, we may not be able to manufacture any products successfully
or in a cost-effective manner.
WE HAVE NO EXPERIENCE IN PERFORMING THE ANALYTICAL PROCEDURES RELATED TO GENETIC
TESTING AND HAVE ESTABLISHED AN EXCLUSIVE COMMERCIAL AGREEMENT WITH A THIRD
PARTY TO PERFORM THESE PROCEDURES FOR OUR OCUGENE GLAUCOMA GENETIC TEST. IF WE
ARE UNABLE TO MAINTAIN THIS ARRANGEMENT, AND ARE UNABLE TO ESTABLISH NEW
ARRANGEMENT WITH THIRD PARTIES, WE WILL HAVE TO ESTABLISH OUR OWN REGULATORY
COMPLIANT ANALYTICAL PROCESS FOR GENETIC TESTING.
We have no experience in the analytical procedures related to genetic
testing. We have entered into an agreement with a clinical laboratory under
which the laboratory will exclusively perform OcuGene genetic analytical
procedures at a commercial scale in the United States. Accordingly, we are
reliant on this provider for all of our OcuGene analytical procedures. If we are
unable to maintain this arrangement, we would have to contract with another
clinical laboratory or would have to establish our own facilities. We cannot
assure you that we will be able to contract with another laboratory to perform
these services on a commercially reasonable basis, or at all.
Clinical laboratories must adhere to Good Laboratory Practice
regulations that are strictly enforced by the FDA on an ongoing basis through
its facilities inspection program. Should we be required to perform the
analytical procedures for genetic testing ourselves, we:
- will be required to expend significant amounts of capital to
install an analytical capability;
- will be subject to the regulatory requirements described above;
and
- will require substantial additional capital.
Therefore, we will have to either contract with another laboratory or
establish our own analytical function, and we cannot assure you we will be able
to successfully pursue either alternative on a cost-efficient basis, or at all.
13
WE RELY ON A SOLE SOURCE FOR SOME OF THE RAW MATERIALS IN OUR PRODUCTS, AND THE
RAW MATERIALS WE NEED MAY NOT BE AVAILABLE TO US
We are dependent upon our development partner for the active drug
incorporated into our ISV-616 product candidate. The further development of this
product will be dependent upon reaching appropriate agreement with our
development partner on future supply of the compound.
In addition, certain of the raw materials we use in formulating our
DuraSite drug delivery system, and other components of our product candidates,
are available from only one source. Any significant interruption in the supply
of these raw materials could delay our clinical trials, product development or
product sales and could harm our business.
OUR PRODUCTS ARE SUBJECT TO GOVERNMENT REGULATIONS AND APPROVAL WHICH MAY DELAY
OR PREVENT THE MARKETING OF POTENTIAL PRODUCTS AND IMPOSE COSTLY PROCEDURES UPON
OUR ACTIVITIES
The FDA and comparable agencies in state and local jurisdictions and in
foreign countries impose substantial requirements upon preclinical and clinical
testing, manufacturing and marketing of pharmaceutical products. Lengthy and
detailed preclinical and clinical testing, validation of manufacturing and
quality control processes, and other costly and time-consuming procedures are
required. Satisfaction of these requirements typically takes several years and
the time needed to satisfy them may vary substantially, based on the type,
complexity and novelty of the pharmaceutical product. The effect of government
regulation may be to delay or to prevent marketing of potential products for a
considerable period of time and to impose costly procedures upon our activities.
The FDA or any other regulatory agency may not grant approval for any products
we develop on a timely basis, or at all. Success in preclinical or early stage
clinical trials does not assure success in later stage clinical trials. Data
obtained from preclinical and clinical activities are susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. If
regulatory approval of a product is granted, such approval may impose
limitations on the indicated uses for which a product may be marketed. Further,
even after we have obtained regulatory approval, later discovery of previously
unknown problems with a product may result in restrictions on the product,
including withdrawal of the product from the market. Moreover, the FDA has
recently reduced previous restrictions on the marketing, sale and prescription
of products for indications other than those specifically approved by the FDA.
Accordingly, even if we receive FDA approval of a product for certain indicated
uses, our competitors, including our collaborators, could market products for
such indications even if such products have not been specifically approved for
such indications. Delay in obtaining or failure to obtain regulatory approvals
would make it difficult or impossible to market our products and would harm our
business.
The FDA's policies may change and additional government regulations may
be promulgated which could prevent or delay regulatory approval of our potential
products. Moreover, increased attention to the containment of health care costs
in the United States could result in new government regulations that could harm
our business. Adverse governmental regulation might arise from future
legislative or administrative action, either in the United States or abroad. See
"--Uncertainties regarding healthcare reform and third-party reimbursement may
impair our ability to raise capital, form collaborations and sell our products."
WE COMPETE IN HIGHLY COMPETITIVE MARKETS AND OUR COMPETITORS' FINANCIAL,
TECHNICAL, MARKETING, MANUFACTURING AND HUMAN RESOURCES MAY SURPASS OR LIMIT OUR
ABILITY TO DEVELOP AND/OR MARKET OUR PRODUCTS AND TECHNOLOGIES
Our success depends upon developing and maintaining a competitive advantage in
the development of products and technologies in our areas of focus. We have many
competitors in the United States and abroad, including pharmaceutical,
biotechnology and other companies with varying resources and degrees of
concentration in the ophthalmic market. Our competitors may have existing
products or products under development which may be technically superior to ours
or which may be less costly or more acceptable to the market. Competition from
these companies is intense and is expected to increase as new products enter the
market and new technologies become available. Many of our competitors have
substantially greater financial, technical, marketing, manufacturing and
14
human resources than we do. In addition, they may also succeed in developing
technologies and products that are more effective, safer, less expensive or
otherwise more commercially acceptable than any that we have or will develop.
Our competitors may obtain cost advantages, patent protection or other
intellectual property rights that would block or limit our ability to develop
our potential products. Our competitors may also obtain regulatory approval for
commercialization of their products more effectively or rapidly than we will. If
we decide to manufacture and market our products by ourselves, we will be
competing in areas in which we have limited or no experience such as
manufacturing efficiency and marketing capabilities. See "-- We have no
experience in commercial manufacturing and need to establish manufacturing
relationships with third parties, and if contract manufacturing is not available
to us or does not satisfy regulatory requirements, we will have to establish our
own regulatory compliant manufacturing capability."
WE ARE DEPENDENT UPON KEY EMPLOYEES AND WE MAY NOT BE ABLE TO RETAIN OR ATTRACT
NEW KEY EMPLOYEES
We are highly dependent on Dr. Chandrasekaran and other principal
members of our scientific and management staff. The loss of services from these
key personnel might significantly delay the achievement of planned development
objectives. Furthermore, a critical factor to our success is recruiting and
retaining qualified personnel. Competition for skilled individuals in the
biotechnology business is highly intense, and we may not be able to continue to
attract and retain personnel necessary for the development of our business. The
loss of key personnel or the failure to recruit additional personnel or to
develop needed expertise could harm our business.
OUR INSURANCE COVERAGE MAY NOT ADEQUATELY COVER OUR POTENTIAL PRODUCT LIABILITY
EXPOSURE
We are exposed to potential product liability risks inherent in the
development, testing, manufacturing, marketing and sale of human therapeutic
products. Product liability insurance for the pharmaceutical industry is
extremely expensive. Our present product liability insurance coverage may not be
adequate. In addition, our existing coverage will not be adequate as we further
develop, manufacture and market our products, and adequate insurance coverage
against potential claims may not be available in sufficient amounts or at a
reasonable cost.
UNCERTAINTIES REGARDING HEALTHCARE REFORM AND THIRD-PARTY REIMBURSEMENT MAY
IMPAIR OUR ABILITY TO RAISE CAPITAL, FORM COLLABORATIONS AND SELL OUR PRODUCTS
The continuing efforts of governmental and third party payers to contain
or reduce the costs of healthcare through various means may harm our business.
For example, in some foreign markets the pricing or profitability of health care
products is subject to government control. In the United States, there have
been, and we expect there will continue to be, a number of federal and state
proposals to implement similar government control. The implementation or even
the announcement of any of these legislative or regulatory proposals or reforms
could harm our business by impeding our ability to achieve profitability, raise
capital or form collaborations.
In addition, the availability of reimbursement from third party payers
determines, in large part, the demand for healthcare products in the United
States and elsewhere. Examples of such third party payers are government and
private insurance plans. Significant uncertainty exists as to the reimbursement
status of newly approved healthcare products, and third party payers are
increasingly challenging the prices charged for medical products and services.
If we succeed in bringing one or more products to the market, reimbursement from
third party payers may not be available or may not be sufficient to allow us to
sell our products on a competitive or profitable basis.
OUR USE OF HAZARDOUS MATERIALS MAY POSE ENVIRONMENTAL RISKS AND LIABILITIES
WHICH MAY CAUSE US TO INCUR SIGNIFICANT COSTS
Our research, development and manufacturing processes involve the
controlled use of small amounts of radioactive and other hazardous materials. We
are subject to federal, state and local laws, regulations and policies governing
the use, manufacture, storage, handling and disposal of radioactive and other
hazardous materials and waste products. Although we believe that our safety
procedures for handling and disposing of these materials comply
15
with the standards prescribed by current laws and regulations, we cannot
completely eliminate the risk of accidental contamination or injury from these
materials. In the event of such an accident, we could be held liable for any
damages that result, and any such liability could exceed our resources.
Moreover, we may be required to incur significant costs to comply with
environmental laws and regulations, especially to the extent that we manufacture
our own products.
MANAGEMENT AND PRINCIPAL STOCKHOLDERS MAY BE ABLE TO EXERT SIGNIFICANT CONTROL
ON MATTERS REQUIRING APPROVAL BY OUR STOCKHOLDERS
As of September 30, 2001, our management and principal stockholders
together beneficially owned approximately 25% of our outstanding shares of
common stock. As a result, these stockholders, acting together, may be able to
effectively control all matters requiring approval by our stockholders,
including the election of a majority of our directors and the approval of
business combinations.
THE MARKET PRICES FOR SECURITIES OF BIOPHARMACEUTICAL AND BIOTECHNOLOGY
COMPANIES SUCH AS OURS MAY BE HIGHLY VOLATILE DUE TO REASONS THAT ARE RELATED
AND UNRELATED TO THE OPERATING PERFORMANCE AND PROGRESS OF OUR COMPANY
The market prices for securities of biopharmaceutical and biotechnology
companies, including ours, have been highly volatile. The market has from time
to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. In addition, future
announcements, such as the results of testing and clinical trials, the status of
our relationships with third-party collaborators, technological innovations or
new therapeutic products, governmental regulation, developments in patent or
other proprietary rights, litigation or public concern as to the safety of
products developed by us or others and general market conditions, concerning us,
our competitors or other biopharmaceutical companies, may have a significant
effect on the market price of our common stock. We have not paid any cash
dividends on our common stock, and we do not anticipate paying any dividends in
the foreseeable future.
In addition, on September 11, 2001, terrorist attacks destroyed the
World Trade Center in New York City and damaged the Pentagon in Washington, D.C.
The impact of these events, as well as any future events occurring in connection
with these events, including U.S. military retaliation or additional terrorist
acts, on financial markets is not yet fully known but has included, and could
continue to include, among other things, increased price and volume volatility
and/or economic recession. These events, as well as fluctuations in our
operating results and market conditions for biopharmaceutical and biotechnology
stocks in general, could have a significant effect on the volatility of the
market price for our common stock and on the future price of our common stock.
WE HAVE ADOPTED AND ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR
PREVENT AN ACQUISITION OF OUR COMPANY
Provisions of our certificate of incorporation and bylaws may constrain or
discourage a third party from acquiring or attempting to acquire control of us.
Such provisions could limit the price that investors might be willing to pay in
the future for shares of our common stock. Our board of directors has the
authority to issue up to 5,000,000 shares of preferred stock. The board of
directors has the authority to determine the price, rights, preferences,
privileges and restrictions of the remaining unissued shares of preferred stock
without any further vote or action by the stockholders. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of our outstanding voting stock. Provisions of Delaware law applicable
to us could also delay or make more difficult a merger, tender offer or proxy
contest involving us, including Section 203 of the Delaware General Corporation
Law, which prohibits a Delaware
16
corporation from engaging in any business combination with any interested
stockholder for a period of three years unless conditions set forth in the
Delaware General Corporation Law are met.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes
in interest rates.
We invest our excess cash in investment grade, interest-bearing
securities. At September 30, 2001, we had approximately $11.9 million invested
in money market mutual funds. While a hypothetical decrease in market interest
rates by 10 percent from the September 30, 2001 levels would cause a decrease in
interest income, it would not result in a loss of the principal. Additionally,
the decrease in interest income would not be material.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
See Exhibit Index on page 19.
b) Reports on Form 8-K
None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INSITE VISION INCORPORATED
Dated: November 13, 2001 by: /s/ S. Kumar Chandrasekaran, Ph.D.
---------------------------------
S. Kumar Chandrasekaran, Ph.D.
Chairman of the Board,
Chief Executive Officer and
Chief Financial Officer
(on behalf of the registrant and as
principal financial and
accounting officer)
18
EXHIBIT INDEX
Exhibit Number Description
10.40 Amendment No. 1 to Marina Village Office Tech Lease, dated
July 20, 2001 and effective January 1, 2002.
19