AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 6, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INHALE THERAPEUTIC SYSTEMS, INC.
(Exact Name Of Registrant As Specified In Its Charter)
DELAWARE 94-3134940
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification
Organization) No.)
INHALE THERAPEUTIC SYSTEMS, INC.
150 INDUSTRIAL ROAD
SAN CARLOS, CA 94070
(650) 631-3100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ROBERT B. CHESS
CO-CHIEF EXECUTIVE OFFICER
INHALE THERAPEUTIC SYSTEMS, INC.
150 INDUSTRIAL ROAD
SAN CARLOS, CA 94070
(650) 631-3100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
MARK P. TANOURY, ESQ.
JOHN M. GESCHKE, ESQ.
Cooley Godward LLP
3000 Sand Hill Road
Building 3, Suite 230
Menlo Park, CA 94025
(650) 843-5000
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES TO BE AMOUNT TO BE AGGREGATE PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
6 3/4% Convertible Subordinated
Debentures due October 13, 2006................. $93,625,000 100%(1)(2) $93,625,000(1) $24,717
Common Stock, $.0001 par value per share.......... 2,925,095(3) --(4) --(4) --(4)
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(i) of the Securities Act of 1933.
(2) Exclusive of accrued interest and distributions, if any.
(3) This number represents the number of shares of common stock that are
initially issuable upon conversion of the 6 3/4% Convertible Subordinated
Debentures due October 13, 2006 registered hereby. For purposes of
estimating the number of shares of common stock to be included of the
Debentures, Inhale calculated the number of shares issuable upon conversion
of the debentures based on a conversion price of $32.0075 shares per share
of common stock. In addition, the shares set forth in the table, pursuant to
Rule 416 under the Securities Act of 1933, as amended, the amount to be
registered includes an indeterminate number of shares of common stock
issuable upon conversion of the debentures, as this amount may be adjusted
as a result of stock splits, stock dividends and antidilution provisions.
(4) No additional consideration will be received for the common stock and
therefore, no registration fee is required pursuant to Rule 457(i).
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION
PROSPECTUS DATED JANUARY 6, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
P R O S P E C T U S
INHALE THERAPEUTIC SYSTEMS, INC.
$93,625,000
of 6 3/4% Convertible Subordinated Convertible Debentures due October 13, 2006
and 2,925,095 Shares of Common Stock Issuable Upon Conversion of the Debentures
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This prospectus relates to 6 3/4% Convertible Subordinated Debentures due
October 13, 2006 of Inhale Therapeutic Systems, Inc., a Delaware corporation,
held by certain security holders who may offer for sale the debentures and the
shares of our common stock into which the debentures are convertible at any time
at market prices prevailing at the time of sale or at privately negotiated
prices. The selling security holders may sell the debentures or the common stock
directly to purchasers or through underwriters, broker-dealers or agents, who
may receive compensation in the form of discounts, concessions or commissions.
The holders of the debentures may convert the debentures into shares of our
common stock at any time at a conversion price of $32.0075 per share of common
stock. After October 13, 2002, we may redeem the debentures, in whole or in
part, at the redemption prices set forth in the section entitled "Description of
the Debentures--Optional Redemption by Inhale."
In the event of a Change of Control, as defined in the section entitled
"Description of the Debentures--Repurchase at Option of Holders upon a Change in
Control," each holder of the debentures may require us to repurchase the
debentures at 100% of the principal amount of the debentures plus accrued
interest. At our option, we may repurchase the debentures for cash or common
stock.
The debentures are general, unsecured obligations that are subordinated in
right of payment to all of our existing and future senior indebtedness. See
"Description of the Debentures--Subordination".
Our common stock currently trades on the Nasdaq National Market under the
symbol "INHL". The last reported sale price on January 5, 2000 was $44.03 per
share.
Our 6 3/4% Convertible Subordinated Debentures are currently eligible for
trading on the PORTAL Market of the Nasdaq Stock Market.
Investing in our common stock or our convertible subordinated debentures
involves a high degree of risk. Please carefully consider the "Risk Factors"
beginning on page 2 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2000
In connection with this offering, no person is authorized to give any
information or to make any representations not contained in this prospectus. If
information is given or representations are made, you may not rely on that
information or representations as having been authorized by us. This prospectus
is neither an offer to sell nor a solicitation of an offer to buy any securities
other than those registered by this prospectus, nor is it an offer to sell or a
solicitation of an offer to buy securities where an offer or solicitation would
be unlawful. You may not imply from the delivery of this prospectus, nor from
any sale made under this prospectus, that our affairs are unchanged since the
date of this prospectus or that the information contained in this prospectus is
correct as of any time after the date of this prospectus.
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD
CONSIDER CAREFULLY THE INFORMATION IN THIS PROSPECTUS UNDER THE HEADING "RISK
FACTORS."
THE COMPANY
We have created a drug delivery system to easily and painlessly deliver a
wide range of drugs, including peptides, proteins, and other molecules, by
inhalation to the deep lung for treatment of systemic and respiratory diseases.
We are using this system principally to enable non-invasive delivery of
macromolecule drugs currently administered by injection. Our most advanced
program is inhaleable insulin, which is sponsored by Pfizer Inc. Pfizer
commenced dosing for Phase III human clinical trials in June 1999. In addition
to our insulin program with Pfizer, we have development collaborations with
Biogen, Inc., Centeon L.L.C. (a joint venture of Hoechst Marion Roussel AG and
Rhone-Poulenc Rorer, Inc., which have now merged to form Aventis), and Eli Lilly
and Company. We also have early stage feasibility and research collaborations
with several other companies and have tested six drugs in human clinical trials.
Currently there are approximately 35 macromolecule drugs marketed in the
United States and about 120 others in human clinical trials. Sales of the top 15
genetically engineered protein drugs (a subset of macromolecule drugs) were
estimated at $14 billion worldwide in 1997. Most of these drugs are currently
delivered by injection. Injections are undesirable for numerous reasons
including patient discomfort, inconvenience and risk of infection. Poor patient
acceptance of, and compliance with, injectable therapies can lead to increased
incidence of medical complications and higher disease management costs.
Alternatives to injection such as oral, transdermal and nasal delivery have to
date been shown generally to be commercially unattractive due to low natural
bioavailability--the amount of drug absorbed from the delivery site into the
bloodstream relative to injection. As an alternative to the invasiveness of
injection, we believe a deep lung inhalation delivery system could expand the
market for macromolecule drug therapies by increasing patient acceptance and
improving compliance and may enable new therapeutic uses of certain
macromolecule drugs.
We have created a proprietary technology platform integrating customized
formulation, dry powder processing and packaging with a proprietary inhalation
device to enable efficient, reproducible delivery of macromolecule drugs for
systemic and local lung indications. For specific drug products, we formulate
and process bulk drugs supplied by collaborative partners into dry powders which
are packaged into individual dosing units referred to as blisters. The blisters
are designed to be loaded into our device, which patients then activate to
inhale the aerosolized drugs. We have developed a inhalation device that is
being used several times per day for several months in outpatient trials for
insulin. In addition, we have demonstrated room temperature stability of a year
or more for a number of macromolecule drugs, and have scaled-up our powder
processing and packaging for late stage clinical trials and small scale
commercial production for certain drugs.
Our most advanced product is inhaleable insulin for Type 1 and Type 2
diabetes, which is being developed through a collaborative program with Pfizer.
Insulin and insulin delivery systems sales were estimated to be $3.2 billion in
1998. Data published by Pfizer and clinical investigators from a 190 person
Phase Ilb human clinical trial using our drug delivery system showed that
inhaleable insulin provided statistically equivalent control of diabetes when
compared with injectable mealtime insulin for diabetics on insulin, and improved
control of diabetes for patients poorly controlled on oral therapies. Pfizer
initiated dosing for Phase III trials in June 1999. These trials are expected to
involve over 117 clinical sites. In November 1998, Pfizer announced that it
entered into a co-development and co-promotion arrangement with Hoechst for
inhaleable insulin. Hoechst subsequently announced that Hoechst and Pfizer would
construct a jointly-owned manufacturing facility estimated to cost over
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$160 million for the supply of insulin for pulmonary delivery. We will receive
royalties on inhaleable insulin products marketed by Pfizer and Hoechst as well
as revenues for supplying devices and powders.
Our development strategy is to focus our efforts on applying our pulmonary
delivery system primarily to drugs for systemic and local lung diseases that
either have proven efficacy and are approved for delivery by injection or are in
late stage clinical trials. Our business strategy is to work with collaborative
partners to develop and commercialize macromolecule drugs for deep lung
delivery. In a typical collaboration, our partner will provide the drug, fund
clinical development, and market the resulting commercial product. We will
supply the delivery system and receive revenues from powder manufacturing,
device supply, and royalties from sales of any commercial products. Prior to
commercialization, we receive revenues from our partners for research and
development funding and progress payments upon achievement of certain
developmental milestones.
In addition to Pfizer's sponsorship of inhaleable insulin, we have active
pulmonary delivery development programs with Biogen for
AVONEX-Registered Trademark-, an interferon beta drug used in the treatment of
multiple sclerosis; Centeon for an alpha-1 proteinase inhibitor for genetic
emphysema; and Lilly for a proprietary compound. These and other ongoing
projects in various stages of research, formulation and clinical development
have been selected as focus programs by us because we believe our approach may
have significant advantages over current therapies. We anticipate that any
product that may be developed would be commercialized with a collaborative
partner and believe our partnering strategy will enable us to reduce the
investment required to develop a large and diversified potential product
portfolio.
Our principal executive offices are located at 150 Industrial Road, San
Carlos, CA 94070. Our telephone number is (650) 631-3100. We maintain an
Internet home page at www.inhale.com. The contents of our web page are not a
part of this prospectus.
RECENT EVENTS
In November 1999, we entered into an agreement with Alliance Pharmaceutical
Corp. to acquire its PulmoSpheres-Registered Trademark- technology and other
related assets for particle formation and powder processing. In exchange for the
PulmoSpheres-Registered Trademark- technology and related assets and a number of
shares of Alliance common stock having a market value of $5.0 million, we paid
Alliance $15.0 million in cash and a number of shares of our common stock having
a market value of $5.0 million. Alliance will also have the right to additional
substantial payments upon the achievement of certain milestones and royalties on
a defined number of products commercialized using the technology.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, INVESTORS
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING AN INVESTMENT
IN THE NOTES OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES. THIS
PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT ARE "FORWARD-LOOKING
STATEMENTS" FOR PURPOSES OF THESE PROVISIONS, INCLUDING ANY PROJECTIONS OF
EARNINGS, REVENUES OR OTHER FINANCIAL ITEMS, ANY STATEMENTS OF THE PLANS AND
OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ANY STATEMENTS CONCERNING
PROPOSED NEW PRODUCTS OR SERVICES, ANY STATEMENTS REGARDING FUTURE ECONOMIC
CONDITIONS OR PERFORMANCE AND ANY STATEMENT OF ASSUMPTIONS UNDERLYING ANY OF THE
FOREGOING. IN SOME CASES, FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE
USE OF TERMINOLOGY SUCH AS "MAY", "WILL", "EXPECTS", "PLANS", "ANTICIPATES",
"ESTIMATES", "POTENTIAL", OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER
COMPARABLE TERMINOLOGY. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN
THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, THERE CAN BE NO
ASSURANCE THAT SUCH EXPECTATIONS OR ANY OF THE FORWARD-LOOKING STATEMENTS WILL
PROVE TO BE CORRECT AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE
PROJECTED OR ASSUMED IN THE FORWARD-LOOKING STATEMENTS. OUR FUTURE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, AS WELL AS ANY FORWARD-LOOKING STATEMENTS,
ARE SUBJECT TO INHERENT RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO
THE RISK FACTORS SET FORTH BELOW AND FOR THE REASONS DESCRIBED ELSEWHERE IN THIS
PROSPECTUS. ALL FORWARD-LOOKING STATEMENTS AND REASONS WHY RESULTS MAY DIFFER
INCLUDED IN THIS PROSPECTUS ARE MADE AS OF THE DATE HEREOF AND WE ASSUME NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENT OR REASON WHY ACTUAL
RESULTS MIGHT DIFFER.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM IS COMMERCIALLY FEASIBLE.
We are in an early stage of development. There is a risk that our deep lung
drug delivery technology will not be commercially feasible. Even if our deep
lung delivery technology is commercially feasible, it may not be commercially
accepted across a range of large and small molecule drugs. We have tested six
deep lung delivery formulations in humans, but many of our potential
formulations have not been tested in humans.
Many of the underlying drug compounds contained in our deep lung
formulations have been tested in humans by other companies using alternative
delivery routes. Our potential products require extensive research, development
and preclinical (animal) and clinical (human) testing. Our potential products
also may involve lengthy regulatory review before they can be sold. We do not
know if, and cannot assure you that, any of our potential products will prove to
be safe and effective or meet regulatory standards. There is a risk that any of
our potential products will not be able to be produced in commercial quantities
at acceptable cost or marketed successfully. Our failure to achieve commercial
feasibility, demonstrate safety, achieve clinical efficacy, obtain regulatory
approval or, together with partners, successfully market products will
negatively impact our revenues and results of operations.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM IS EFFICIENT.
We may not be able to achieve the total system efficiency needed to be
competitive with alternative routes of delivery. Total system efficiency is
determined by the amount of drug loss during manufacture, in the delivery
device, in reaching the site of absorption, and during absorption from that site
into the bloodstream. Deep lung bioavailability is the percentage of a drug that
is absorbed into the bloodstream when that drug is delivered directly to the
lungs as compared to injection. Bioavailability is the initial screen for
whether deep lung delivery of any systemic drug is commercially feasible. We
would not consider a drug to be a good candidate for development and
commercialization if its drug loss is excessive at any one stage or cumulatively
in the manufacturing and delivery process or if its deep lung bioavailability is
too low.
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WE DO NOT KNOW IF OUR DEEP LUNG DRUG FORMULATIONS ARE STABLE.
We may not be able to identify and produce powdered versions of drugs that
retain the physical and chemical properties needed to work with our delivery
device. Formulation stability is the physical and chemical stability of the drug
over time and under various storage, shipping and usage conditions. Formulation
stability will vary with each deep lung formulation and the type and amount of
ingredients that are used in the formulation. Problems with powdered drug
stability would negatively impact our ability to develop and market our
potential products or obtain regulatory approval.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM IS SAFE.
We may not be able to prove potential products to be safe. Our products
require lengthy laboratory, animal and human testing. Most of our products are
in preclinical testing or the early stage of human testing. If we find that any
product is not safe, we will not be able to commercialize the product. The
safety of our deep lung formulations will vary with each drug and the
ingredients used in its formulation.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM PROVIDES CONSISTENT DOSES
OF MEDICINE.
We may not be able to provide reproducible dosages of stable formulations
sufficient to achieve clinical success. Reproducible dosing is the ability to
deliver a consistent and predictable amount of drug into the bloodstream over
time both for a single patient and across patient groups. Reproducible dosing
requires the development of:
- an inhalation device that consistently delivers predictable amounts of dry
powder formulations to the deep lung;
- accurate unit dose packaging of dry powder formulations; and
- moisture resistant packaging.
We may not be able to develop reproducible dosing of any potential product.
The failure to do so means that we would not consider it a good candidate for
development and commercialization.
WE DEPEND ON PARTNERS FOR REGULATORY APPROVALS AND COMMERCIALIZATION OF OUR
PRODUCTS.
Since we are in the business of developing technology for delivering drugs
to the lungs and licensing this technology to companies that make and sell
drugs, we do not have the people and other resources to do the following things:
- make bulk drugs to be used as medicines;
- design and carry out large scale clinical studies;
- prepare and file documents necessary to obtain government approval to sell
a given drug product; and
- market and sell our products when and if they are approved.
When we sign a license agreement to develop a product with a drug company,
the drug company agrees to do some or all of the things described above. If our
partner fails to do any of these things, we cannot complete the development of
the product.
WE MAY NOT OBTAIN REGULATORY APPROVAL FOR OUR PRODUCTS ON A TIMELY BASIS OR AT
ALL.
There is a risk that we will not obtain regulatory approval for our products
on a timely basis, or at all. Our products must undergo rigorous animal and
human testing and an extensive review process mandated by the United States Food
and Drug Administration ("FDA") and equivalent foreign
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authorities. This process generally takes a number of years and requires the
expenditure of substantial resources although the time required for completing
such testing and obtaining such approvals is uncertain. We have not submitted
any of our products to the FDA for marketing approval. We have no experience
obtaining such regulatory approval.
In addition, we may encounter delays or rejections based upon changes in FDA
policy, including policy relating to good manufacturing practice compliance,
during the period of product development. We may encounter similar delays in
other countries.
Even if regulatory approval of a product is granted, the approval may limit
the indicated uses for which we may market our product. In addition, our
marketed product, our manufacturing facilities and Inhale, as the manufacturer,
will be subject to continual review and periodic inspections. Later discovery
from such review and inspection of previously unknown problems may result in
restrictions on our product or on us, including withdrawal of our product from
the market. The failure to obtain timely regulatory approval of our products,
any product marketing limitations or a product withdrawal would negatively
impact our revenues and results of operations.
WE DO NOT KNOW IF OUR TECHNOLOGIES CAN BE INTEGRATED SUCCESSFULLY TO BRING
PRODUCTS TO MARKET.
We may not be able to integrate all of the relevant technologies to provide
a deep lung drug delivery system. Our integrated approach to systems development
relies upon several different but related technologies:
- dry powder formulations;
- dry powder processing technology;
- dry powder packaging technology; and
- a deep lung delivery device.
At the same time we must:
- establish collaborations with partners;
- perform laboratory and clinical testing of potential products; and
- scale-up our manufacturing processes.
We must accomplish all of these steps without delaying any aspect of
technology development. Any delay in one component of product or business
development could delay our ability to develop, obtain approval of or market
therapeutic products using our deep lung delivery technology.
WE MAY NOT BE ABLE TO MANUFACTURE OUR PRODUCTS IN COMMERCIAL QUANTITIES.
POWDER PROCESSING. We have no experience manufacturing products for
commercial purposes. We have only performed powder processing on the small scale
needed for testing formulations and for early stage and larger clinical trials.
We may encounter manufacturing and control problems as we attempt to scale-up
powder processing facilities. We may not be able to achieve such scale-up in a
timely manner or at a commercially reasonable cost, if at all. Our failure to
solve any of these problems could delay or prevent late stage clinical testing
and commercialization of our products and could negatively impact our revenues
and results of operations.
To date, we have relied on one particular method of powder processing. There
is a risk that this technology will not work with all drugs or that the cost of
drug production will prohibit the commercial viability of certain drugs.
Additionally, there is a risk that any alternative powder processing methods we
may pursue will not be commercially practical for aerosol drugs or that we will
not have, or be able to acquire the rights to use, such alternative methods.
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POWDER PACKAGING. Our fine particle powders and small quantity packaging
require special handling. We have designed and qualified automated filling
equipment for small and moderate quantity packaging of fine powders. We face
significant technical challenges in scaling-up an automated filling system that
can handle the small dose and particle sizes of our powders in commercial
quantities. There is a risk that we will not be able to scale-up our automated
filling equipment in a timely manner or at commercially reasonable costs. Any
failure or delay in such scale-up would delay product development or bar
commercialization of our products and would negatively impact our revenues and
results of operations.
INHALATION DEVICE. We face many technical challenges in further developing
our inhalation device to work with a broad range of drugs, to produce such a
device in sufficient quantities and to adapt the device to different powder
formulations. In addition, we are attempting to develop a smaller inhalation
device, which presents particular technical challenges. There is a risk that we
will not successfully achieve any of these things. Our failure to overcome any
of these challenges would negatively impact our revenues and results of
operations.
For late stage clinical trials and initial commercial production, we intend
to use one or more contract manufacturers to produce our drug delivery device.
There is a risk that we will not be able to enter into or maintain arrangements
with any potential contract manufacturers. Our failure to do so would negatively
impact our revenues and results of operations.
WE DEPEND ON KEY SUPPLIERS FOR OUR INHALATION DEVICE AND BULK DRUGS.
We plan to subcontract the manufacture of our pulmonary delivery device
before commercial production of our first product. We have identified contract
manufacturers that we believe have the technical capabilities and production
capacity to manufacture our devices and which can meet the requirements of good
manufacturing practices. We cannot assure you that we will be able to obtain and
maintain satisfactory contract manufacturing on commercially acceptable terms,
if at all. Our dependence on third parties for the manufacture of our inhalation
device may negatively impact our cost of goods and our ability to develop and
commercialize products on a timely and competitive basis.
We obtain the bulk drugs we use to formulate and manufacture the dry powders
for our deep lung delivery system from sole sources of supply. For example, with
respect to our source of bulk insulin, we have entered into a collaborative
agreement with Pfizer which has, in turn, entered into an agreement with Hoechst
to manufacture biosynthetic recombinant insulin. Under the terms of their
agreement, Pfizer and Hoechst agreed to construct a jointly owned manufacturing
plant in Frankfurt, Germany. Until its completion, Pfizer will provide us with
insulin from Hoechst's existing plant. If our sole source suppliers fail to
provide bulk drugs in sufficient quantities when required, our revenues and
results of operations will be negatively impacted.
WE DO NOT KNOW IF THE MARKET WILL ACCEPT OUR DEEP LUNG DRUG DELIVERY SYSTEM.
The commercial success of our potential products depends upon market
acceptance by health care providers, third-party payors like health insurance
companies and Medicare, and patients. Our products under development use a new
method of drug delivery and there is a risk that our potential products will not
be accepted by the market. Market acceptance will depend on many factors,
including:
- the safety and efficacy results of our clinical trials;
- favorable regulatory approval and product labeling;
- the frequency of product use;
- the availability of third-party reimbursement;
- the availability of alternative technologies; and
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- the price of our products relative to alternative technologies.
There is a risk that health care providers, patients or third-party payors
will not accept our deep lung drug delivery system. If the market does not
accept our potential products, our revenues and results of operations would be
significantly and negatively impacted.
IF OUR PRODUCTS ARE NOT COST EFFECTIVE, GOVERNMENT AND PRIVATE INSURANCE PLANS
WILL NOT PAY FOR OUR PRODUCTS.
In both domestic and foreign markets, sales of our products under
development will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
managed care providers, private health insurers and other organizations. In
addition, such third-party payors are increasingly challenging the price and
cost effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
Legislation and regulations affecting the pricing of pharmaceuticals may change
before our proposed products are approved for marketing. Adoption of such
legislation and regulations could further limit reimbursement for medical
products. A government third-party payor decision not to provide adequate
coverage and reimbursements for our products would limit market acceptance of
such products.
WE EXPECT TO CONTINUE TO LOSE MONEY FOR THE NEXT SEVERAL YEARS.
We have never been profitable and, through September 30, 1999, have incurred
a cumulative deficit of approximately $74.3 million. We expect to continue to
incur substantial and increasing losses over at least the next several years as
we expand our research and development efforts, testing activities and
manufacturing operations, and as we further expand our late stage clinical and
early commercial production facility. All of our potential products are in
research or in the early stages of development except for our insulin
collaboration. We have generated no revenues from approved product sales. Our
revenues to date have consisted primarily of payments under short-term research
and feasibility agreements and development contracts. To achieve and sustain
profitable operations, we must, alone or with others, successfully develop,
obtain regulatory approval for, manufacture, introduce, market and sell products
using our deep lung drug delivery system. There is a risk that we will not
generate sufficient product or contract research revenue to become profitable or
to sustain profitability.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.
We anticipate that our existing capital resources will enable us to maintain
currently planned operations through at least the next 18 months. However, this
expectation is based on our current operating plan, which is expected to change
as a result of many factors, and we may need additional funding sooner than
anticipated. In addition, we may choose to raise additional capital due to
market conditions or strategic considerations, even if we believe we have
sufficient funds for our current or future operating plans. To the extent that
additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to our
stockholders.
We have no credit facility or other committed sources of capital. To the
extent operating and capital resources are insufficient to meet future
requirements, we will have to raise additional funds to continue the development
and commercialization of our technologies. Such funds may not be available on
favorable terms, or at all. In particular, our substantial leverage may limit
our ability to obtain additional financing. If adequate funds are not available
on reasonable terms, we may be required to curtail operations significantly or
to obtain funds by entering into financing, supply or collaboration agreements
on unattractive terms. Our inability to raise capital could negatively impact
our business.
7
OUR PATENTS MAY NOT PROTECT OUR PRODUCTS AND OUR PRODUCTS MAY INFRINGE ON
THIRD-PARTY PATENT RIGHTS.
We have filed patent applications covering certain aspects of our device,
powder processing technology, and powder formulations and deep lung route of
delivery for certain molecules, and we plan to file additional patent
applications. We currently have 45 issued U.S. and foreign patents that cover
certain aspects of our technology and we have a number of patent applications
pending. There is a risk that any of the patents applied for will not issue, or
that any patents that issue or have issued will not be valid and enforceable.
Enforcing our patent rights would be time consuming and costly.
Our access or our partners' access to the drugs to be formulated will affect
our ability to develop and commercialize our technology. Many drugs, including
powder formulations of certain drugs that are presently under development by us,
are subject to issued and pending U.S. and foreign patents that may be owned by
our competitors. We know that there are issued patents and pending patent
applications relating to the deep lung delivery of large molecule drugs,
including several for which we are developing deep lung delivery formulations.
This situation is highly complex, and the ability of any one company, including
Inhale, to commercialize a particular drug is unpredictable.
We intend generally to rely on the ability of our partners to provide access
to the drugs that are to be formulated by us for deep lung delivery. There is a
risk that our partners will not be able to provide access to such drug
candidates. Even if such access is provided, there is a risk that our partners
or we will be accused of, or determined to be, infringing a third-party's patent
rights and will be prohibited from working with the drug or be found liable for
damages that may not be subject to indemnification. Any such restriction on
access to drug candidates or liability for damages would negatively impact our
revenues and results of operations.
OUR COMPETITORS MAY DEVELOP AND SELL BETTER DRUG DELIVERY SYSTEMS.
We are aware of other companies engaged in developing and commercializing
pulmonary drug delivery systems and enhanced injectable drug delivery systems.
Many of these companies have greater research and development capabilities,
experience, manufacturing, marketing, financial and managerial resources than we
do and represent significant competition for us. Acquisitions of or
collaborations with competing drug delivery companies by large pharmaceutical
companies could enhance our competitors' financial, marketing and other
resources. Accordingly, our competitors may succeed in developing competing
technologies, obtaining regulatory approval for products or gaining market
acceptance before us. Developments by others could make our products or
technologies uncompetitive or obsolete. Our competitors may introduce products
or processes competitive with or superior to ours.
INVESTORS SHOULD BE AWARE OF INDUSTRY-WIDE RISKS.
In addition to the risks associated specifically with our business described
above, investors should also be aware of general risks associated with drug
development and the pharmaceutical industry. These include, but are not limited
to:
- changes in and compliance with government regulations;
- handling of hazardous materials;
- hiring and retaining qualified people; and
- insuring against product liability claims.
WE MAY NOT ACHIEVE YEAR 2000 COMPLIANCE.
We are aware of the issues associated with the programming code in existing
computer systems as the Year 2000 approaches. The Year 2000 ("Y2K") problem is
pervasive and complex as virtually every computer operation may be affected in
some way by the rollover of the two digit year value to "00."
8
The issue is whether systems will properly recognize date sensitive information
when the year changes to 2000. If our software and firmware with date-sensitive
functions are not Y2K compliant, they may recognize a date with "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, interruptions in manufacturing operations, or a temporary inability to
process transactions or engage in similar normal business activities.
To date, we have experienced no material Year 2000 problems. We have
developed a comprehensive contingency plan to address situations that may result
if we are unable to achieve Y2K readiness of our critical operations. As we
experienced no signficant problems relating to our operations as the year
changed to 2000, we have not yet had to implement this contingency plan.
Nevertheless, we cannot assure you that our contingency plan will adequately
address all issues that may arise in the year 2000.
Prior to January 1, 2000, we conducted formal communication with significant
vendors and suppliers to determine the extent to which our operations are
vulnerable to those third parties' failure to remediate their own Y2K issues.
While we have not experienced any material problems with any significant vendor
since January 1, 2000, in the event that any of our significant suppliers do not
successfully achieve Y2K compliance in a timely manner, our business or
operations could be negatively affected. We cannot assure you that the systems
of other companies on which our systems rely were converted on a timely basis
and will not have a future adverse effect on our operations.
We are also vulnerable to external forces that might generally affect
industry and commerce, such as utility and transportation company Y2K compliance
failures and related service interruptions, although we have not experienced any
material disruptions since January 1, 2000. The failure by us or our suppliers
to develop and implement successfully appropriate plans should Year 2000
problems continue to develop could have a negative impact on our operations and
financial condition.
WE EXPECT OUR STOCK PRICE TO REMAIN VOLATILE.
Our stock price is volatile. In the last twelve months, based on closing
prices on the Nasdaq National Market, our stock price ranged from $23.00 to
$44.03. We expect it to remain volatile. A variety of factors may have a
significant effect on the market price of our common stock, including:
- fluctuations in our operating results;
- announcements of technological innovations or new therapeutic products;
- announcement or termination of collaborative relationships by Inhale or
our competitors;
- governmental regulation;
- clinical trial results or product development delays;
- developments in patent or other proprietary rights;
- public concern as to the safety of drug formulations developed by Inhale
or others; and
- general market conditions.
Any litigation instigated against us as a result of this volatility could
result in substantial costs and a diversion of our management's attention and
resources, which could negatively impact our financial condition, revenues and
results of operations.
THE DEBENTURES ARE SUBORDINATED TO ANY EXISTING AND FUTURE SENIOR DEBT
The debentures are contractually subordinated in right of payment to our
existing and future Senior Debt. As of September 30, 1999, we had approximately
$4.9 million of Senior Debt. The
9
indenture does not limit the creation of additional Senior Debt (or any other
indebtedness). In connection with the expansion of our facilities, we expect
that we may significantly increase our Senior Debt in the near future. Any
significant additional indebtedness incurred may materially adversely impact our
ability to service our debt, including the debentures. Due to the subordination
provisions, in the event of our insolvency, funds which we would otherwise use
to pay the holders of the debentures will be used to pay the holders of Senior
Debt to the extent necessary to pay the Senior Debt in full. As a result of
these payments, our general creditors may recover less, ratably, than the
holders of our Senior Debt and such general creditors may recover more, ratably,
than the holders of our debentures or our other subordinated indebtedness. In
addition, the holders of our Senior Debt may, under certain circumstances,
restrict or prohibit us from making payments on the debentures.
SUBSTANTIAL INDEBTEDNESS MAY ADVERSELY AFFECT OUR CASH FLOW.
As of September 30, 1999, we had approximately $4.9 million in long-term
debt. Upon closing of the offering of the debentures, our long-term debt
increased by approximately $108 million. This increased indebtedness has and
will continue to impact us by:
- significantly increasing our interest expense and related debt service
costs;
- making it more difficult to obtain additional financing; and
- constraining our ability to react quickly in an unfavorable economic
climate.
Currently, we are not generating sufficient cash flow to satisfy the annual
debt service payments that will be required as a result of the consummation of
sale of the debentures. This may require us to use a portion of the proceeds
from the sale of the debentures to pay interest or borrow additional funds or
sell additional equity to meet our debt service obligations. If we are unable to
satisfy our debt service requirements, substantial liquidity problems could
result, which would negatively impact our future prospects.
OUR ABILITY TO REPURCHASE DEBENTURES, IF REQUIRED, MAY BE LIMITED.
In certain circumstances involving a Change of Control, the holders of the
debentures may require us to repurchase some or all of the holder's debentures.
We cannot assure you that we will have sufficient financial resources at such
time or would be able to arrange financing to pay the repurchase price of the
debentures. Our ability to repurchase the debentures in such event may be
limited by law, the indenture, by the terms of other agreements relating to our
Senior Debt and as such indebtedness and agreements may be entered into,
replaced, supplemented or amended from time to time. We may be required to
refinance our Senior Debt in order to make such payments. We may not have the
financial ability to repurchase the debentures if payment for our Senior Debt is
accelerated.
AN ACTIVE TRADING MARKET FOR THE DEBENTURES MAY NOT DEVELOP.
The debentures are a new issue of securities for which there is currently no
trading market. Although the debentures are eligible for trading in the PORTAL
market, we cannot predict whether an active trading market for the debentures
will develop or be sustained. If an active market for the debentures fails to
develop or be sustained, the trading price of the debentures could fall. If an
active trading market were to develop, the debentures could trade at prices that
may be lower than the initial offering price of the debentures. Whether or not
the debentures will trade at lower prices depends on many factors, including:
- prevailing interest rates and the markets for similar securities;
- general economic conditions; and
- our financial condition, historic financial performance and future
prospects.
10
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 to register
the debentures and common stock offered by this prospectus. However, this
prospectus does not contain all of the information contained in the registration
statement and the exhibits and schedules to the registration statement. We
strongly encourage you to carefully read the registration statement and the
exhibits and schedules to the registration statement. We also file annual,
quarterly and special reports, proxy statements and other information with the
SEC.
You may inspect and copy such material at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, as well as at the SEC's regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. You may also obtain copies of such material from the SEC
at prescribed rates by writing to the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the SEC's
Website at www.sec.gov.
If at any time during the two-year period following October 13, 1999, we are
not subject to the information requirements of Section 13 or 15(d) of the
Exchange Act, we will furnish to holders of the debentures, to holders of common
stock issued upon conversion thereof and to prospective purchasers thereof the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act in order to permit compliance with Rule 144A in connection with
resales of such debentures and common stock issued upon conversion thereof.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information contained in
documents that we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus.
Information in this prospectus supersedes information incorporated by reference
that we filed with the SEC prior to the date of this prospectus, while
information that we file later with the SEC will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings we will make with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934:
1. Our Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
filed on March 29, 1999, including all material incorporated by reference
therein;
2. Our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1999, filed on May 14, 1999, including all material incorporated by
reference therein;
3. Our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1999, filed on August 13, 1999, including all material incorporated by
reference therein;
4. Our Quarterly Report on form 10-Q for the fiscal quarter ended
September 30, 1999, filed on November 12, 1999, including all material
incorporated by reference therein;
5. Our Current Report on Form 8-K, filed on October 4, 1999;
6. Our Current Report on Form 8-K, filed on October 5, 1999;
7. All other reports filed by us pursuant to Section 13(a) or 15(d) of the
Exchange Act since December 31, 1998, including all material incorporated by
reference therein; and
8. The description of the common stock contained in our Registration Statement
on Form 8-A.
11
You may request a copy of these filings, at no cost to you, by writing or
telephoning us at: Inhale Therapeutic Systems, Inc. Attention: Investor
Relations, 150 Industrial Road, San Carlos, CA 94070 Telephone (650) 631-3100.
Our common stock is quoted on the Nasdaq National Market under the symbol
"INHL". The last reported sales price of the common stock on the Nasdaq National
Market ("Nasdaq") on January 5, 2000 was $44.03 per share. You may inspect
reports and other information concerning us at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
You should rely only on the information incorporated by reference or
provided in this prospectus. We have authorized no one to provide you with
different information. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the notes or the shares of
common stock offered hereby. See "Selling Security Holders".
RATIO OF EARNINGS TO FIXED CHARGES
We have not presented a ratio of earnings to fixed charges because we had no
earnings for the relevant periods. Fixed charges were approximately $185,000,
$158,000, $196,000, $435,000 and $1,065,000 for the years ended December 31,
1994, 1995, 1996, 1997 and 1998, respectively, and $803,000 and $890,000 for the
nine months ended September 30, 1998 and 1999, respectively.
12
BUSINESS
OVERVIEW
Inhale is creating a drug delivery system to deliver a wide range of drugs,
including peptides, proteins and other molecules, by inhalation to the deep
lung. Inhale is using this system principally to enable non-invasive delivery of
macromolecule drugs currently administered by injection. Inhale has a variety of
drug delivery programs in development with partners such as Pfizer, Biogen,
Centeon and others and has tested six drugs in human clinical trials. Inhale's
lead program is inhaleable insulin sponsored by Pfizer. Pfizer commenced dosing
for Phase III clinical trials in June 1999. This trial is expected to utilize at
least 117 clinical sites.
Currently there are approximately 35 macromolecule drugs marketed in the
United States and about 120 others in human clinical trials. Sales of the top 15
genetically engineered protein drugs, which are a subset of macromolecule drugs,
were estimated at $14 billion worldwide in 1997. Most of these drugs are
currently delivered by injection. Injections are undesirable for numerous
reasons including patient discomfort, inconvenience and risk of infection. Poor
patient acceptance of, and compliance with, injectable therapies can lead to
increased incidence of medical complications and higher disease management
costs. Alternatives to injection such as oral, transdermal and nasal delivery
have to date been shown generally to be commercially unattractive due to low
natural bioavailability--the amount of drug absorbed from the delivery site into
the bloodstream relative to injection. As an alternative to the invasiveness of
injection, Inhale believes a deep lung or pulmonary delivery system could expand
the market for macromolecule drug therapies and may enable new therapeutic uses
of certain macromolecule drugs.
Inhale is creating a proprietary platform integrating customized
formulation, dry powder processing and packaging with a proprietary inhalation
device to enable efficient, reproducible delivery of macromolecule drugs for
systemic and local lung indications. For specific drug products, Inhale
formulates and processes bulk drugs supplied by collaborative partners into dry
powders which are packaged into individual dosing units referred to as blisters.
The blisters are designed to be loaded into Inhale's device, which patients then
activate to inhale the aerosolized drugs. Inhale has developed a inhalation
device that is being used several times per day, for several months in
outpatient trials for insulin. In addition, Inhale has demonstrated room
temperature stability of a year or more for a number of macromolecule drugs, and
has scaled-up its powder processing and packaging for late stage clinical trials
and small scale production for certain drugs.
As an alternative to invasive delivery techniques, Inhale believes that a
deep lung delivery system could potentially expand the market for macromolecule
drug therapies by increasing patient acceptance and improving compliance, which
in turn could decrease medical complications and the associated costs of disease
management. Additionally, deep lung delivery may enable new therapeutic uses of
certain macromolecule drugs. Inhale is focusing development efforts on applying
its pulmonary delivery system primarily to drugs for systemic and local lung
diseases that either have proven efficacy and are approved for delivery by
injection or are in late stage clinical trials.
A cornerstone of Inhale's business strategy is to work with collaborative
partners to develop and commercialize macromolecule drugs for deep lung
delivery. In a typical collaboration, Inhale's partner will support the
application of Inhale's technology to a particular drug by providing the drug,
funding clinical development, and marketing the resulting commercial product.
Inhale typically will supply the delivery system and receive research and
development and progress payments during development, and receive revenues from
powder manufacturing, device supply, and royalties from sales of any commercial
products.
In addition to Pfizer's sponsorship of inhaleable insulin, Inhale has active
development programs with several other corporate partners. Inhale's most recent
collaboration is with Biogen for pulmonary
13
delivery of AVONEX-Registered Trademark- a leading drug used for the treatment
of multiple sclerosis. Inhale is also engaged in development collaborations with
Centeon on alpha-1 proteinase inhibitor for genetic emphysema, and with Lilly
for an undisclosed macromolecule. Inhale is also engaged in early stage
feasibility and research programs with respect to other compounds. Inhale
anticipates that any product that may be developed would be commercialized with
a collaborative partner and believes its partnering strategy will enable it to
reduce the investment required to develop a large and diversified potential
product portfolio.
THE OPPORTUNITY FOR DEEP LUNG DRUG DELIVERY
MACROMOLECULES
Innovations in biotechnology and recombinant techniques have led to a large
increase in the number of macromolecule drugs over the last several years. These
drugs, which are identical or similar to the body's natural molecules, are
enabling new therapies for many previously untreated or poorly treated diseases.
Currently, approximately 35 macromolecule drugs are approved for marketing in
the United States and approximately 120 additional macromolecule drugs are in
human clinical trials, many for chronic and subchronic diseases. Sales of
genetically engineered protein drugs were estimated at $14 billion worldwide in
1997.
Due principally to their large size, most macromolecules typically have been
delivered by injection. Drug injections administered in hospitals or doctors'
offices can be expensive and inconvenient to patients. Many patients find
self-injectable therapies unpleasant. As a result, such therapies for many
chronic and subchronic diseases meet with varying degrees of patient acceptance
and compliance with the prescribed regimens. Poor acceptance and compliance can
lead to increased incidence of medical complications and potentially higher
disease management costs. In addition, some elderly, infirm or pediatric
patients cannot administer their own injections and require assistance, thereby
increasing both inconvenience to these patients and the cost of therapy.
Medical science, health care providers and consumers have been searching for
alternatives to injection as a means of delivery of macromolecules used in the
systemic treatment of chronic and subchronic diseases. Several non-invasive
routes of delivery are being explored for macromolecule drugs, including oral,
transdermal, nasal and pulmonary.
Oral delivery is a common method of delivery for many small molecule drugs.
However, drug delivery scientists generally believe that oral delivery provides
extremely low delivery system efficiency for most macromolecules due primarily
to the low natural permeability to macromolecules of the gastrointestinal tract.
In addition, Inhale believes that dosage reproducibility for oral delivery of
macromolecules may be very poor because of their low oral bioavailability. While
several companies are working on oral delivery for macromolecule drugs, no
commercially viable system is currently being marketed.
Passive transdermal delivery using "patch" technology has not been
successful to date since the skin is even less naturally permeable to
macromolecules than the gastrointestinal tract. No macromolecule drugs have been
approved for marketing in the United States utilizing patch technology. Certain
peptides and proteins can be transported across the skin barrier into the
bloodstream using high pressure "needle-less" injection devices. The devices,
which inject proteins like insulin through the skin into the body, have been
available for many years. However, Inhale believes these devices have not been
well accepted due to patient discomfort and relatively high cost.
The nasal route has been shown to have low and variable bioavailability for
proteins and peptides, which is a major limitation for the nasal administration
of such drugs. As a result of these limitations, penetration enhancers are often
used with nasal delivery to achieve higher bioavailability; these
14
enhancers may cause local irritation to the nasal tissue and result in safety
concerns with long-term use. Only four peptides, have been approved for
marketing in the United States utilizing nasal delivery.
Pulmonary drug delivery systems, such as metered-dose inhalers ("MDIs"),
existing dry powder inhalers and nebulizers, are used primarily to deliver drugs
to the airways of the lung for local lung applications. Approximately 35 drugs
are approved for marketing by the FDA for delivery into the lung, but none of
these pulmonary drug delivery systems was designed to optimize drug delivery to
the deep lung for absorption into the bloodstream. MDIs, dry powder inhalers and
nebulizers currently typically deliver only a fraction of the drug to the deep
lung, with most of the drug being lost in the delivery device or in the mouth
and throat. Consequently, Inhale believes that the total efficiency of such
systems is generally not high enough to be commercially feasible for systemic
delivery of most macromolecule drugs.
In addition, pulmonary drug delivery devices currently do not provide the
dosage reproducibility and formulation stability generally needed for
commercially viable systemic macromolecule drug delivery. Inhale believes that
many MDI and dry powder systems do not provide the deep lung dosage
reproducibility necessary for many systemic applications because the patient
must coordinate the breathing maneuver with the generation of the aerosol.
Further, Inhale believes that many macromolecules currently cannot be formulated
for use in MDI systems, since macromolecule drugs could be denatured by the MDI
formulating ingredients. In addition, Inhale believes that some macromolecules
may be inactivated by nebulization and that many dry powder systems do not
provide the protection needed for long-term stability that may be needed for
macromolecule formulations.
Inhale believes that an efficient and reproducible deep lung delivery system
for systemic macromolecule drugs used in the treatment of chronic and subchronic
diseases represents a significant commercial opportunity. Such a system could
improve patient acceptance of systemic macromolecule drug therapy and compliance
with prescribed regimens, thereby improving therapeutic outcomes and reducing
the costs of administration and treatment of disease. Additionally, pulmonary
delivery may enable new therapeutic uses of certain macromolecule drugs.
Inhale also believes that opportunities for a deep lung delivery system
exist in the delivery of macromolecules for local lung diseases due to the
limitations of current pulmonary devices. Biotechnology and pharmaceutical
companies are developing new macromolecule drugs for pulmonary diseases such as
asthma, cystic fibrosis, emphysema, lung cancer, pneumonia and bronchitis.
Pulmonary delivery is the preferred route for treating most lung diseases since
much smaller amounts of certain drugs generally are needed than for systemic
administration and the drug can be applied directly to the site of action,
thereby potentially reducing systemic side effects.
OTHER MOLECULES
In addition to developing a deep lung delivery system for macromolecules,
Inhale is investigating opportunities for leveraging its technology for small
molecules where there is a clear, demonstrable need for an alternative drug
delivery system and where Inhale's existing technology can be applied without
significant modification. Examples include molecules that require rapid systemic
absorption for efficacy (i.e., analgesics and antiemetics), molecules that
undergo massive first pass metabolism by the oral route or molecules used for
local lung delivery for diseases such as asthma that are currently delivered by
sub-optimal aerosol systems.
MDIs, existing dry powder inhalers and nebulizers have been used primarily
to deliver drugs to the airways of the lung for local lung applications. Some of
the problems associated with traditional small molecule aerosol delivery systems
include poor reproducibility, low efficiency, low drug payload per puff, poor
moisture barrier and, in the case of wet systems, long dosing time and microbial
growth.
15
Inhale believes that its technology could be used to address these problems
by providing efficient dispersion of the drug into the lungs, reproducible
delivery of a consistent and predictable amount of drug into the bloodstream,
and a strong moisture barrier in the blister packs. Inhale further believes its
technology could potentially be applied economically in market segments where it
is essential that significant drug doses reach the lung. Large amounts of drugs
taken orally or through inefficient inhalers can result in side effects which
could be avoided or reduced through more efficient pulmonary delivery.
STRATEGY
Inhale's goal is to become the leading drug delivery company in the field of
pulmonary delivery of macromolecules. In addition, Inhale is leveraging its
technology base for other applications where its system can provide significant
market advantages. Inhale's strategy incorporates the following principal
elements:
- DEVELOP A BROADLY APPLICABLE DEEP LUNG DELIVERY SYSTEM. Inhale is
developing its non-invasive deep lung drug delivery system to be
applicable to a wide range of peptides, proteins and other molecules
currently delivered by injection or poorly delivered by inhalation or
other routes. Inhale intends to develop an effective non-invasive delivery
alternative that can: (1) expand market penetration for existing
therapeutics currently delivered by injection, infusion or other routes;
(2) commercialize new indications by using deep lung delivery as a new
route of administration; and (3) extend existing patents or seek new
patents to gain important competitive advantages for Inhale and its
partners.
- BUILD COMPETITIVE ADVANTAGE THROUGH AN INTEGRATED SYSTEMS APPROACH. Inhale
is developing a commercially viable deep lung delivery system through an
integrated systems solution. Inhale combines its expertise in aerosol
engineering, chemical engineering, mechanical engineering, aerosol
science, protein formulations, fine powder processing and powder filling,
and pulmonary physiology and biology to build a proprietary,
fully-integrated system for pulmonary delivery of therapeutic drugs.
Inhale believes that building expertise in technology across several
disciplines provides it with a significant competitive advantage.
- PARTNER WITH PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES. Inhale's strategy
is to market its proposed products through collaborative partners. Inhale
is seeking to work with partners that have significant clinical
development and marketing resources, and currently has collaborations with
several large pharmaceutical and biotechnology companies. For patented
drug products, Inhale intends to partner with owners or licensees from the
outset of the project. For drugs that are off-patent or licensed-in,
Inhale may perform initial feasibility screening work, formulations
development and early stage human clinical trials before entering into a
partner relationship for further development. Inhale believes this
partnering strategy enables it to reduce its cash requirements while
developing a large and diversified potential product portfolio.
- FOCUS ON APPROVED OR LATE STAGE DRUGS. To date, Inhale has focused
primarily on drugs that either have proven efficacy and are approved for
marketing or are in late stage clinical trials. Inhale believes that
working primarily with drugs with demonstrated efficacy reduces the
technical risk of its projects. In the future, Inhale anticipates working
on drugs at earlier stages of development.
- EXPAND MANUFACTURING CAPABILITY. Inhale intends to formulate, manufacture
and package dry powders for most of its drugs and to subcontract
manufacturing of its inhalation device. Inhale believes that this strategy
will provide manufacturing economies of scale across a range of
therapeutic products and expand capacity for additional partnerships and
commercial scale production.
16
INHALE'S DEEP LUNG DRUG DELIVERY SYSTEM
Inhale believes that the following criteria are necessary for a commercially
viable non-invasive deep lung drug delivery system:
- SYSTEM EFFICIENCY/COST. The system must attain a certain minimum
efficiency in delivering a drug to the bloodstream as compared to
injection. Bioavailability (the percentage of drug absorbed into the
bloodstream from the lungs relative to that absorbed from injection) is
the most important element of system efficiency. Total system efficiency
is critical due to the high cost of macromolecule drugs. Total delivery
system efficiency is determined by the amount of drug loss during
manufacture, in the delivery device, in reaching the site of absorption,
and during absorption from that site into the bloodstream. Inhale believes
that for most systemic macromolecule drugs, a non-invasive delivery system
must show total delivery system efficiency of at least 5% to 25% compared
to injection for the system to be commercially viable.
- REPRODUCIBILITY: The system must deliver a consistent and predictable
amount of drug to the lung and into the bloodstream.
- FORMULATION STABILITY. Formulations used in the system must remain
physically and chemically stable over time and under a range of storage,
shipping and usage conditions.
- SAFETY. The system should not introduce local toxicity problems during
chronic or subchronic use by a wide patient population.
- CONVENIENCE. The system must be convenient to the patient in terms of
comfort, ease of operation, transportability and required dosage time.
Inhale approaches pulmonary drug delivery with the objective of maximizing
overall delivery system efficiency while addressing commercial requirements for
reproducibility, formulation stability, safety and convenience. To achieve this
goal, Inhale's delivery system integrates customized drug formulations with its
proprietary inhalation device. Inhale combines an understanding of lung biology,
aerosol science, chemical engineering, mechanical engineering and protein
formulations in its system development efforts. Inhale believes that this
interdisciplinary capability provides an important competitive advantage.
Inhale has chosen to base its deep lung delivery system on dry powders for
several reasons. Many proteins are more stable in dry powders than in liquids.
In addition, dry powder aerosols can carry approximately five times more drug in
a single breath than MDIs and, for many drugs, at least 25 times more than
currently marketed liquid or nebulizer systems. Inhale believes that a dry
powder system for drugs requiring higher doses, such as insulin and alpha-1
proteinase inhibitor, could decrease dosing time as compared with nebulizers.
Inhale takes bulk drugs supplied by partners and formulates and processes
them into fine powders that are then packaged into individual blisters. The
blisters are designed to be loaded into Inhale's device, which patients activate
to inhale the aerosolized drugs. Once inhaled, the aerosol particles are
deposited in the deep lung, dissolved in the alveolar fluid and absorbed into
the bloodstream. Although Inhale is in the advanced stages of developing its
system technologies, there can be no assurance that Inhale's products will ever
be successfully commercialized.
FORMULATIONS
Each macromolecule drug poses different formulation challenges due to
varying chemical and physical characteristics and dosing requirements. This
requires significant optimization work for each specific drug. Inhale has
assembled a team with expertise in protein formulations, powder science and
aerosol science and is applying this expertise to develop proprietary techniques
and methods that it believes will produce stable, fillable and dispersible dry
powder drug formulations. Inhale has several
17
protein powders with on-going room temperature stability (both chemical and
physical) of more than one year. Through its work with numerous macromolecules,
Inhale is developing an extensive body of knowledge on aerosol dry powder
formulations, including knowledge relating to powder flow characteristics and
solubility within the lung, as well as physical and chemical properties of
various excipients. Inhale has filed and expects to continue to file patent
applications on several of its formulations and, though strategic acquisitions,
has acquired rights to certain U.S. and foreign patents and patent application
relating to stabilization of macromolecule drugs in dry formulations.
POWDER PROCESSING
Inhale is modifying standard powder processing equipment and developing
custom techniques to enable it to consistently produce fine dry powders with
particle diameters of between one and five microns without drug degradation or
significant loss of expensive bulk drug. Inhale has scaled up powder processing
to sufficient levels for producing test powders for late stage clinical trials
and small volume marketed products, if any. Inhale is in the process of scaling
up its powder processing systems in order to produce quantities sufficient for
commercial production of products Inhale believes it will need to supply in high
volumes, such as insulin. However, there can be no assurance that Inhale will be
successful in further scaling up its powder processing on a timely basis or at a
reasonable cost, or that the powder processing system will be applicable for
every drug.
POWDER PACKAGING
Fine particle powders have special handling requirements that are different
from those for larger particles. Current commercial filling and packaging
systems are designed for filling larger particle powders and therefore must be
modified to dispense finer particles more accurately and in the small quantities
required. Initially, powder filling was performed manually. Inhale has since
developed and qualified a proprietary automated filling system suitable for use
in clinical trials and initial production quantities for certain products.
Inhale is also developing with Pfizer a proprietary, high capacity system for
production use.
INHALATION DEVICE
Inhale's proprietary pulmonary delivery device is designed to provide deep
lung delivery of therapeutic powders in a reproducible, safe and efficient
manner. The first of a series of patents covering the device was granted in the
United States in October 1995. To achieve its objectives, Inhale has designed
its pulmonary delivery device to perform the following:
- EFFECTIVELY DISPERSE FINE PARTICLES INTO AN AEROSOL CLOUD. Fine powders
have different dispersion requirements or characteristics than large
powders. Most current dry powder inhalers use larger powders and are not
efficient in dispersing powders with diameters of one to five microns.
Inhale has developed and is refining its dispersion system for its device
specifically for fine powders. Inhale's device has been designed to
efficiently remove powders from the packaging, effectively break up the
powder particles and create an aerosol cloud while maintaining the
integrity of the macromolecule drug.
- EFFICIENTLY AND REPRODUCIBLY DELIVER THE AEROSOL CLOUD TO THE DEEP LUNG.
Inhale has developed a proprietary aerosol cloud handling system in its
device that facilitates deep lung powder deposition and reproducible
patient dosing. The handling system design is intended to enable the
aerosolized particles to be transported from the device to the deep lung
during a patient's breath, reducing losses in the throat and upper
airways. In addition, the aerosol cloud handling system, in conjunction
with the dispersion mechanism and materials used in the device, is
designed to reduce powder loss in the device itself.
18
- ELIMINATE THE USE OF PROPELLANTS TO AVOID ASSOCIATED ENVIRONMENTAL
CONCERNS AND FORMULATION DIFFICULTIES. Unlike MDIs, Inhale's device does
not use propellants. The oily surfactants required to stabilize propellant
formulations can cause aggregation of macromolecules. Current
chlorofluorocarbon propellants, which are used in most commercial MDI
systems, are being phased out in many countries due to environmental
concerns.
The success of Inhale's deep lung drug delivery system for any drug will
depend upon Inhale achieving sufficient formulation stability, safety dosage
reproducibility and system efficiency (measured by the percentage of bulk drug
entering the manufacturing process that eventually is absorbed into the
bloodstream relative to that administered by injection for systemic indications,
or the amount of drug delivered to the lung tissue for local lung indications).
The initial screening factor for the feasibility of pulmonary delivery of any
systemic macromolecule drug is pulmonary bioavailability, which measures the
percentage of the drug absorbed into the bloodstream when delivered directly to
the lungs relative to injection. In addition, a certain percentage of each drug
dose may be lost at various stages of the manufacturing and pulmonary delivery
process, including drug formulation, dry powder processing, packaging, and in
moving the drug from a delivery device into the lungs. Excessive drug loss at
any one stage or cumulatively in the manufacturing and delivery process would
render a drug commercially unfeasible for pulmonary delivery. Formulation
stability (the physical and chemical stability of the formulated drug over time
and under various storage, shipping and usage conditions) and safety will vary
with each macromolecule and the type and amount of excipients, that are used in
the formulation. Reproducible dosing (the ability to deliver a consistent and
predictable amount of drug into the bloodstream over time both for a single
patient and across patient groups) requires the development of an inhalation
device that consistently delivers predictable amounts of dry powder formulations
to the deep lung, accurate unit dose packaging of dry powder formulations and
moisture resistant packaging. There can be no assurance that Inhale will be able
to successfully develop such an inhalation device or overcome such other
obstacles to reproducible dosing.
CLINICAL STATUS SUMMARY
The following table sets forth, for both Inhale's partner development
programs and Inhale's programs available or expected to be available for
partnering, the drug currently in development, the indication(s) for the
particular drug, its present stage of clinical development and, with respect to
Inhale's partner development programs, the identity of Inhale's corporate
partner for such drug.
PARTNER DEVELOPMENT PROGRAMS
CLINICAL
DRUG INDICATION(S) STATUS(1) PARTNER
- -------------------------------------------------------- ------------------------- ---------------- ----------
Insulin................................................. Type 1 and 2 Diabetes Phase III Pfizer
Alpha-1 Proteinase Inhibitor............................ Genetic Emphysema Preclinical Centeon
AVONEX-Registered Trademark-............................ Multiple Sclerosis Preclinical Biogen
Undisclosed Protein..................................... Not Released Preclinical Lilly
PTH..................................................... Osteoporosis Phase I Lilly
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PROGRAMS AVAILABLE OR EXPECTED TO BE AVAILABLE FOR PARTNERING
CLINICAL
DRUG INDICATION(S) STATUS(1)
- -------------------------------------------------------------------- ------------------------- ----------------
Calcitonin.......................................................... Osteoporosis, Bone Pain, Phase I
Paget's Disease
Interleukin-1 Receptor.............................................. Asthma Phase I/II
Undisclosed Non-Protein, Non-Peptide................................ Not Released Phase II
Undisclosed Non-Protein, Non-Peptide................................ Not Released Phase I
Undisclosed Non-Protein, Non-Peptide................................ Not Released Preclinical
- ------------------------
(1) Clinical Status means:
Phase III: broad out-patient clinical trials conducted to obtain
information regarding specific patient groups conducted
following encouraging safety and efficacy trials
Phase II: human clinical trials to establish dosing and efficacy in
patients
Phase I: human clinical trials to test safety, and for drugs with systemic
applications, also tests bioavailability compared with injection
in healthy subjects
Preclinical: formulation development and animal testing in preparation for
human clinical trials
INHALE'S PARTNER DEVELOPMENT PROGRAMS
In general, Inhale's partnership arrangements provide funding for
development, payments upon the achievement of certain milestones and royalty and
manufacturing revenues upon the commencement of commercial sales. The
arrangements are cancelable by the partner at any time without significant
penalty.
INSULIN PROGRAM
Insulin is a protein hormone naturally secreted by the pancreas to induce
the removal of glucose from the blood. Diabetes, the inability of the body to
properly regulate blood glucose levels, is caused by insufficient production of
insulin by the pancreas or insufficient use of the insulin that is secreted.
Over time, high blood glucose levels can lead to failure of the microvascular
system, which may lead to blindness, loss of circulation, kidney failure, heart
disease or stroke. Insulin currently is marketed only in injectable form.
Insulin is supplied by various manufacturers, including Lilly, Novo-Nordisk A/S
and Hoechst; however, Hoechst is currently the only supplier of biosynthetic
recombinant insulin.
According to the Centers for Disease Control and Prevention, more than
16 million people in the United States have diabetes (10.3 million are diagnosed
with diabetes, another 5.4 million have undiagnosed diabetes), and 798,000 new
cases are diagnosed each year. All Type 1 diabetics, estimated at between 5% and
15% of all diabetics, require insulin therapy. Type 1 diabetics generally
require both a baseline treatment of long-acting insulin and multiple treatments
of regular, or short acting, insulin throughout the day. Type 2 diabetics,
depending on the severity of their case, may or may not require insulin therapy.
Type 2 diabetics who use insulin are best treated with regular insulin and
sometimes require long-acting insulin as well. Many Type 2 patients who do not
require insulin to survive but would benefit from it are reluctant to start
treatment because of the inconvenience and unpleasantness of injections.
Regular insulin is generally administered 30 minutes before mealtimes and
generally is given only twice a day. A ten-year study by the National Institutes
of Health ("NIH"), however, demonstrated that the side effects of diabetes could
be significantly reduced by dosing more frequently. The NIH study recommended
dosing regular insulin three to four times per day, a regimen which would more
closely
20
mirror the action of naturally produced insulin in non-diabetics. However, many
patients are reluctant to increase their number of doses because they find
injections unpleasant and inconvenient.
Pursuant to a collaborative agreement originally entered into January 1995,
Inhale and Pfizer are developing a regular insulin that can be administered in
one to three blisters using Inhale's deep lung drug delivery system. Inhale
believes that its deep lung drug delivery system could provide increased user
convenience and result in greater patient compliance by eliminating some
injections for Type 1 and Type 2 patients and all injections for some Type 2
patients. In addition, Inhale believes that pulmonary delivery could yield
medical advantages by providing a more rapid acting insulin than certain current
injectable products.
Through its collaboration with Inhale, Pfizer conducted Phase I and Phase
IIa clinical trials which indicated that pulmonary insulin was absorbed
systemically and reduced glucose levels and provides the same control of
diabetes as does injected insulin. In October 1996, Pfizer initiated a
multi-site Phase Ilb outpatient trial with 190 patients with Type 1 and Type 2
diabetes. In June 1998, Pfizer announced the results of Phase Ilb trials. In 70
Type 1 diabetics treated with either inhaleable or conventional injected insulin
therapy for three months, the levels of hemoglobin A1c, the best index of blood
glucose control, were statistically equivalent. Virtually identical results were
obtained in a group of Type 2 diabetics. In September 1998, Pfizer released
additional Phase Ilb data from the inhaleable insulin trials which indicated
that results from 56 of 69 patients in a three-month trial showed that
individuals with Type 2 diabetes can markedly improve their glycemic control
without insulin injections by combining Inhale's pulmonary insulin with oral
diabetes agents.
In November 1998, Pfizer and Hoechst announced that they entered into
worldwide agreements to manufacture insulin and to co-develop and co-promote
inhaled insulin. Under the terms of the agreement, Pfizer and Hoechst agreed to
construct a jointly owned manufacturing plant in Frankfurt, Germany. Until its
completion, Pfizer will provide Inhale with biosynthetic recombinant insulin
from Hoechst's existing plant for powder processing. Inhale will continue to
have responsibility for manufacturing powders and supplying devices and will
receive a royalty on inhaleable insulin products marketed jointly by Pfizer and
Hoechst. Later in the same month, Pfizer held a meeting for 117 Phase III sites
of the inhaleable insulin trials and in June 1999, Pfizer began dosing for the
Phase III clinical trials.
In January 1995 and October 1996, Pfizer made two $5 million equity
investments in Inhale at a 25% premium to the market price of Inhale stock at
the time of each investment.
ALPHA-1 PROTEINASE INHIBITOR PROGRAM
In January 1997, Inhale entered into a collaborative agreement with Centeon
to develop a pulmonary formulation of alpha-1 proteinase inhibitor to treat
patients with alpha-1 antitrypsin deficiency, or genetic emphysema. Alpha-1
proteinase inhibitor is approved in the United States and several European
countries for augmentation treatment of alpha-1 antitrypsin deficiency. Current
treatment is given by systemic intravenous infusion on a weekly basis. This
"replacement therapy" consists of a concentrated form of alpha-1 proteinase
inhibitor derived from human plasma. Under the terms of the collaboration,
Centeon will receive commercialization rights worldwide excluding Japan and
Inhale will receive royalties on product sales, an up-front signing fee and up
to an estimated $15 million in research and development funding and milestone
payments. Centeon will manufacture the active ingredient for use in Inhale's
delivery device. Inhale will manufacture and package the dry powder and supply
inhalation devices to Centeon for commercialization and marketing.
The two companies have completed preclinical work that indicates Inhale's
dry powder formulation of Centeon's alpha-1 proteinase inhibitor has the
potential to significantly improve the efficiency of delivery compared with
current infusion therapy. Inhale believes its pulmonary delivery system could
significantly reduce the amount of drug needed for genetic emphysema therapy
since alpha-1 proteinase
21
inhibitor could be delivered directly to the lung. Centeon is currently
negotiating to secure rights under patents that have been granted in Europe
directed to aerosol formulations for the treatment of the lung containing serine
protease inhibitors, including alpha-1 proteinase inhibitor.
AVONEX-Registered Trademark- Program
In February 1999, Inhale entered into a collaborative agreement with Biogen
to develop pulmonary delivery for Biogen's AVONEX-Registered Trademark-, a drug
used in the treatment of multiple sclerosis. Multiple sclerosis is believed to
be the most common chronic neurological condition of young adults in North
America and Europe. It is estimated that over 250,000 people in the United
States are currently affected by multiple sclerosis and that approximately
10,000 new cases are diagnosed annually in the United States. Under the terms of
the agreement, Inhale will receive royalties on product sales, an up-front
signing fee, and up to an estimated $25 million in research and development
funding and potential progress payments. Biogen will provide bulk
AVONEX-Registered Trademark- to Inhale for formulation into a dry powder which
is stable at room temperature. Inhale will manufacture and package the dry
powder and supply inhalation devices. Biogen will be responsible for clinical
trials, marketing and commercialization.
PROPRIETARY MOLECULE PROGRAM WITH LILLY
In January 1998, Lilly and Inhale entered into a collaborative agreement to
develop pulmonary delivery for an undisclosed protein product based on Inhale's
deep lung drug delivery system. Under the terms of the agreement, Inhale will
receive funding of up to $20 million in research, development and milestone
payments. Lilly will receive global commercialization rights for the pulmonary
delivery of the products with Inhale receiving royalties on any marketed
products. Inhale will manufacture packaged powders for, and supply inhalation
devices to, Lilly.
PTH PROGRAM
In January 1997, Inhale entered into a collaborative agreement with Lilly to
develop pulmonary delivery for a selected Lilly osteoporosis drug, parathyroid
hormone (PTH 1-34). Osteoporosis is estimated to affect approximately
25 million Americans, mostly women. If not prevented or left untreated,
osteoporosis can progress painlessly until a bone breaks. As many as 35,000
people die each year from a cause associated with hip fractures, primarily due
to complications that result from surgery or from being confined to bed.
Under the terms of its agreement with Lilly, Inhale will receive up to an
estimated $20 million in initial fees, funding for research and progress
payments. Lilly will receive global commercialization rights for the pulmonary
delivery of the products, with Inhale receiving royalties on any marketed
products. Inhale will manufacture and package product with bulk drug supplied by
Lilly and supply the inhalation devices.
In late 1998, unexpected observations from a long-term test in rats of the
injectable version of this osteoporosis drug led Lilly to suspend further
clinical development of the injectable and pulmonary versions of PTH pending
further analysis. Inhale is maintaining a minimum development effort in its
pulmonary program pending further direction from Lilly. Depending on the
continued evaluations by Lilly, this inhalation program could be re-initiated,
suspended for an extended period, or possibly terminated. Inhale does not
currently believe that this program will be re-initiated by Lilly in the near
future, if at all.
INHALE'S PROGRAMS AVAILABLE OR EXPECTED TO BE AVAILABLE FOR PARTNERING
CALCITONIN PROGRAM
Inhale is funding a proprietary program to develop deep lung delivery of
calcitonin for the treatment of osteoporosis, bone pain and Paget's disease.
Calcitonin is a peptide hormone secreted by
22
the thyroid gland that inhibits bone resorption and lowers serum calcium.
Calcitonin is available in two forms, fish and human. Calcitonin is administered
daily or every other day by injection in the United States. In the United
States, salmon calcitonin is approved for the treatment of postmenopausal
osteoporosis, Paget's disease, hypercalcemia of cancer and bone pain. Human
calcitonin is approved for Paget's disease and bone pain. Paget's disease is a
chronic disorder of the adult skeleton, in which localized areas of bone become
hyperactive and are replaced by a softened and enlarged bone structure. About 3%
of Caucasians in the United States over age 60 have Paget's disease.
Hypercalcemia occurs as a result of excessive serum calcium levels caused by
hyperparathyroidism and malignancy. It occurs in approximately 10-20% of cancer
patients.
In April 1997, Inhale announced the successful completion of Phase I
clinical trials to determine the safety and bioavailability of pulmonary
delivery of a dry powder, aerosolized form of salmon calcitonin as a potential
treatment for osteoporosis, Paget's disease, hypercalcemia and other bone
diseases. The single-dose study conducted in the United Kingdom with a total of
36 fasted normal volunteers indicated that the drug was systemically absorbed
through the pulmonary route when delivered with Inhale's system. Inhale is
continuing work on this program while it seeks a partner for further clinical
development.
INTERLEUKIN-1 RECEPTOR PROGRAM
Interleukin-1 receptor is a cytokine that helps initiate the inflammatory
response to foreign pathogens. Inhale collaborated with Immunex to develop
pulmonary delivery of a therapeutic product for asthma. Initial formulation
development and animal toxicology have been completed, and the two companies
successfully completed Phase I/II trials demonstrating pulmonary delivery. This
program is awaiting further work and/or licensing by Immunex.
MOLECULE PROGRAMS WITH BAXTER
In March 1996, Inhale entered into a collaborative agreement with Baxter
International Inc. to use Inhale's dry powder pulmonary delivery system as a
technology platform for developing and launching therapeutic products. In
connection with the collaboration, Baxter made a $20 million equity investment
in Inhale at a 25% premium to the market price of Inhale stock at the time of
the investment. Baxter received worldwide commercialization rights for four
non-protein/peptide drugs in exchange for up to an estimated $60 million in
research and development funding and progress payments. In April 1998, Inhale
announced that the first two compounds from its collaboration with Baxter had
successfully completed Phase I and Phase II trials respectively. In addition, it
was announced that the program would focus on the product that had completed
Phase I as it was the product with the most commercial potential. The technology
from one of the three remaining products was returned to Inhale, leaving the
development of the other two compounds on hold. In October 1998, Inhale
announced that it had reached an agreement with Baxter to amend their
collaborative agreement to facilitate signing a new corporate partner to fund
further development and commercialization of the undisclosed compound that had
been their focus since April 1998. Baxter's obligations under that amendment
expired in September 1999. As a result, rights to the compounds reverted to
Inhale and are now available for other partnering opportunities.
OTHER PROGRAMS
In addition to the above mentioned programs, Inhale has and continues to
conduct feasibility studies with respect to additional drug formulations both
for its own account and in cooperation with potential partners. Inhale will
continue to pursue these and other feasibility programs to determine the
potential for collaborative development programs with respect to these drugs.
Included among such studies is initial research on a long-acting inhaleable
insulin. Some diabetic patients require a long-acting insulin to maintain
baseline insulin levels. A long-acting, inhaleable form of insulin could be
23
used by these patients as a supplement to short-acting, mealtime inhaleable
insulin. This program is part of a broader sustained release program announced
by Inhale in January 1999.
MANUFACTURING
Inhale generally plans to formulate, manufacture and package the powders for
its deep lung delivery products and to subcontract the manufacture of its
proprietary pulmonary delivery devices. Under its collaborative agreement with
Pfizer to develop inhaleable insulin, Inhale will be the primary manufacturer of
insulin powders and Pfizer will be primarily responsible for filling blisters.
The terms of the collaborative agreement with Pfizer provide that prior to the
commercialization of its first products, Inhale must build and have validated a
powder processing and packaging facility and must select and have validated a
device manufacturer or manufacturers. Inhale believes its manufacturing strategy
will enable it to achieve the following:
- provide economies of scale by utilizing manufacturing capacity for
multiple products;
- improve its ability to retain any manufacturing know-how; and
- allow its customers to bring pulmonary delivery products to market faster.
Inhale has built a powder processing and packaging facility in San Carlos,
California capable of producing powders in quantities sufficient for human
clinical trials and commercial launch. This facility has been inspected and
licensed by the State of California and is used to manufacture and package
powders under current good manufacturing practices. Inhale intends to expand the
facility to meet its future commercial manufacturing commitments.
Inhale is working to further scale up its powder processing to a larger
production scale system and to further develop the necessary powder packaging
technologies. Fine particle powders and small quantity powder packaging (such as
those to be used in Inhale's delivery system) require special handling. Current
commercial packaging systems are designed for filling larger quantities of
larger particle powders and therefore must be modified to dispense finer
particles in the small quantities required by Inhale. Inhale has developed and
validated a proprietary prototype automated filling system which Inhale believes
is capable of supporting its requirements through Phase III trials and into
commercial production for some products. Inhale is developing a higher capacity
automated filling unit capable of filling blisters on a production scale for
moderate and large volume products. Inhale faces significant technical
challenges in developing an automated, commercial-scale filling system that can
accurately and economically handle the small dose and particle sizes of its
powders. There can be no assurance that Inhale will be able to develop or
acquire the technology necessary to develop successfully any such system in a
timely manner or at commercially reasonable cost. Any failure or delay in
developing such technology would delay product development or bar
commercialization of Inhale's products and would have a material adverse effect
on Inhale.
A new inhalation device has been developed for commercial use and is being
used in the Phase III insulin and other trials in 1999. Inhale plans to
subcontract the manufacture of its pulmonary delivery device before commercial
production of its first product. Inhale has identified contract manufacturers
that it believes have the technical capabilities and production capacity to
manufacture its devices and which can meet the requirements of current good
manufacturing practices. There can be no assurance that Inhale will be able to
obtain and maintain satisfactory contract manufacturing on commercially
acceptable terms, if at all. Inhale's dependence upon third parties for the
manufacture of its inhalation device may adversely affect Inhale's cost of goods
and its ability to develop and commercialize products on a timely and
competitive basis.
24
GOVERNMENT REGULATION
The research and development, manufacture and marketing of pulmonary drug
delivery systems are subject to regulation by the FDA in the United States and
by comparable regulatory agencies in other countries. These national agencies
and other federal, state and local entities regulate, among other things,
research and development activities and the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of Inhale's products.
The process required by the FDA before a pulmonary drug delivery system may
be marketed in the United States depends on whether the compound has existing
approval for use in other dosage forms. If the drug is a new chemical entity
that has not been approved, the process includes the following:
- preclinical laboratory and animal tests;
- the filing of an Investigational New Drug application ("IND");
- adequate and well-controlled human clinical trials to establish the safety
and efficacy of the drug in its intended indication; and
- submission to the FDA for approval of a New Drug Application ("NDA") with
respect to drugs or a Biological License Application ("BLA") with respect
to biologics.
If the drug has been previously approved, the approval process is similar,
except that certain toxicity tests normally required for the IND and NDA/BLA
application may not be necessary.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the potential safety and efficacy of the product and
its formulation. Pulmonary systems must be formulated according to current good
manufacturing practices, and preclinical safety tests must be conducted by
laboratories that comply with FDA good laboratory practices regulations. The
results of the preclinical tests are submitted to the FDA as part of an IND
application and are reviewed by the FDA before human clinical trials begin. The
IND application becomes effective 30 days after receipt by the FDA, unless the
FDA raises objections.
Clinical trials involve the administration of the drug to healthy volunteers
or to patients under the supervision of, a qualified principal investigator.
Clinical trials are conducted in accordance with protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part
of the IND. Each clinical study is conducted under the auspices of an
independent Institutional Review Board ("IRB"). The IRB will consider, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the product generally is tested for safety, dosage
tolerance, pharmacokinetics, absorption, metabolism and excretion. Phase II
involves studies in a limited patient population to:
- determine the efficacy of the product for specific, targeted indications;
- determine dosage tolerance and optimal dosage; and
- identify possible adverse effects and safety risks.
When Phase II evaluations demonstrate that dosing the drug by the pulmonary
system is effective and has an acceptable safety profile, Phase III trials are
undertaken to evaluate further clinical efficacy and safety within an expanded
patient population at geographically dispersed clinical study sites. The FDA,
the clinical trial sponsor, the investigator or the IRB may suspend clinical
trials at any time if it believes that clinical subjects are being exposed to an
unacceptable health risk.
25
The results of product development, preclinical studies and clinical studies
are submitted to the FDA as an NDA/BLA for approval of the marketing and
commercial shipment of the pulmonary system. The FDA may deny an NDA/BLA if
applicable regulatory criteria are not satisfied or may require additional
clinical testing. Even if such data is submitted, the FDA may ultimately decide
that the NDA/BLA does not satisfy the criteria for approval. Product approvals
may be withdrawn if compliance with regulatory standards are not maintained or
if problems occur after the product reaches the market. The FDA may require
testing and surveillance programs to monitor the effect of pulmonary systems
that have been commercialized, and has the power to prevent or limit future
marketing of the product based on the results of these post-marketing programs.
Each domestic drug product manufacturing establishment must be registered
with, and approved by, the FDA. Drug product manufacturing establishments
located in California also must be licensed by the State of California.
Establishments handling controlled substances must be licensed by the United
States Drug Enforcement Administration ("DEA"). Domestic manufacturing
establishments are subject to biennial inspections by the FDA for current good
manufacturing practices compliance. Inhale is also subject to U.S. federal,
state and local regulations regarding workplace safety, environmental protection
and hazardous and controlled substance controls, among others.
Many of the drugs with which Inhale is working are already approved for
marketing by the FDA. Inhale believes that when working with approved drugs, the
approval process for delivery by pulmonary delivery may require less time and
fewer tests than for new chemical entities. However, Inhale expects that its
formulations often will use excipients not currently approved for pulmonary use.
Use of these excipients will require additional toxicological testing that may
increase the costs of, or lengthen the time in, gaining regulatory approval. In
addition, regulatory procedures applicable to Inhale's products may change as
regulators gain experience in the area of macromolecules, and any such changes
may delay or increase the cost of regulatory approval.
Inhale's device will not be developed as an independent product but will be
an inseparable part of the deep lung drug delivery system for each specific
molecule. Prior to or at the time of submission of the IND, the FDA Center and
division within the Center will be identified to be responsible for the review
of the IND and NDA/BLA. In the case of Inhale's products, either the Center for
Drug Evaluation and Research or the Center for Biologics Evaluation and
Research, in consultation with the Center for Devices and Radiological Health,
will be involved in the review. However, one Center is designated as the Center
which has the lead responsibility for regulating the product. The jurisdiction
within the FDA is based on the primary mode of action of the drug and is
identified in the FDA's intercenter agreement.
Inhale expects that its partners generally will be responsible for clinical
and regulatory approval procedures, but Inhale may participate in this process
by submitting to the FDA or to each partner portions of the Drug Master File
being developed and to be maintained by Inhale which contains data concerning
the manufacturing processes for the product. The regulatory review process
generally takes a number of years and requires the expenditure of substantial
resources. Inhale's ability to manufacture and sell products developed under
contract depends upon the partner's completion of satisfactory clinical trials
and obtaining marketing approvals. Inhale may prepare and submit an IND
application and perform initial clinical studies before licensing the product to
a partner. Inhale's business strategy contemplates performing more of these
studies in the future.
Sales of Inhale's products outside the United States are subject to
regulatory requirements governing human clinical trials and marketing approval
for drugs and pulmonary delivery systems. Such requirements vary widely from
country to country.
Prior to marketing a new dosage form of any drug, including one developed
for use with Inhale's pulmonary drug delivery system, the product must undergo
rigorous preclinical and clinical testing and an extensive review process
mandated by the FDA and equivalent foreign authorities regardless of
26
whether or not such drug was already approved for marketing in another dosage
form. These processes generally take a number of years and require the
expenditure of substantial resources. None of Inhale's proposed products has
been submitted to the FDA for marketing approval. Inhale has no experience
obtaining such regulatory approval, does not have the expertise or other
resources to do so and intends to rely on its partners to fund clinical testing
and to obtain product approvals.
PATENTS AND PROPRIETARY RIGHTS
Inhale's policy is to apply for patent protection for the technology,
inventions and improvements deemed important to the development of its business.
Inhale also relies upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to maintain and further develop its
competitive position. Inhale plans to defend aggressively its proprietary
technology and any issued patents.
Inhale expects that its integrated system for the development of pulmonary
delivery technology for macromolecule drugs will yield innovations in dry powder
formulations, powder processing, powder packaging and device design. It is
Inhale's strategy to build proprietary positions in each of its technological
areas. Inhale's success will depend in part upon its ability to protect its
proprietary technology from infringement, misappropriation, duplication and
discovery. Inhale has filed patent applications covering certain aspects of its
device and powder processing technology and powder formulations and pulmonary
route of delivery for certain molecules, and plans to file additional patent
applications. There can be no assurance that any of the patents applied for by
Inhale will issue, or that any patents that issue will be valid and enforceable.
Even if such patents are enforceable, Inhale anticipates that any attempt to
enforce its patents could be time consuming and costly.
Inhale currently has 45 issued U.S. and foreign patents covering certain
aspects of its technology and has a number of patent applications pending. Among
the significant and more recent patents received by Inhale from the United
States Patent and Trademark Office (the "PTO") are the following:
- Patent No. 5,458,135 (October 17, 1995) for certain claims covering the
use of its device in a method for delivering powder formulations of drugs
to the lung.
- Patent No. 5,607,915 (March 4, 1997) for pulmonary delivery of active
fragments of parathyroid hormone (PTH) 1-34.
- Patent No. 5,654,007 (August 5, 1997) for a system and methods for
processing fine dispersible powders for easier processing.
- Patent No. 5,740,794 (April 21, 1998) for a method and means to access a
packaged drug, to break up a dry powder drug into particles with
compressed air (aerosolize), and to transport the aerosolized drug into a
holding chamber.
- Patent No. 5,775,320 (July 7, 1998) for a method and means for dispersing
a dry-powder or liquid drug, and transferring the drug in its aerosolized
"cloud" form to a holding chamber where it is held until a patient is
ready to inhale, as well as a method and means to pull in atmospheric
"chase" air following the initial inhalation to help push the drug into
the deep lung.
- Patent No. 5,780,014 (July 14, 1998) for methods and means for pulmonary
delivery of dry powder alpha-1 proteinase inhibitor for administration to
a patient.
- Patent No. 5,785,049 (July 28, 1998) for approximately 50 claims directed
to methods and means for aerosolizing dry powders through use of a high
pressure gas stream to draw dry powder from a receptacle such as a blister
and for which Inhale utilizes the design described therein to achieve
efficient aerosolization of fine dry powders to enable deep lung delivery
for systemic absorption.
27
- Patent No. 5,826,633 (October 27, 1998) relating to Inhale's powder
handling technologies, including the process of transferring fine powder
particles into blister packs in an un-compacted state so that they can be
easily dispersed in Inhale's pulmonary delivery system.
- Patent No. 5,928,469 (July 27, 1999) for a method for preparing storage
stable compositions. In this method, a material to be stored and a glass
forming substance are spray-dried to form stable particles
- Patent No. 5,976,574 (November 2, 1999) for a process for spray-drying
hydrophobic drugs in organic solvent suspensions.
- Patent No. 5,985,248 (November 16, 1999) for a process for spray-drying a
hydrophobic drug and a hydrophilic excipient in an organic solvent and
compositions formed by the process.
- Patent No. 5,994,314 (November 30, 1999) for dry powder nucleic acid
compositions and methods for their preparation
- Patent No. 5,997,848 (December 7, 1999) for pulmonary administration of
dry powder insulin which is rapidly absorbed through the alveoli into the
systemic circulation
In October 1999, Inhale and Alliance entered into an agreement for Inhale to
acquire Alliance's PulmoSpheres-Registered Trademark- technology and other
related assets for particle formation and powder processing and in
November 1999, the acquisition was completed. The
PulmoSpheres-Registered Trademark- technology utilizes an emulsification process
to produce a powder having characteristics that Inhale believes may improve
efficiency and reproducibility for drugs delivered to the lung through
alternative technologies such as MDIs as well as potentially improve drug
delivery through Inhale's proprietary deep lung drug delivery system. The assets
acquired included Alliance's intellectual property portfolio for
PulmoSpheres-Registered Trademark- consisting of, among other things, several
patent applications. With respect to applications of the
PulmoSpheres-Registered Trademark- technology outside the respiratory field,
Inhale has licensed the technology back to Alliance. While Alliance has made
several representations in its agreement with Inhale regarding its ownership
rights of the PulmoSpheres-Registered Trademark- technology, it is possible that
third parties might assert claims challenging Alliance's rights, and thus
Inhale's rights. Even if Inhale can defend its rights successfully, the
uncertainty regarding the status of its rights during the time any such
litigation is pending may prevent Inhale from using the underlying technology.
In April 1998, Inhale and Initiatech Inc. signed an agreement under which
Inhale will license technology, intellectual property, and patents for
protecting biologically active compounds in the dry state. Inhale plans to use
this technology to expand its current technology base in stabilizing dry powder
aerosol formulations for peptides, proteins, and other macromolecules at room
temperature. Inhale's license is exclusive for the fields of respiratory
delivery of pharmaceutical products and for any delivery form of insulin. The
license includes rights to two issued U.S. patents and a Canadian patent
covering the protection of biological materials from degradation. Initiatech has
licensed exclusive rights to this technology from the Boyce Thompson Institute
for Plant Research Inc., (BTI) including the right to sub-license.
In June 1997, Inhale acquired the intellectual property portfolio of the
BioPreservation Division of Pafra. This portfolio includes issued U.S. and
foreign Letters Patents and pending applications relating to the stabilization
of macromolecule drugs in dry formulations. An application for reissue of the
original U.S. patent included in this portfolio is pending in the PTO. There can
be no assurance that Inhale will be successful in obtaining a reissued patent. A
second U.S. patent issued on July 27, 1999. A granted European patent included
in this portfolio was the subject of an opposition proceeding before the
European Patent Office. The opposition hearing was held on December 16, 1999.
Inhale successfully defended the patent and its method claims relating to glass
stabilization technology against four opposing parties. There can be no
assurance that any of the other Pafra patent applications will issue, or that
any Pafra patents will be held to be valid and enforceable. The inability to
obtain or defend the Pafra patents could have a material adverse effect on
Inhale.
28
Inhale has obtained license rights to certain know-how and patent
applications owned by Genentech, Inc. covering formulations and powder
processing and pulmonary delivery of certain molecules, which it believes could
be important to the development of its business. These license rights are
worldwide, nonexclusive, sublicensable and royalty free. In 1997, Genentech
successfully defended an opposition proceeding involving a pending European
patent licensed to Inhale. Recently, this decision was upheld on appeal. The
pending patent covers the pulmonary delivery of cytokines and growth factors.
The patent positions of pharmaceutical, biotechnology and drug delivery
companies, including Inhale, are uncertain and involve complex legal and factual
issues. Additionally, the coverage claimed in a patent application can be
significantly reduced before the patent is issued. As a consequence, Inhale does
not know whether any of its patent applications will be circumvented or
invalidated. Since patent applications in the United States are maintained in
secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, Inhale
cannot be certain that it was the first inventor of inventions covered by its
issued patents or pending patent applications or that it was the first to file
patent applications for such inventions. Moreover, Inhale may have to
participate in interference proceedings declared by the PTO to determine
priority of invention, which could result in substantial cost to Inhale, even if
the eventual outcome is favorable. An adverse outcome could subject Inhale to
significant liabilities to third parties, require disputed rights to be licensed
from or to third parties or require Inhale to cease using the technology in
dispute.
Inhale is aware of numerous pending and issued U.S. and foreign patent
rights and other proprietary rights owned by third parties that relate to
aerosol devices and delivery, pharmaceutical formulations, dry powder processing
technology and the pulmonary route of delivery for certain powder formulations
of macromolecules. Inhale cannot predict with any certainty which, if any,
patent references will be considered relevant to its technology by authorities
in the various jurisdictions where such rights exist, nor can Inhale predict
with certainty which, if any, of these rights will or may be asserted against it
by such third parties. There can be no assurance that Inhale can obtain any
license to any technology that it determines it needs, on reasonable terms, if
at all, or that Inhale could develop or otherwise obtain alternate technology.
The failure to obtain licenses if needed would have a material adverse effect on
Inhale.
Inhale also relies upon trade secret protection for its confidential and
proprietary information. No assurance can be given that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to Inhale's trade secrets or disclose such
technology, or that Inhale can meaningfully protect its trade secrets.
Third parties from time to time have asserted or may assert that Inhale is
infringing their proprietary rights based upon issued patents, trade secrets or
know-how that they believe cover Inhale's technology. In addition, future
patents may issue to third parties which Inhale's technology may infringe.
Inhale could incur substantial costs in defending itself and its partners
against any such claims. Furthermore, parties making such claims may be able to
obtain injunctive or other equitable relief which could effectively block
Inhale's ability to further develop or commercialize some or all of its products
in the United States and abroad, and could result in the award of substantial
damages. In the event of a claim of infringement, Inhale and its partners may be
required to obtain one or more licenses from third parties. There can be no
assurance that Inhale or its partners will be able to obtain such licenses at a
reasonable cost, if at all. Defense of any lawsuit or failure to obtain any such
required license could have a material adverse effect on Inhale.
Inhale's ability to develop and commercialize its technology will be
affected by its or its partners' access to the drugs which are to be formulated.
Many biopharmaceutical drugs, including some of those which are presently under
development by Inhale, are subject to issued and pending United States and
foreign patent rights which may be owned by competing entities. There are issued
patents and pending patent applications relating to the pulmonary delivery of
macromolecule drugs, including several for
29
which Inhale is developing pulmonary delivery formulations. Inhale intends
generally to rely on the ability of its partners to provide access to the drugs
which are to be formulated for pulmonary delivery. There can be no assurance,
however, that Inhale's partners will be able to provide access to drug
candidates for formulation for pulmonary delivery or that, if such access is
provided, Inhale or its partners will not be accused of, or determined to be,
infringing a third party's rights and will not be prohibited from working with
the drug or be found liable for damages that may not be subject to
indemnification. Any such restriction on access or liability for damages would
have a material adverse effect on Inhale.
It is Inhale's policy to require its employees and consultants, outside
scientific collaborators, sponsored researchers and other advisors who receive
confidential information from Inhale to execute confidentiality agreements upon
the commencement of employment or consulting relationships with Inhale. These
agreements provide that all confidential information developed or made known to
the individual during the course of the individual's relationship with Inhale is
to be kept confidential and not disclosed to third parties except in specific
circumstances. The agreements provide that all inventions conceived by an
employee shall be the property of Inhale. There can be no assurance, however,
that these agreements will provide meaningful protection or adequate remedies
for Inhale's trade secrets in the event of unauthorized use or disclosure of
such information.
COMPETITION
Inhale believes that products developed using its technology will compete on
the basis of system efficiency, dosage reproducibility, safety, patient
convenience and cost. There is intense competition to develop a solution to the
non-invasive delivery of drugs from several drug delivery and pharmaceutical
companies, many of which are much larger and have far greater resources than
Inhale. These include companies working on developing systems for other
non-invasive routes of delivery, such as oral, transdermal, bucal, nasal, and
needle-less injections, as well as companies working on pulmonary delivery
systems. In addition, several companies are working on sustained release
injectable systems. While these latter systems involve injections, the lower
number of injections could be competitive with Inhale's pulmonary delivery
technology in certain applications. Inhale believes its technology and
integrated pulmonary delivery systems approach provides it with important
competitive advantages in the delivery of drugs compared with currently known
alternatives. However, new drugs or further developments in alternative drug
delivery methods may provide greater therapeutic benefits for a specific drug or
indication, or may offer comparable performance at lower cost than Inhale's
proprietary deep lung drug delivery system.
With respect to pulmonary delivery, several companies are marketing and
developing dry powder, MDI, liquid and nebulizer devices that could have
applications for drug delivery, including Dura Pharmaceuticals, Inc. and Aradigm
Corporation, which also have collaborative arrangements with corporate partners
for the development of pulmonary delivery systems for insulin. Several of these
companies may have or may be developing dry powder devices that could be used
for pulmonary delivery of macromolecules. There can be no assurance that
competitors will not introduce products or processes competitive with or
superior to those of Inhale. Inhale intends to monitor competitive device
activities and continue to focus its activities on those products for which
Inhale believes it has and can maintain a competitive advantage. If a device is
developed that is superior to Inhale's for certain applications, Inhale may seek
to obtain a license to allow Inhale's partners to use such device with
Inhale-developed powders, although there can be no assurance that Inhale would
be able to do so.
Inhale's success depends upon maintaining a competitive advantage in the
development of products and technologies for pulmonary delivery of
pharmaceutical drugs. If a competing company were to develop or acquire rights
to a better dry powder pulmonary delivery device or fine powder processing
technology, a better system for efficiently and reproducibly delivering
macromolecule drugs to the deep lung, a non-invasive drug delivery system which
is more attractive for delivery drugs to the
30
deep lung, a non-invasive drug delivery system which is more attractive for the
delivering of drugs than pulmonary delivery, or an invasive delivery system
which overcomes some of the drawbacks of current invasive systems for chronic or
subtonic indications (such as sustained release system), Inhale's business would
be negatively impacted.
Inhale is in competition with pharmaceutical, biotechnology and drug
delivery companies, hospitals, research organizations, individual scientists and
nonprofit organizations engaged in the development of alternative drug delivery
systems or new drug research and testing, as well as with entities producing and
developing injectable drugs. Inhale is aware of a number of companies currently
seeking to develop new products and non-invasive alternatives to injectable drug
delivery, including oral delivery systems, intranasal delivery systems,
transdermal systems, bucal and colonic absorption systems. Several of these
companies may have developed or are developing dry powder devices that could be
used for pulmonary delivery of macromolecules. Many of these companies and
entities have greater research and development capabilities, experience,
manufacturing, marketing, financial and managerial resources than Inhale and
represent significant competition for Inhale. Acquisitions of competing drug
delivery companies by large pharmaceutical companies could enhance competitors'
financial, marketing and other resources. Accordingly, Inhale's competitors may
succeed in developing competing technologies, obtaining FDA approval for
products or gaining market acceptance more rapidly than Inhale. Developments by
others may render Inhale's products or technologies noncompetitive or obsolete.
EMPLOYEES AND CONSULTANTS
As of September 30, 1999, Inhale had 306 full time employees, of which 248
were engaged in research and development (including manufacturing) activities
and 58 were engaged in general administration and business development. Two
hundred fifty-one of the employees hold advanced degrees, of which 50 are
Ph.D.s. Inhale employs scientists and engineers with expertise in the areas of
pulmonary biology, aerosol science, mechanical engineering, protein chemistry
and chemical engineering. None of Inhale's employees are covered by a collective
bargaining agreement and Inhale has experienced no work stoppages. Inhale
believes that it maintains good relations with its employees.
To complement its own expertise, Inhale utilizes specialists in regulatory
affairs, pulmonary toxicology, process engineering, manufacturing, quality
assurance, device design, clinical trial design and business development. These
individuals include certain of Inhale's scientific advisors (see "Management"
below) as well as independent consultants.
FACILITIES
Inhale currently leases approximately 165,000 feet in San Carlos, California
and 20,000 square feet in Palo Alto, California. The Palo Alto facility is used
for research, development and administration. The lease has a five-year term,
and expires on May 31, 2003.
The San Carlos facility is leased pursuant to a 15-year lease agreement. The
San Carlos facility serves as the Company's corporate headquarters and is used
for research and development, manufacturing and administration. The lease
provides Inhale with an option to lease approximately 80,000 additional square
feet in the same facility. This manufacturing facility operates under current
good manufacturing practices and has been approved and licensed by the State of
California to manufacture clinical supplies for use in human clinical trials.
In October 1998, Inhale acquired 4.7 acres of land adjacent to its San
Carlos facility. Inhale intends to use this property to expand future
operations. In October 1999, Inhale commenced construction of a 85,000 square
foot facility on this site to expand its administrative offices and research and
development capacity.
31
DESCRIPTION OF THE DEBENTURES
The debentures were issued under an indenture between us and Chase Manhattan
Bank and Trust Company, National Association, as trustee, dated October 13,
1999. The terms of the debentures include those provided in the indenture and
those provided in the registration rights agreement, which we entered into with
the initial purchasers of the debentures on October 13, 1999.
The following description of provisions of the debentures is not complete
and is subject to, and qualified in its entirety by reference to, the
debentures, the indenture and the registration rights agreement.
GENERAL
The debentures are general unsecured obligations of Inhale and rank junior
in right of payment to all of our existing and future Senior Debt and are
convertible into our common stock as described under "--Conversion Rights"
below. The debentures will mature on October 13, 2006, unless earlier redeemed
by us or repurchased by us at the option of the holder upon the occurrence of a
Change of Control (as defined below).
The debentures bear interest from October 13, 1999 at the rate of 6 3/4% per
year, subject to adjustment upon the occurrence of a Reset Transaction. See
"--Interest Rate Adjustments" below. Interest is payable semi-annually on
April 13 and October 13 of each year to holders of record at the close of
business on the preceding March 31 and September 30, respectively, beginning
April 13, 2000. We may pay interest on debentures represented by certificated
debentures by check mailed to such holders. However, a holder of debentures with
an aggregate principal amount in excess of $5,000,000 will be paid by wire
transfer in immediately available funds at the election of such holder. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
Principal will be payable, and the debentures may be presented for
conversion, registration of transfer and exchange, without service charge, at
our office or agency in New York City, which shall initially be the office or
agency of the trustee in New York, New York. See "--Form, Denomination and
Registration" for information as to debentures held by QIBs (as defined below).
The indenture does not contain any financial covenants or any restrictions
on the payment of dividends, the repurchase of our securities or the incurrence
of Senior Debt or any other indebtedness. The indenture also does not contain
any covenants or other provisions that afford protection to holders of
debentures in the event of a highly leveraged transaction or a Change in Control
of Inhale except to the extent described under "--Repurchase at Option of
Holders Upon a Change of Control" below.
INTEREST RATE ADJUSTMENTS
If a Reset Transaction occurs, the interest rate will be adjusted to equal
the Adjusted Interest Rate from the effective date of such Reset Transaction to,
but not including, the effective date of any succeeding Reset Transaction.
A "Reset Transaction" means:
- a merger, consolidation or statutory share exchange to which the entity
that is the issuer of the common stock into which the debentures are then
to be convertible into is a party;
- a sale of all or substantially all the assets of that entity;
- a recapitalization of that common stock; or
- a distribution described in clause (4) of the fourth paragraph under
"--Conversion Rights" below,
32
after the effective date of which transaction or distribution the debentures
would be convertible into:
- shares of an entity the common stock of which had a dividend yield for the
four fiscal quarters of such entity immediately preceding the public
announcement of the transaction or distribution that was more than 2.5%
higher than the dividend yield on our common stock (or other common stock
then issuable upon conversion of the debentures) for the four fiscal
quarters preceding the public announcement of the transaction or
distribution; or
- shares of an entity that announces a dividend policy prior to the
effective date of the transaction or distribution which policy, if
implemented, would result in a dividend yield on that entity's common
stock for the next four fiscal quarters that would result in such a 2.5%
increase.
The "Adjusted Interest Rate" with respect to any Reset Transaction will be
the rate per year that is the arithmetic average of the rates quoted by two
dealers engaged in the trading of convertible securities selected by us or our
successor as the rate at which interest should accrue so that the fair market
value, expressed in dollars, of a debenture immediately after the later of
- the public announcement of the Reset Transaction or
- the public announcement of a change in dividend policy in connection with
the Reset Transaction
will equal the average Trading Price of a debenture for the 20 trading days
preceding the date of public announcement of the Reset Transaction However, the
Adjusted Interest Rate will not be less than 6 3/4% per year.
For purposes of the definition of Reset Transaction, the dividend yield on
any security for any period means the dividends paid or proposed to be paid
pursuant to an announced dividend policy on the security for that period divided
by, if with respect to dividends paid on that security, the average Closing
Price (as defined in the indenture) of the security during that period and, if
with respect to dividends proposed to be paid on the security, the Closing Price
of such security on the effective date of the related Reset Transaction.
The "Trading Price" of a security on any date of determination means:
- the closing sale price (or, if no closing sale price is reported, the last
reported sale price) of a security (regular way) on the New York Stock
Exchange ("NYSE") on that date;
- if that security is not listed on the NYSE on that date, the closing sale
price as reported in the composite transactions for the principal U.S.
securities exchange on which that security is listed;
- if that security is not so listed on a U.S. national or regional
securities exchange, the closing sale price as reported by the Nasdaq
National Market;
- if that security is not so reported, the last price quoted by Interactive
Data Corporation for that security or, if Interactive Data Corporation is
not quoting such price, a similar quotation service selected by us;
- if that security is not so quoted, the average of the mid-point of the
last bid and ask prices for that security from at least two dealers
recognized as market-makers for that security; or
- if that security is not so quoted, the average of that last bid and ask
prices for that security from a dealer engaged in the trading of
convertible securities.
33
FORM, DENOMINATION AND REGISTRATION
The debentures were issued in fully registered form, without coupons, in
denominations of $1,000 principal amount and whole multiples of $1,000.
The debentures are evidenced by a global debenture deposited with the
trustee as custodian for The Depository Trust Company, New York, New York
("DTC"), and registered in the name of Cede & Co. as DTC's nominee. Record
ownership of the global debenture may be transferred, in whole or in part, only
to another nominee of DTC or to a successor of DTC or its nominee, except as set
forth below.
A "qualified institutional buyer," as defined in rule 144A under the
Securities Act ("QIB") may hold its interests in the global debenture directly
through DTC if such QIB is a participant in DTC, or indirectly through
organizations which are direct DTC participants. Transfers between direct DTC
participants will be effected in the ordinary way in accordance with DTC's rules
and will be settled in same-day funds. QIBs may also beneficially own interests
in the global debenture held by DTC through certain banks, brokers, dealers,
trust companies and other parties that clear through or maintain a custodial
relationship with a direct DTC participant, either directly or indirectly.
So long as Cede & Co., as nominee of DTC, is the registered owner of the
global debenture, Cede & Co. for all purposes will be considered the sole holder
of the global debenture. Except as provided below, owners of beneficial
interests in the global debenture will not be entitled to have certificates
registered in their names, will not receive or be entitled to receive physical
delivery of certificates in definitive form, and will not be considered holders
thereof. The laws of some states require that certain persons take physical
delivery of securities in definitive form. Consequently, the ability to transfer
a beneficial interest in the global debenture to such persons may be limited.
We will wire, through the facilities of the trustee, principal, premium, if
any, and interest payments on the global debenture to Cede & Co., the nominee
for DTC, as the registered owner of the global debenture. Inhale, the trustee
and any paying agent will have no responsibility or liability for paying amounts
due on the global debenture to owners of beneficial interests in the global
debenture.
It is DTC's current practice, upon receipt of any payment of principal of
and premium, if any, and interest on the global debenture, to credit
participants' accounts on the payment date in amounts proportionate to their
respective beneficial interests in the debentures represented by the global
debenture, as shown on the records of DTC, unless DTC believes that it will not
receive payment on the payment date. Payments by DTC participants to owners of
beneficial interests in debentures represented by the global debenture held
through DTC participants will be the responsibility of DTC participants, as is
now the case with securities held for the accounts of customers registered in
"street name."
If you would like to convert your debentures into common stock pursuant to
the terms of the debentures, you should contact your broker or other direct or
indirect DTC participant to obtain information on procedures, including proper
forms and cut-off times, for submitting those requests.
Because DTC can only act on behalf of DTC participants, who in turn act on
behalf of indirect DTC participants and other banks, your ability to pledge your
interest in the debentures represented by global debenture to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such interest, may be affected by the lack of a physical certificate.
Neither Inhale nor the trustee (nor any registrar, paying agent or
conversion agent under the indenture) will have any responsibility for the
performance by DTC or direct or indirect DTC participants of their obligations
under the rules and procedures governing their operations. DTC has advised us
that it will take any action permitted to be taken by a holder of debentures,
including, without limitation, the presentation of debentures for conversion as
described below, only at the
34
direction of one or more direct DTC participants to whose account with DTC
interests in the global debenture are credited and only for the principal amount
of the debentures for which directions have been given.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created
to hold securities for DTC participants and to facilitate the clearance and
settlement of securities transactions between DTC participants through
electronic book-entry changes to the accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations such as the initial purchasers of
the debentures. Certain DTC participants or their representatives, together with
other entities, own DTC. Indirect access to the DTC system is available to
others such as banks, brokers, dealers and trust companies that clear through,
or maintain a custodial relationship with, a participant, either directly or
indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the global debenture among DTC participants, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
us within 90 days, we will cause debentures to be issued in definitive form in
exchange for the global debenture. None of Inhale, the trustee or any of their
respective agents will have any responsibility for the performance by DTC,
direct or indirect DTC participants of their obligations under the rules and
procedures governing their operations, including maintaining, supervising or
reviewing the records relating to, or payments made on account of, beneficial
ownership interests in global debentures.
DTC's management is aware that some computer applications, systems and the
like for processing data that are dependent upon calendar dates, including dates
before, on or after January 1, 2000, may encounter "Year 2000 problems." DTC has
informed DTC participants and other members of the financial community that it
has developed and is implementing a program so that its systems, as the same
relates to the timely payment of distributions, including principal and interest
payments, to securityholders, book-entry deliveries and settlement of trades
within DTC, continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including, but not limited to, issuers and their agents, as
well as third-party vendors from whom DTC licenses software and hardware, and
third-party vendors on whom DTC relies for information or the provision of
services, including telecommunications and electrical utility service providers,
among others. DTC has informed DTC participants and other members of the
financial community that it is contacting and will continue to contact
third-party vendors from whom DTC acquires services to (1) impress upon them the
importance of such services being Year 2000 compliant and (2) determine the
extent of their efforts for Year 2000 remediation (and, as appropriate, testing)
of their services. In addition, DTC is in the process of developing such
contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty or contract modification of any kind.
35
CONVERSION RIGHTS
The holders of debentures may, at any time prior to the close of business on
the final maturity date of the debentures, convert any outstanding debentures
(or portions thereof) into our common stock, initially at the conversion price
set forth on the cover page of this prospectus, subject to adjustment as
described below. Holders may convert debentures only in denominations of $1,000
and whole multiples of $1,000. Except as described below, no adjustment will be
made on conversion of any debentures for interest accrued thereon or dividends
paid on any common stock.
If debentures are converted after a record date for an interest payment but
prior to the next interest payment date, those debentures, other than debentures
called for redemption, must be accompanied by funds equal to the interest
payable on the next interest payment date on the principal amount so converted.
No payment will be required if we exercise our right to redeem such debentures
on a redemption date that is an interest payment date. We are not required to
issue fractional shares of common stock upon conversion of debentures and
instead will pay a cash adjustment based upon the market price of our common
stock on the last business day before the date of the conversion. In the case of
debentures called for redemption, conversion rights will expire at the close of
business on the second business day preceding the date fixed for redemption,
unless we default in payment of the redemption price.
A holder may exercise the right of conversion by delivering the debenture to
be converted to the specified office of a conversion agent, with a completed
notice of conversion, together with any funds that may be required as described
in the preceding paragraph. The conversion date will be the date on which the
debentures, the notice of conversion and any required funds have been so
delivered. A holder delivering a debenture for conversion will not be required
to pay any taxes or duties relating to the issuance or delivery of the common
stock for such conversion, but will be required to pay any tax or duty which may
be payable relating to any transfer involved in the issuance or delivery of the
common stock in a name other than the holder of the debenture. Certificates
representing shares of common stock will be issued or delivered only after all
applicable taxes and duties, if any, payable by the holder have been paid. If
any debenture is converted within two years after its original issuance, the
common stock issuable upon conversion will not be issued or delivered in a name
other than that of the holder of the debenture unless the applicable
restrictions on transfer have been satisfied.
The initial conversion price will be adjusted for certain events, including:
1) the issuance of our common stock as a dividend or distribution on our
common stock;
2) certain subdivisions and combinations of our common stock;
3) the issuance to all holders of our common stock of certain rights or
warrants to purchase our common stock (or securities convertible into our
common stock) at less than (or having a conversion price per share less
than) the current market price of our common stock;
4) the dividend or other distribution to all holders of our common stock or
shares of our capital stock (other than common stock) or evidences of our
indebtedness or our assets (including securities, but excluding those
rights and warrants referred to above and dividends and distributions in
connection with a reclassification, change, consolidation, merger,
combination, sale or conveyance resulting in a change in the conversion
consideration pursuant to the second succeeding paragraph or dividends or
distributions paid exclusively in cash);
5) dividends or other distributions consisting exclusively of cash to all
holders of our common stock to the extent that such distributions,
combined together with (A) all other such all-cash distributions made
within the preceding 12 months for which no adjustment has been made plus
(B) any cash and the fair market value of other consideration paid for
any tender offers by us or any of our subsidiaries for our common stock
concluded within the preceding
36
12 months for which no adjustment has been made, exceeds 10% of our
market capitalization on the record date for such distribution; market
capitalization is the product of the then current market price of our
common stock times the number of shares of our common stock then
outstanding; and
6) the purchase of our common stock pursuant to a tender offer made by us
or any of our subsidiaries to the extent that the same involves an
aggregate consideration that, together with (A) any cash and the fair
market value of any other consideration paid in any other tender offer by
us or any of our subsidiaries for our common stock expiring within the
12 months preceding such tender offer for which no adjustment has been
made plus (B) the aggregate amount of any all-cash distributions referred
to in clause (5) above to all holders of our common stock within
12 months preceding the expiration of tender offer for which no
adjustments have been made, exceeds 10% of our market capitalization on
the expiration of such tender offer.
No adjustment in the conversion price will be required unless such
adjustment would require a change of at least 1% in the conversion price then in
effect at such time. Any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment.
Except as stated above, the conversion price will not be adjusted for the
issuance of our common stock or any securities convertible into or exchangeable
for our common stock or carrying the right to purchase any of the foregoing.
In the case of
- any reclassification or change of our common stock (other than changes
resulting from a subdivision or combination) or
- a consolidation, merger or combination involving us or a sale or
conveyance to another corporation of all or substantially all of our
property and assets,
in each case as a result of which holders of our common stock are entitled to
receive stock, other securities, other property or assets (including cash or any
combination thereof) with respect to or in exchange for our common stock, the
holders of the debentures then outstanding will be entitled thereafter to
convert those debentures into the kind and amount of shares of stock, other
securities or other property or assets (including cash or any combination
thereof) which they would have owned or been entitled to receive upon such
reclassification, change, consolidation, merger, combination, sale or conveyance
had such debentures been converted into our common stock immediately prior to
such reclassification, change, consolidation, merger, combination, sale or
conveyance. We may not become a party to any such transaction unless its terms
are consistent with the foregoing.
If a taxable distribution to holders of our common stock or other
transaction occurs which results in any adjustment of the conversion price, the
holders of debentures may, in certain circumstances, be deemed to have received
a distribution subject to U.S. income tax as a dividend. In certain other
circumstances, the absence of an adjustment may result in a taxable dividend to
the holders of common stock. See "Certain United States Federal Income Tax
Considerations."
We may from time to time, to the extent permitted by law, reduce the
conversion price of the debentures by any amount for any period of at least
20 days. In that case we will give at least 15 days' notice of such decrease. We
may make such reductions in the conversion price, in addition to those set forth
above, as our board of directors deems advisable to avoid or diminish any income
tax to holders of our common stock resulting from any dividend or distribution
of stock (or rights to acquire stock) or from any event treated as such for
income tax purposes.
37
OPTIONAL REDEMPTION BY INHALE
The debentures are not redeemable prior to October 13, 2002. At any time on
or after that date, we may redeem some or all of the debentures on at least 20
but not more than 60 days' notice, at the following prices (expressed in
percentages of the principal amount), together with accrued and unpaid interest
to, but excluding, the date fixed for redemption. However, if a redemption date
is an interest payment date, the semi-annual payment of interest becoming due on
such date shall be payable to the holder of record as of the relevant record
date and the redemption price shall not include such interest payment.
DURING THE TWELVE MONTHS COMMENCING REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
October 13, 2002............................................................ 103.375%
October 13, 2003............................................................ 102.250%
October 13, 2004............................................................ 101.125%
October 13, 2005............................................................ 100.000%
If we do not redeem all of the debentures, the trustee will select the
debentures to be redeemed in principal amounts of $1,000 or whole multiples of
$1,000 by lot or on a pro rata basis. If any debentures are to be redeemed in
part only, a new debenture or debentures in principal amount equal to the
unredeemed principal portion thereof will be issued. If a portion of a holder's
debentures is selected for partial redemption and the holder converts a portion
of its debentures, the converted portion will be deemed to be taken from the
portion selected for redemption.
No sinking fund is provided for the debentures.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL
If a Change of Control occurs, each holder of debentures will have the right
to require us to repurchase all of that holder's debentures not previously
called for redemption, or any portion of those debentures that is equal to
$1,000 or a whole multiple of $1,000, on the date that is 45 days after the date
we give notice at a repurchase price equal to 100% of the principal amount of
the debentures to be repurchased, together with interest accrued and unpaid to,
but excluding, the repurchase date.
Instead of paying the repurchase price in cash, we may pay the repurchase
price in common stock. The number of shares of common stock a holder will
receive will equal the repurchase price divided by 95% of the average of the
closing sales prices of our common stock for the five trading days immediately
preceding and including the third day prior to the repurchase date. However, we
may not pay in common stock unless we satisfy certain conditions prior to the
repurchase date as provided in the indenture.
Within 30 days after the occurrence of a Change of Control, we are required
to give notice to all holders of debentures, as provided in the indenture, of
the occurrence of the Change of Control and of their resulting repurchase right.
We must also deliver a copy of our notice to the trustee. To exercise the
repurchase right, a holder of debentures must deliver prior to or on the 30th
day after the date of our notice irrevocable written notice to the trustee of
the holder's exercise of its repurchase right, together with the debentures with
respect to which the right is being exercised.
A "Change of Control" will be deemed to have occurred at such time after the
original issuance of the debentures when the following has occurred:
- the acquisition by any person, including any syndicate or group deemed to
be a "person" under Section 13(d)(3) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), of beneficial ownership, directly
or indirectly, through a purchase, merger or other acquisition transaction
or series of transactions of shares of our capital stock entitling that
person to exercise 50% or more of the total voting power of all shares of
our capital stock entitled to vote
38
generally in elections of directors, other than any acquisition by us, any
of our subsidiaries or any of our employee benefit plans; or
- our consolidation or merger with or into any other person, any merger of
another person into us, or any conveyance, transfer, sale, lease or other
disposition of all or substantially all of our properties and assets to
another person, other than:
1) any transaction (A) that does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of our
capital stock and (B) pursuant to which holders of our capital stock
immediately prior to the transaction have the entitlement to exercise,
directly or indirectly, 50% or more of the total voting power of all
shares of our capital stock entitled to vote generally in the election
of directors of the continuing or surviving person immediately after
the transaction; and
2) any merger solely for the purpose of changing our jurisdiction of
incorporation and resulting in a reclassification, conversion or
exchange of outstanding shares of common stock solely into shares of
common stock of the surviving entity.
However, a Change of Control will not be deemed to have occurred if the
closing sales price per share of our common stock for any five trading days
within the period of 10 consecutive trading days ending immediately after the
later of the Change of Control or the public announcement of the Change of
Control, in the case of a Change of Control under the first clause above, or the
period of 10 consecutive trading days ending immediately before the Change of
Control, in the case of a Change of Control under the second clause above,
equals or exceeds 110% of the conversion price of the debentures in effect on
each such trading day. The beneficial owner shall be determined in accordance
with Rule 13d-3 promulgated by the SEC under the Exchange Act. The term "person"
includes any syndicate or group which would be deemed to be a "person" under
Section 13(d)(3) of the Exchange Act.
Rule 13e-4 under the Exchange Act, as amended, requires the dissemination of
certain information to security holders if an issuer tender offer occurs and may
apply if the repurchase option becomes available to holders of the debentures.
We will comply with this rule to the extent applicable at that time.
We may, to the extent permitted by applicable law, at any time purchase the
debentures in the open market or by tender at any price or by private agreement.
Any debenture so purchased by us may, to the extent permitted by applicable law,
be reissued or resold or may be surrendered to the trustee for cancellation. Any
debentures surrendered to the trustee may not be reissued or resold and will be
canceled promptly.
The foregoing provisions would not necessarily protect holders of the
debentures if highly leveraged or other transactions involving us occur that may
adversely affect holders.
Our ability to repurchase debentures upon the occurrence of a Change in
Control is subject to important limitations. The occurrence of a Change in
Control could cause an event of default under, or be prohibited or limited by,
the terms of Senior Debt that we may incur in the future. As a result, any
repurchase of the debentures would, absent a waiver, be prohibited under the
subordination provisions of the indenture until the Senior Debt is paid in full.
Further, we cannot assure you that we would have the financial resources, or
would be able to arrange financing, to pay the repurchase price for all the
debentures that might be delivered by holders of debentures seeking to exercise
the repurchase right. Any failure by us to repurchase the debentures when
required following a Change in Control would result in an event of default under
the indenture, whether or not such repurchase is permitted by the subordination
provisions of the indenture. Any such default may, in turn, cause a default
under Senior Debt that we may incur in the future. See "--Subordination" below.
39
SUBORDINATION
The debentures are subordinated in right of payment to the prior payment in
full of all our existing and future Senior Debt. The indenture provides that in
the event of any distribution of our assets upon our dissolution, winding up,
liquidation or reorganization, the holders of our Senior Debt shall first be
paid in respect of all Senior Debt in full in cash or other payment satisfactory
to the holders of Senior Debt before we make any payments of principal of, or
premium, if any, and interest (including liquidated damages, if any) on the
debentures. In addition, if the debentures are accelerated because of an event
of default, the holders of any Senior Debt would be entitled to payment in full
in cash or other payment satisfactory to the holders of Senior Debt of all
obligations in respect of Senior Debt before the holders of the debentures are
entitled to receive any payment or distribution. Under the indenture, we must
promptly notify holders of Senior Debt if payment of the debentures is
accelerated because of an event of default.
The indenture further provides if any default by us has occurred and is
continuing in the payment of principal of or premium, if any, or interest on,
rent or other payment obligations in respect of, any Senior Debt, then no
payment shall be made on account of principal of, premium, if any, or interest
on the debentures (including any liquidated damages), until all such payments
due in respect of that Senior Debt have been paid in full in cash or other
payment satisfactory to the holders of that Senior Debt. During the continuance
of any event of default with respect to any Designated Senior Debt (other than a
default in payment of the principal of or premium, if any, or interest on, rent
or other payment obligations in respect of any Designated Senior Debt),
permitting the holders thereof to accelerate the maturity thereof (or, in the
case of any lease, permitting the landlord either to terminate the lease or to
require us to make an irrevocable offer to terminate the lease following an
event of default thereunder), no payment may be made by us, directly or
indirectly, with respect to principal of or premium, if any, or interest on the
debentures (including any liquidated damages, if any) for 179 days following
written notice to us, from any holder, representative or trustee under any
agreement pursuant to which that Designated Senior Debt may have been issued,
that such an event of default has occurred and is continuing, unless such event
of default has been cured or waived or that Designated Senior Debt has been paid
in full in cash or other payment satisfactory to the holders of that Designated
Senior Debt. However, if the maturity of that Designated Senior Debt is
accelerated (or, in the case of a lease, as a result of such events of default,
the landlord under the lease has given us notice of its intention to terminate
the lease or to require us to make an irrevocable offer to terminate the lease
following an event of default thereunder), no payment may be made on the
debentures until that Designated Senior Debt has been paid in full in cash or
other payment satisfactory to the holders of that Designated Senior Debt or such
acceleration (or termination, in the case of the lease) has been cured or
waived.
By reason of such subordination provisions, in the event of insolvency,
funds which we would otherwise use to pay the holders of debentures will be used
to pay the holders of Senior Debt to the extent necessary to pay Senior Debt in
full in cash or other payment satisfactory to the holders of Senior Debt. As a
result of these payments, our general creditors may recover less, ratably, than
holders of Senior Debt and such general creditors may recover more, ratably,
than holders of debentures.
"Senior Debt" means the principal of, premium, if any, interest (including
all interest accruing subsequent to the commencement of any bankruptcy or
similar proceeding, whether or not a claim for post-petition interest is
allowable as a claim in any such proceeding) and rent payable on or termination
payment with respect to or in connection with, and all fees, costs, expenses and
other amounts accrued or due on or in connection with, our Indebtedness, whether
outstanding on the date of the indenture or subsequently created, incurred,
assumed, guaranteed or in effect guaranteed by us (including all deferrals,
renewals, extensions or refundings of, or amendments, modifications or
supplements to, the foregoing), unless in the case of any particular
Indebtedness, the instrument
40
creating or evidencing such Indebtedness or the assumption or guarantee thereof
expressly provides that that Indebtedness shall not be senior in right of
payment to the debentures or expressly provides that such Indebtedness is equal
with or junior " to the debentures. However, the term "Senior Debt" shall not
include our Indebtedness to any of our subsidiaries of which we own, directly or
indirectly, a majority of the voting stock.
"Indebtedness" means, with respect to any person:
1) all indebtedness, obligations and other liabilities (contingent or
otherwise) of that person for borrowed money (including obligations in
respect of overdrafts, foreign exchange contracts, currency exchange
agreements, interest rate protection agreements, and any loans or
advances from banks, whether or not evidenced by notes or similar
instruments) or evidenced by bonds, debentures, notes or other
instruments for the payment of money, or incurred in connection with the
acquisition of any property, services or assets (whether or not the
recourse of the lender is to the whole of the assets of such person or to
only a portion thereof), other than any account payable or other accrued
current liability or obligation to trade creditors incurred in the
ordinary course of business in connection with the obtaining of materials
or services;
2) all reimbursement obligations and other liabilities (contingent or
otherwise) of that person with respect to letters of credit, bank
guarantees, bankers' acceptances, surety bonds, performance bonds or
other guaranty of contractual performance;
3) all obligations and liabilities (contingent or otherwise) in respect of
(A) leases of such person required, in conformity with generally accepted
accounting principles, to be accounted for as capitalized lease
obligations on the balance sheet of such person, and (B) any lease or
related documents (including a purchase agreement) in connection with the
lease of real property which provides that such person is contractually
obligated to purchase or cause a third party to purchase the leased
property and thereby guarantee a minimum residual value of the leased
property to the landlord and the obligations of such person under such
lease or related document to purchase or to cause a third party to
purchase the leased property;
4) all obligations of such person (contingent or otherwise) with respect to
an interest rate or other swap, cap or collar agreement or other similar
instrument or agreement or foreign currency hedge, exchange, purchase or
similar instrument or agreement;
5) all direct or indirect guaranties or similar agreements by that person
in respect of, and obligations or liabilities (contingent or otherwise)
of that person to purchase or otherwise acquire or otherwise assure a
creditor against loss in respect of, indebtedness, obligations or
liabilities of another person of the kind described in clauses
(1) through (4);
6) any indebtedness or other obligations described in clauses (1) through
(4) secured by any mortgage, pledge, lien or other encumbrance existing
on property which is owned or held by such person, regardless of whether
the indebtedness or other obligation secured thereby shall have been
assumed by such person; and
7) any and all deferrals, renewals, extensions and refundings of, or
amendments, modifications or supplements to, any indebtedness, obligation
or liability of the kind described in clauses (1) through (6).
"Designated Senior Debt" means our Senior Debt which, at the date of
determination, has an aggregate amount outstanding of, or under which, at the
date of determination, the holders thereof are committed to lend up to, at least
$25 million and is specifically designated in the instrument evidencing or
governing that Senior Debt as "Designated Senior Debt" for purposes of the
indenture. However, the instrument may place limitations and conditions on the
right of that Senior Debt to exercise the rights of Designated Senior Debt. At
September 30, 1999, we had approximately $4.9 million of Senior Debt and no
Designated Senior Debt. There are no restrictions in the indenture on the
creation of
41
Senior Debt or any other indebtedness in the future. For information concerning
our potential incurrence of additional Senior Debt, see "Management's Discussion
of and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The debentures are our obligations exclusively and will be, in effect,
subordinated to all Indebtedness (including trade payables) of any subsidiaries
that we own in the future. The indenture does not limit the amount of
Indebtedness or other liabilities any future subsidiaries may incur. Our ability
to make required interest, principal, repurchase, cash conversion or redemption
payments on the debentures may be impaired as a result of the obligations of any
future subsidiaries. Any future subsidiaries would be separate and distinct
legal entities and would have no obligation, contingent or otherwise, to pay any
amounts due pursuant to the debentures or to make any funds available therefor,
whether by dividends, loans or other payments. Any right we have to receive
assets of any of our future subsidiaries upon the latter's liquidation or
reorganization (and the consequent right of the holders of the debentures to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors, except to the extent that we are ourselves
recognized as a creditor of that subsidiary, in which case our claims would
still be subordinate to any security interests in the assets of that subsidiary
and any indebtedness of that subsidiary senior to that held by us. There are no
restrictions in the indenture on the ability of any of our future subsidiaries
to incur Indebtedness or other liabilities.
We are obligated to pay reasonable compensation to the trustee and to
indemnify the trustee against any losses, liabilities or expenses incurred by it
in connection with its duties relating to the debentures. The trustee's claims
for such payments will be senior to those of holders of the debentures in
respect of all funds collected or held by the trustee.
EVENTS OF DEFAULT
Each of the following constitutes an event of default under the indenture:
1) our failure to pay when due the principal of or premium, if any, on any
of the debentures at maturity, upon redemption or exercise of a
repurchase right or otherwise, whether or not such payment is prohibited
by the subordination provisions of the indenture;
2) our failure to pay an installment of interest (including liquidated
damages, if any) on any of the debentures for 30 days after the date when
due, whether or not such payment is prohibited by the subordination
provisions of the indenture;
3) our failure to perform or observe any other term, covenant or agreement
contained in the debentures or the indenture for a period of 60 days
after written notice of such failure, requiring us to remedy the same,
shall have been given to us by the trustee or to us and the trustee by
the holders of at least 25% in aggregate principal amount of the
debentures then outstanding;
4) our failure to make any payment by the end of the applicable grace
period, if any, after the maturity of any Indebtedness for borrowed money
in an amount in excess of $5 million (PROVIDED that such failure will not
constitute an event of default if (1) we determine, in good faith, that a
lessor under a lease described in clause (3)(A) of the definition of
Indebtedness set forth under "--Subordination" (that is, a sale/leaseback
transaction) breached a covenant under the lease and we give notice of
the breach to the lessor and the trustee and (2) as a result of the
breach, we withhold payment under the lease) (a "Default Exception"), or
the acceleration of Indebtedness for borrowed money in an amount in
excess of $5 million because of a default with respect to such
Indebtedness (other than a Default Exception) without such Indebtedness
having been discharged or such acceleration having been cured, waived,
rescinded or annulled, in either case, for a period of 30 days after
written notice to us
42
by the trustee or to us and the trustee by holders of at least 25% in
aggregate principal amount of the debentures then outstanding; and
5) certain events of our bankruptcy, insolvency or reorganization.
The indenture provides that the trustee shall, within 90 days of the
occurrence of a default, give to the registered holders of the debentures notice
of all uncured defaults known to it, but the trustee shall be protected in
withholding such notice if it, in good faith, determines that the withholding of
such notice is in the best interest of such registered holders, except in the
case of a default in the payment of the principal of, or premium, if any, or
interest on, any of the debentures when due or in the payment of any redemption
or repurchase obligation.
If an event of default specified in clause (5) above occurs and is
continuing, then automatically the principal of all the debentures and the
interest thereon shall become immediately due and payable. If an event of
default shall occur and be continuing, other than with respect to clause (5)
above (the default not having been cured or waived as provided under
"--Meetings, Modifications and Waiver" below), the trustee or the holders of at
least 25% in aggregate principal amount of the debentures then outstanding may
declare the debentures due and payable at their principal amount together with
accrued interest, and thereupon the trustee may, at its discretion, proceed to
protect and enforce the rights of the holders of debentures by appropriate
judicial proceedings. Such declaration may be rescinded or annulled either with
the written consent of the holders of a majority in aggregate principal amount
of the debentures then outstanding or a majority in aggregate principal amount
of the debentures represented at a meeting at which a quorum (as specified under
"--Meetings, Modifications and Waiver" below) is present, in each case upon the
conditions provided in the indenture.
The indenture contains a provision entitling the trustee, subject to the
duty of the trustee during default to act with the required standard of care, to
be indemnified by the holders of debentures before proceeding to exercise any
right or power under the indenture at the request of such holders. The indenture
provides that the holders of a majority in aggregate principal amount of the
debentures then outstanding through their written consent, or the holders of a
majority in aggregate principal amount of the debentures then outstanding
represented at a meeting at which a quorum is present by a written resolution,
may direct the time, method and place of conducting any proceeding for any
remedy available to the trustee or exercising any trust or power conferred upon
the trustee.
We are required to furnish annually to the trustee a statement as to the
fulfillment of our obligations under the indenture.
CONSOLIDATION, MERGER OR ASSUMPTION
We may, without the consent of the holders of debentures, consolidate with,
merge into or transfer all or substantially all of our assets to any other
corporation organized under the laws of the United States or any of its
political subdivisions provided that:
- the surviving corporation assumes all our obligations under the indenture
and the debentures;
- at the time of such transaction, no event of default, and no event which,
after notice or lapse of time, would become an event of default, shall
have happened and be continuing; and
- certain other conditions are met.
MEETINGS, MODIFICATIONS AND WAIVER
The indenture contains provisions for convening meetings of the holders of
debentures to consider matters affecting their interests.
43
The indenture (including the terms and conditions of the debentures) may be
modified or amended by us and the trustee, without the consent of the holder of
any debenture, for the purposes of, among other things:
- adding to our covenants for the benefit of the holders of debentures;
- surrendering any right or power conferred upon us;
- providing for conversion rights of holders of debentures if any
reclassification or change of our common stock or any consolidation,
merger or sale of all or substantially all of our assets occurs;
- providing for the assumption of our obligations to the holders of
debentures in the case of a merger, consolidation, conveyance, transfer or
lease;
- reducing the conversion price, provided that the reduction will not
adversely affect the interests of holders of debentures in any material
respect;
- complying with the requirements of the SEC in order to effect or maintain
the qualification of the indenture under the Trust Indenture Act of 1939,
as amended;
- curing any ambiguity or correcting or supplementing any defective
provision contained in the indenture; provided that such modification or
amendment does not, in the good faith opinion of our board of directors
and the trustee, adversely affect the interests of the holders of the
debentures in any material respect; or
- adding or modifying any other provisions which we and the trustee may deem
necessary or desirable and which will not adversely affect the interests
of the holders of debentures in any material respect.
Modifications and amendments to the indenture or to the terms and conditions
of the debentures may also be made, and past default by us may be waived,
either:
- with the written consent of the holders of at least a majority in
aggregate principal amount of the debentures at the time outstanding or
- by the adoption of a resolution at a meeting of holders by at least a
majority in aggregate principal amount of the debentures represented at
such meeting.
However, no such modification, amendment or waiver may, without the written
consent or the affirmative vote of the holder of each debenture so affected:
- change the maturity of the principal of or any installment of interest on
that debenture (including any payment of liquidated damages);
- reduce the principal amount of, or any premium or interest on (including
any payment of liquidated damages), that debenture;
- change the currency of payment of that debenture or interest thereon;
- impair the right to institute suit for the enforcement of any payment on
or with respect to that debenture;
- modify our obligations to maintain an office or agency in New York City;
- except as otherwise permitted or contemplated by provisions concerning
corporate reorganizations, adversely affect the repurchase option of
holders upon a Change of Control or the conversion rights of holders of
the debentures;
- modify the subordination provisions of the debentures in a manner adverse
to the holders of debentures;
- reduce the percentage in aggregate principal amount of debentures
outstanding necessary to modify or amend the indenture or to waive any
past default; or
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- reduce the percentage in aggregate principal amount of debentures
outstanding required for the adoption of a resolution or the quorum
required at any meeting of holders of debentures at which a resolution is
adopted.
The quorum at any meeting called to adopt a resolution will be persons
holding or representing a majority in aggregate principal amount of the
debentures at the time outstanding and, at any reconvened meeting adjourned for
lack of a quorum, 25% of that aggregate principal amount.
SATISFACTION AND DISCHARGE
We may discharge our obligations under the indenture while debentures remain
outstanding, subject to certain conditions, if
- all outstanding debentures will become due and payable at their scheduled
maturity, within one year; or
- all outstanding debentures are scheduled for redemption within one year,
and, in either case, we have deposited with the trustee an amount sufficient
to pay and discharge all outstanding debentures on the date of their scheduled
maturity or the scheduled date of redemption.
GOVERNING LAW
The indenture and the debentures are governed by, and construed in
accordance with, the law of the State of New York.
INFORMATION CONCERNING THE TRUSTEE
Chase Manhattan Bank and Trust Company, National Association, as trustee
under the indenture, has been appointed by us as paying agent, conversion agent,
registrar and custodian with regard to the debentures. ChaseMellon Shareholder
Services LLC is the transfer agent and registrar for our common stock. The
trustee or its affiliates may from time to time in the future provide banking
and other services to us in the ordinary course of their business.
REGISTRATION RIGHTS
We have, at our expense, filed with the SEC a shelf registration statement
on such form as we deem appropriate covering resales by holders of all
debentures and the common stock issuable upon conversion of the debentures.
Under the terms of the registration rights agreement, we agree to use all
reasonable efforts to:
- cause the registration statement to become effective as promptly as is
practicable, but in no event later than 180 days after the earliest date
of original issuance of any of the debentures; and
- keep the registration statement effective until such date that is two
years after the last date of original issuance of any of the debentures
(or such earlier date when the holders of the debentures and the common
stock issuable upon conversion of the debentures are able to sell all such
securities immediately without restriction pursuant to the volume
limitation provisions of Rule 144 under the Securities Act or any
successor rule thereto or otherwise).
We also agree to provide to each registered holder copies of the prospectus,
notify each registered holder when the shelf registration statement has become
effective and take certain other actions as are required to permit unrestricted
resales of the debentures and the common stock issuable upon conversion of the
debentures. A holder who sells those securities pursuant to the shelf
registration statement generally will be required to be named as a selling
stockholder in the related prospectus and to deliver a prospectus to purchasers
and will be bound by the provisions of the registration rights
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agreement, which are applicable to that holder (including certain
indemnification provisions). If a shelf registration statement covering those
securities is not effective, they may not be sold or otherwise transferred
except pursuant to an exemption from registration under the Securities Act and
any other applicable securities laws or in a transaction not subject to those
laws.
Each holder must notify us not later than three business days prior to any
proposed sale by that holder pursuant to the shelf registration statement. This
notice will be effective for five business days. We may suspend the holder's use
of the prospectus for a reasonable period not to exceed 45 days (60 days under
certain circumstances relating to a proposed or pending material business
transaction, the disclosure of which would impede our ability to consummate such
transaction) in any 90-day period, and not to exceed an aggregate of 90 days in
any 12-month period, if we, in our reasonable judgment, believe we may possess
material non-public information the disclosure of which would have a material
adverse effect on us and our subsidiaries taken as a whole. Each holder, by its
acceptance of a debenture, agrees to hold any communication by us in response to
a notice of a proposed sale in confidence.
Under the terms of the registration rights agreement, if
- on the 90th day following the earliest date of original issuance of any of
the debentures, the shelf registration statement had not been filed with
the SEC;
- on the 180th day following the earliest date of original issuance of any
of the debentures, the shelf registration statement had not been declared
effective; or
- the registration statement shall cease to be effective or fail to be
usable without being succeeded within five business days by a
post-effective amendment or a report filed with the SEC pursuant to the
Exchange Act that cures the registration statement; or
- on the 45th or 60th day, as the case may be, of any period that the
prospectus has been suspended as described in the preceding paragraph,
such suspension has not been terminated (each, a "registration default"),
additional interest as liquidated damages will accrue on the debentures, from
and including the day following the registration default to but excluding the
day on which the registration default has been cured. Liquidated damages will be
paid semi-annually in arrears, with the first semi-annual payment due on the
first interest payment date, as applicable, following the date on which such
liquidated damages begin to accrue, and will accrue at a rate per year equal to:
- an additional 0.25% of the principal amount to and including the 90th day
following such registration default; and
- an additional 0.5% of the principal amount from and after the 91st day
following such registration default.
In no event will liquidated damages accrue at a rate per year exceeding
0.5%. If a holder has converted some or all of its debentures into common stock,
the holder will be entitled to receive equivalent amounts based on the principal
amount of the debentures converted.
We agreed to distribute a questionnaire to each holder to obtain certain
information regarding the holder for inclusion in the prospectus. Holders were
required to complete and deliver the questionnaire within 20 business days after
receipt of the questionnaire to be named as selling stockholders in the related
prospectus at the time of effectiveness. A holder will not be entitled to
liquidated damages unless it has provided all information requested by the
questionnaire prior to the deadline.
The specific provisions relating to the registration described above are
contained in the registration rights agreement which was entered into on the
closing of the initial offering of the debentures.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and certain provisions of our
certificate of incorporation and bylaws is a summary and is qualified in its
entirety by the provisions of our certificate of incorporation and bylaws.
Our authorized capital stock consists of 50,000,000 shares of common stock,
and 10,000,000 shares of preferred stock.
COMMON STOCK
As of January 4, 2000, there were 17,226,456 shares of our common stock
outstanding. The holders of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. The
holders of common stock are not entitled to cumulative voting rights with
respect to the election of directors, and as a consequence, minority
stockholders are not able to elect directors on the basis of their votes alone.
Subject to preferences that may be applicable to any shares of preferred stock
issued in the future, holders of common stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
Inhale, holders of the common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding preferred stock. Holders of common stock have no preemptive
rights and no right to convert their common stock into any other securities.
There are no redemption or sinking fund provisions applicable to the common
stock.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by stockholders. The issuance of preferred stock could adversely
affect the voting power of holders of common stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control. We
have no present plan to issue any shares of preferred stock.
REGISTRATION RIGHTS
Pursuant to a restated investor rights agreement, as amended, the holders of
approximately 250,044 shares of common stock are entitled to require us in any
twelve-month period, to register their shares on Form S-3, subject to certain
conditions and limitations. Subject to certain limitations, we are required to
bear all registration and selling expenses in connection with such requested
registrations. These registration rights expire in 2004, or with respect to any
individual holder, at such time as that holder owns less than one percent of our
outstanding common stock and is able to dispose of all of that holder's
registrable securities in any 90 day period pursuant to Rule 144 under the
Securities Act.
Pfizer has the right to include shares of our common stock purchased
pursuant to the purchase agreement relating to its equity investment in the
first firmly underwritten public offering of our common stock effected after
January 18, 2000. We are required to pay all expenses in connection with such
registration, excluding the fees of counsel for Pfizer.
Baxter has the right to include shares of our common stock purchased
pursuant to the purchase agreement relating to its equity investment in the
first firmly underwritten public offering of our
47
common stock effected after March 1, 1999. We are required to pay all expenses
in connection with such registration, excluding fees of counsel for Baxter.
Alliance has the right to include shares of our common stock issued pursuant
to the asset purchase agreement with Alliance in any registration statement for
the account of Inhale or an Inhale security holder (except the registration
statement of which this prospectus is a part) for the offering of common stock
to the public until the shares issued to Alliance are transferable pursuant to
Rule 144 in any 90 day period.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CHARTER AND BYLAWS
Our certificate of incorporation provides for the Board of Directors to be
divided into three classes, with staggered three-year terms. As a result, only
one class of directors will be elected at each annual meeting of stockholders,
with the other classes continuing for the remainder of their respective
three-year terms. Stockholders have no cumulative voting rights, and the
stockholders representing a majority of the shares of common stock outstanding
are able to elect all of the directors.
Our certificate of incorporation also requires that any action required or
permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of the stockholders and may not be effected by a
consent in writing and that the stockholders may amend our bylaws or adopt new
bylaws, only by the affirmative vote of 66 2/3% of the outstanding voting
securities. A special meeting of the stockholders may be called by the Chairman,
either Chief Executive Officer or stockholders owning 10% or more of the
outstanding voting capital stock. These provisions may have the effect of
delaying, deferring or preventing a change in control.
The classification of the Board of Directors and lack of cumulative voting
will make it more difficult for our existing stockholders to replace the Board
of Directors as well as for another party to obtain control of Inhale by
replacing the Board of Directors. Since the Board of Directors has the power to
retain and discharge our officers, these provisions could also make it more
difficult for existing stockholders or another party to effect a change in
management.
These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control or management. These provisions are
intended to enhance the likelihood of continued stability in the composition of
the Board of Directors and in the policies of the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change in control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal. The provisions also are
intended to discourage certain tactics that may be used in proxy rights.
However, such provisions could have the effect of discouraging others from
making tender offers for our shares and, as a consequence, they also may inhibit
fluctuations in the market price of the our shares that could result from actual
or rumored takeover attempts. Such provisions also may have the effect of
preventing changes in our management.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the time that such stockholder became an
interested stockholder, unless:
- prior to such time, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested holder;
- Upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of
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determining the number of shares outstanding those shares owned (a) by
persons who are directors and also officers and (b) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in
a tender or exchange offer; or at or subsequent to such time, the business
combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder.
In general, Section 203 defines "business combination" to include the
following:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock or any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits by or through
the corporation.
In general, Section 203 defines "interested stockholder" as an entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services LLC is the transfer agent and registrar for
our common stock.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain anticipated U.S. federal
income tax consequences to a holder with respect to the purchase, ownership and
disposition of the debentures or our common stock acquired upon conversion of a
debenture as of the date hereof. This summary is generally limited to holders
who will hold the debentures and the shares of common stock into which the
debentures are convertible as "capital assets" within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code") and
who acquired the debentures in the initial offering at the initial offering
price, and does not deal with special situations including those that may apply
to particular holders such as exempt organizations, holders subject to the U.S.
federal alternative minimum tax, dealers in securities, commodities or foreign
currencies, financial institutions, insurance companies, regulated investment
companies, holders whose "functional currency" is not the U.S. dollar and
persons who hold the debentures or shares of common stock in connection with a
"straddle," "hedging," "conversion" or other risk reduction transaction. This
discussion does not address the tax consequences arising under any state, local
or foreign law.
The federal income tax considerations set forth below are based upon the
Internal Revenue Code of 1986, as amended, existing and proposed Treasury
Regulations, court decisions, and Internal Revenue Service ("IRS") rulings now
in effect, all of which are subject to change. We have not sought any ruling
from the IRS with respect to statements made and conclusions reached in this
discussion and there can be no assurance that the IRS will agree with such
statements and conclusions. Prospective investors should particularly note that
any such change could have retroactive application so as to result in federal
income tax consequences different from those discussed below.
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As used herein, the term "U.S. holder" means a beneficial owner of a
debenture (or our common stock acquired upon conversion of a debenture) that is
for U.S. federal income tax purposes:
- a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or of any political subdivision thereof (other than a
partnership that is not treated as a U.S. person under any applicable
Treasury Regulations);
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source;
- a trust, if a court within the U.S. is able to exercise primary
jurisdiction over its administration and one or more U.S. persons within
the meaning of Section 7701(a)(30) of the Code have authority to control
all of its substantial decisions, or if the trust has a valid election in
effect under applicable U.S. Treasury regulations to be treated as a U.S.
person; or
- is otherwise subject to U.S. federal income taxation on a net income basis
in respect of the debentures or our common stock.
As used herein, a "non-U.S. holder" means a holder that is not a U.S.
holder. Prospective investors are urged to consult their tax advisors regarding
the tax consequences, in their particular circumstances, of purchasing, holding
and disposing of the debentures or our common stock, including the tax
consequences arising under any state, local or foreign laws. While the following
does not purport to discuss all tax matters relating to the debentures or the
common stock acquired upon conversion of a debenture, the following are the
material tax consequences of the debentures and common stock acquired upon
conversion of a debenture, subject to the qualifications set forth below.
Based on currently applicable authorities, we are treating the debentures as
indebtedness for U.S. federal income tax purposes. However, since the debentures
have certain equity characteristics, it is possible that the IRS will contend
that the debentures should be treated as an equity interest in, rather than
indebtedness of Inhale. Except as otherwise noted, the remainder of this
discussion assumes that the debentures constitute indebtedness for U.S. tax
purposes.
U.S. HOLDERS
STATED INTEREST
The debentures were not issued with more than a de minimis amount of
original issue discount within the meaning of Section 1273(a) of the Code. As a
result, interest paid on a debenture will be includible in the income of a U.S.
holder as ordinary income at the time it accrues or is actually or
constructively received in accordance with the holder's method of accounting for
U.S. federal income tax purposes. The interest rate on the debentures is subject
to increase by the payment of liquidated damages if the debentures are not
registered with the Commission within prescribed time periods. We are treating
the possibility that we will pay such additional interest as subject to a remote
and incidental contingency, within the meaning of applicable Treasury
Regulations and, therefore, we believe that any such additional interest will
not affect the yield to maturity on the debentures and therefore will be taxable
to U.S. holders at the time it accrues or is received in accordance with each
such holder's method of accounting. Our determination that there is a remote
likelihood of paying additional interest on the debentures is binding on each
U.S. holder unless the holder explicitly discloses in the manner required by
applicable Treasury Regulations that its determination is different from ours.
Our determination is not, however, binding on the IRS.
CONVERSION OR REPURCHASE FOR COMMON STOCK
A U.S. holder will not recognize income, gain or loss upon conversion of the
debentures solely into our common stock or a repurchase for common stock of a
debenture pursuant to exercise of the
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repurchase right (except with respect to any amounts attributable to accrued
interest on the debentures, which will be treated as interest for federal income
tax purposes), and except with respect to cash received in lieu of fractional
shares, and with respect to market discount, as described below under "--Market
Discount." The U.S. holder's basis in the common stock received on conversion or
repurchase of a debenture for common stock pursuant to the repurchase right will
be the same as the U.S. holder's adjusted tax basis in the debentures at the
time of conversion or repurchase (reduced by any basis allocable to a fractional
share), and the holding period for the common stock received on conversion or
repurchase will include the holding period of the debentures that were converted
or repurchased.
Cash received in lieu of a fractional share of common stock upon conversion
of the debentures into common stock or upon a repurchase for common stock of a
debenture pursuant to exercise of the repurchase right will be treated as a
payment in exchange for the fractional share of common stock. Accordingly, the
receipt of cash in lieu of a fractional share of common stock generally will
result in capital gain or loss measured by the difference between the cash
received for the fractional share and the U.S. holder's adjusted tax basis in
the fractional share.
DIVIDENDS ON COMMON STOCK
Generally, distributions will be treated as a dividend, subject to tax as
ordinary income, to the extent of our current or accumulated earnings or
profits, then as a tax-free return of capital to the extent of such U.S.
holder's adjusted tax basis in the common stock and thereafter as gain from the
sale or exchange of such common stock. Additionally, a dividend distribution to
a corporate U.S. holder may qualify for a dividends received deduction.
DISPOSITION, REDEMPTION OR REPURCHASE FOR CASH
Except as set forth above under "--Conversion or Repurchase for Common
Stock," and below under "--Market Discount," U.S. holders generally will
recognize capital gain or loss upon the sale, redemption, including a repurchase
for cash pursuant to the repurchase right, or other taxable disposition of the
debentures or common stock in an amount equal to the difference between:
- the U.S. holder's adjusted tax basis in the debentures or common stock (as
the case may be); and
- the amount of cash and fair market value of any property received from
such disposition (other than amounts attributable to accrued interest on
the debentures, which will be treated as interest for federal income tax
purposes).
A U.S. holder's adjusted tax basis in a debenture generally will equal the
cost of the debenture to such U.S. holder, increased by market discount
previously included in income by the U.S. holder and reduced by any amortized
premium.
Such gain or loss from the taxable disposition of the debentures or common
stock generally will be long-term capital gain or loss if the debentures were
held for more than one year at the time of the disposition and, in the case of
an individual holder, will be taxed at a maximum rate of 20%. Short term capital
gains realized by individual U.S. holders are taxed at a maximum rate of 39.6%.
Corporate U.S. holders are subject to a maximum regular income tax rate of 35%
on all capital gains and ordinary income. The deductibility of capital losses is
subject to limitations.
MARKET DISCOUNT
The resale of debentures may be affected by the impact on a purchaser of the
"market discount" provisions of the Code. For this purpose, the market discount
on a debenture generally will be equal to the amount, if any, by which the
stated redemption price at maturity of the debenture immediately
51
after its acquisition exceeds the U.S. holder's adjusted tax basis in the
debenture. Subject to a de minimis exception, these provisions generally require
a U.S. holder who acquires a debenture at a market discount to treat as ordinary
income any gain recognized on the disposition of the debenture to the extent of
the "accrued market discount" on the debenture at the time of disposition,
unless the U.S. holder elects to include accrued market discount in income
currently. This election to include market discount in income currently, once
made, applies to all market discount obligations acquired on or after the first
taxable year to which the election applies and may not be revoked without the
consent of the IRS. In general, market discount will be treated as accruing on a
straight-line basis over the remaining term of the debenture at the time of
acquisition, or, at the election of the U.S. holder, under a constant yield
method. A U.S. holder who acquires a debenture at a market discount and who does
not elect to include accrued market discount in income currently may be required
to defer the deduction of a portion of the interest on any indebtedness incurred
or maintained to purchase or carry the debenture until the debenture is disposed
of in a taxable transaction. If a U.S. holder acquires a debenture with market
discount and receives common stock upon conversion of the debenture, the amount
of accrued market discount not previously included in income with respect to the
converted debenture through the date of conversion will be treated as ordinary
income and will increase the U.S. holder's basis in the debenture.
AMORTIZABLE PREMIUM
A U.S. holder who purchases a debenture at a premium over its stated
principal amount, plus accrued interest, generally may elect to amortize such
premium ("section 171 premium") from the purchase date to the debenture's
maturity date under a constant-yield method that reflects semiannual compounding
based on the debenture's payment period. Amortizable premium, however, will not
include any premium attributable to a debenture's conversion feature. The
premium attributable to the conversion feature is the excess, if any, of the
debenture's purchase price over what the debenture's fair market value would be
if there were no conversion feature. Amortized section 171 premium is treated as
an offset to interest income on a debenture and not as a separate deduction.
Bond premium on a debenture held by a U.S. holder that does not make the
election to amortize will decrease the gain or increase the loss otherwise
recognized upon disposition of the debenture. The election to amortize premium
on a constant yield method, once made, applies to all debt obligations held or
subsequently acquired by the electing U.S. holder on or after the first day of
the first taxable year to which the election applies and may not be revoked
without the consent of the IRS.
ADJUSTMENT OF CONVERSION PRICE
The conversion price of the debentures is subject to adjustment under
certain circumstances. Under Section 305 of the Code and the Treasury
Regulations issued thereunder, adjustments or the failure to make such
adjustments to the conversion price of the debentures may result in a taxable
constructive distribution to the U.S. holders of debentures if, and to the
extent that, certain adjustments or failure to make adjustments in the
conversion price that may occur in limited circumstances (for example, an
adjustment to reflect a taxable dividend to holders of our common stock)
increase the proportionate interest of a U.S. holder in our assets or earnings
and profits whether or not the U.S. holders ever convert the debentures. Such
constructive distribution will be treated as a dividend, resulting in ordinary
income (and a possible dividends received deduction in the case of corporate
holders) to the extent of our current and accumulated earnings and profits, with
any excess treated first as a tax-free return of capital which reduces the U.S.
holder's tax basis in the debentures to the extent thereof and thereafter as
gain from the sale or exchange of the debentures. Generally, a U.S. holder's tax
basis in a debenture will be increased to the extent any such constructive
distribution is treated as dividend. Moreover, if there is an adjustment (or a
failure to make an adjustment) to the conversion price of the debentures that
increases the proportionate interest of the holders of outstanding common stock
in our assets or earnings and profits, then such increase in the
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proportionate interest of the holders of the common stock generally will be
treated as a constructive distribution to such holders, taxable as described
above. As a result, U.S. holders of debentures could have taxable income as a
result of an event pursuant to which they receive no cash or property.
DEDUCTIBILITY OF INTEREST
Generally, under Section 279 of the Code, an interest deduction in excess of
$5.0 million is not permitted with respect to certain "corporate acquisition
indebtedness." Corporate acquisition indebtedness includes any indebtedness that
is:
- issued to provide consideration for the direct or indirect acquisition of
stock or assets of another corporation;
- subordinated;
- convertible directly or indirectly into the stock of the issuing
corporation; and
- issued by a corporation that has a debt to equity ratio that exceeds 2 to
1.
Our ability to deduct all of the interest payable on the debentures will depend
on the application of the foregoing tests to us. The availability of an interest
deduction with respect to the debentures was not determinative in our issuance
of the debentures pursuant to this offering.
Under Section 163(l) of the Code, no deduction is permitted for interest
paid or accrued on any indebtedness of a corporation that is "payable in equity"
of the issuer or a related party. Debt is treated as debt payable in equity of
the issuer if the debt is part of an arrangement designed to result in payment
of the instrument with or by reference to the equity. Such arrangements could
include debt instruments that are convertible at the holder's option if it is
substantially certain that the option will be exercised. The legislative history
indicates that it is not expected the provision will affect debt with a
conversion feature where the conversion price is significantly higher than the
market price of the stock on the date of the debt issuance. Accordingly, we do
not believe that our interest deduction with respect to interest payments on the
debentures will be adversely affected by these rules.
BACKUP WITHHOLDING AND INFORMATION REPORTING
We or our designated paying agent will, where required, report to U.S.
holders of debentures or common stock and the IRS the amount of any interest
paid on the debentures (or dividends paid with respect to the common stock or
other reportable payments) in each calendar year and the amount of tax, if any,
withheld with respect to such payments.
Under the backup withholding provisions of the Code and the applicable
Treasury Regulations, a U.S. holder of debentures or our common stock acquired
upon the conversion of a debenture may be subject to backup withholding at the
rate of 31% with respect to dividends or interest paid on, or the proceeds of a
sale, exchange or redemption of, debentures or common stock, unless:
- such holder is a corporation or comes within certain other exempt
categories and when required demonstrates this fact; or
- provides a correct taxpayer identification number, certifies as to no loss
of exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules.
The amount of any backup withholding from a payment to a U.S. holder will be
allowed as a credit against the U.S. holder's federal income tax liability and
may entitle such holder to a refund, provided that the required information is
furnished to the IRS.
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Treasury Regulations, generally effective January 1, 2001, subject to
certain transition rules, modify the currently effective information withholding
and backup withholding procedures and requirements. Prospective investors should
consult their own tax advisors concerning the application of the new withholding
regulations.
NON-U.S. HOLDERS
PAYMENTS OF INTEREST
Generally, payments of interest on the debentures to, or on behalf of, a
non-U.S. holder will not be subject to U.S. federal withholding tax where such
interest is not effectively connected with the conduct of a trade or business
within the U.S. by such non-U.S. holder if
- such non-U.S. holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of our stock within the
meaning of Code Section 871(h)(3);
- such non-U.S. holder is not (a) a controlled foreign corporation for U.S.
federal income tax purposes that is related to us through stock ownership
or (b) a bank that received the debenture on an extension of credit made
pursuant to a loan agreement entered into in the ordinary course of its
trade or business as described in Code Section 881(c)(3)(A); and
- the non-U.S. holder provides a statement signed under penalties of perjury
that includes its name and address and certifies that it is not a U.S.
person in compliance with applicable requirements of the Treasury
Regulations or an exemption is otherwise established.
If certain requirements are satisfied, the certification described above may
be provided by a securities clearing organization, a bank, or other financial
institution that holds customer's securities in the ordinary course of its trade
or business. For purposes of this exception, the non-U.S. holder of debentures
would be deemed to own constructively the common stock into which it could be
converted.
If these requirements cannot be satisfied, a non-U.S. holder will be subject
to U.S. federal withholding tax at a rate of 30% (or lower treaty rate, if
applicable) on interest payments on the debentures unless:
- the interest is effectively connected with the conduct of a U.S. trade or
business, in which case the interest will be subject to U.S. federal
income tax on net income that applies to U.S. persons generally; or
- an applicable income tax treaty provides for a lower rate of, or exemption
from, withholding tax.
It is not clear whether the above discussion would be applicable to liquidated
damages, if any, received by non-U.S. holders.
CONVERSION OF DEBENTURES
A non-U.S. holder generally will not be subject to U.S. federal withholding
tax on the conversion of a debenture into common stock. To the extent a non-U.S.
holder receives cash in lieu of a fractional share of common stock upon
conversion, such cash may give rise to gain that would be subject to the rules
described below with respect to the sale or exchange of a debenture or common
stock. See "Sale or Exchange of Debentures or Common Stock" below.
ADJUSTMENT OF CONVERSION PRICE
The conversion price of the debentures is subject to adjustment in certain
circumstances. Any such adjustment could, in certain circumstances, give rise to
a deemed distribution to non-U.S. holders of the debentures. See "U.S.
Holders--Adjustment of Conversion Price" above. In such case, the deemed
54
distribution would be subject to the rules below regarding withholding of U.S.
federal tax on dividends in respect of common stock.
DISTRIBUTIONS ON COMMON STOCK
Distributions on common stock will constitute a dividend for U.S. federal
income tax purposes to the extent of our current or accumulated earnings and
profits as determined under U.S. federal income tax principles. Dividends paid
on common stock held by a non-U.S. holder will be subject to U.S. federal
withholding tax at a rate of 30% (or lower treaty rate, if applicable), unless
the dividend is effectively connected with the conduct of a U.S. trade or
business by the non-U.S. holder and, if required by a tax treaty, is
attributable to a permanent establishment maintained in the United States, in
which case the dividend will be subject to U.S. federal income tax on net income
that applies to U.S. persons generally (and, with respect to corporate holders
under certain circumstances, the branch profits tax). A non-U.S. holder may be
required to satisfy certain certification requirements in order to claim a
reduction of or exemption from withholding under the foregoing rules. However,
prior to January 1, 2001, for purposes of an applicable tax treaty, if a
stockholder's address is outside the United States it will be assumed that such
stockholder is a citizen or resident of that country absent the payor's
knowledge to the contrary.
SALE OR EXCHANGE OF DEBENTURES OR COMMON STOCK
In general, a non-U.S. holder will not be subject to a U.S. federal
withholding tax on gain recognized upon the sale or other disposition (including
a redemption) of a debenture or common stock received upon conversion thereof
unless the gain is effectively connected with the conduct of a U.S. trade or
business by the non-U.S. holder and, if required by a tax treaty, is
attributable to a permanent establishment maintained in the United States, or
unless the non-U.S. holder:
- is a nonresident alien individual who is present in the United States for
183 or more days in the taxable year in which the gain is realized and
certain other conditions are satisfied; or
- is subject to tax pursuant to the provisions of U.S. tax law applicable to
certain U.S. expatriates.
However, if the Company were to become a United States real property holding
corporation (a "USRPHC"), a non-U.S. holder might be subject to federal income
tax withholding with respect to gain realized on the disposition of debentures
or shares of common stock. In that case, any withholding tax withheld pursuant
to the rules applicable to dispositions of a "United States real property
interest" would be creditable against such non-U.S. holder's U.S. federal income
tax liability and might entitle such non-U.S. holder to a refund upon furnishing
required information to the IRS. We do not believe that we are a USRPHC or will
become a USRPHC in the future.
U.S. ESTATE TAX
Debentures owned or treated as owned by an individual who is not a citizen
or resident (as specifically defined for U.S. federal estate tax purposes) of
the United States at the time of death (a "nonresident decedent") will not be
includible in the nonresident decedent's gross estate for U.S. federal estate
tax purposes as a result of such nonresident decedent's death, provided that, at
the time of death, the nonresident decedent does not own, actually or
constructively, 10% or more of the total combined voting power of all classes of
our stock and payments with respect to such debentures would not have been
effectively connected with the conduct of a U.S. trade or business by the
nonresident decedent. Common stock owned or treated as owned by a nonresident
decedent will be includible in the nonresident decedent's gross estate for U.S.
federal estate tax purposes as a result of the nonresident decedent's death.
Subject to applicable treaty limitations, if any, a nonresident decedent's
estate may be subject to U.S. federal estate tax on property includible in the
estate for U.S. federal estate tax purposes.
55
BACKUP WITHHOLDING AND INFORMATION REPORTING
A non-U.S. holder will generally not be subject to IRS reporting or backup
withholding if the payor has received appropriate certification statements from
or on behalf of the non-U.S. holder and provided that the payor does not have
actual knowledge that the non-U.S. holder is a U.S. person. However, with
respect to distributions on common stock, prior to January 1, 2001, if a
stockholder's address is outside of the United States it will be assumed that
such stockholder is a citizen or resident of that country absent the payor's
knowledge to the contrary. The payment of the proceeds from the disposition of
the debentures or common stock to or through the U.S. office of any U.S. or
foreign broker will be subject to IRS reporting and possibly backup withholding
unless the owner certifies as to its non-U.S. status under penalties of perjury
or otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the holder is a U.S. person or that the conditions of any
other exemption are not, in fact, satisfied. The payment of the proceeds from
the disposition of a debenture or common stock to or through a non-U.S. office
of a non-U.S. broker that is not a U.S. related person will not be subject to
IRS or backup withholding. For this purpose, a "U.S. related person" is:
- a "controlled foreign corporation" for U.S. federal income tax purposes;
or
- a non-U.S. person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment (or for such part of the period that the broker has been in
existence) is derived from activities that are effectively connected with
the conduct of a U.S. trade or business.
In the case of the payment of proceeds from the disposition of debentures or
common stock to or through a non-U.S. office of a broker that is a U.S. related
person, the applicable Treasury Regulations require IRS reporting on the payment
unless the broker has documentary evidence in its files that the owner is a
non-U.S. holder and the broker has no knowledge to the contrary. Backup
withholding will not apply to payments made through foreign offices of a broker
that is a U.S. person or a U.S. related person (absent actual knowledge that the
payee is a U.S. person).
Any amounts withheld under the backup withholding rates from a payment to a
non-U.S. holder will be allowed as a credit against such holder's U.S. federal
income tax liability, if any, or will otherwise be refundable, provided that the
requisite procedures are followed. Non-U.S. holders of the debentures or common
stock should consult their own tax advisors regarding their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption, if applicable.
The IRS has issued new withholding regulations generally effective
January 1, 2001. The proposed regulations provide that information reporting,
but not backup withholding, may apply to a payment made outside the United
States of the proceeds of a sale of a debenture through an office outside the
United States of a broker that is a foreign partnership if one or more of its
partners are "U.S. persons," as defined in the Treasury Regulations, who in the
aggregate hold more than 50% of the income or capital interest in the
partnership or such foreign partnership is engaged in a U.S. trade or business,
unless the broker has documentary evidence in its records that the holder is a
non-U.S. person and does not have actual knowledge that the holder is a U.S.
person, or the holder otherwise establishes an exemption. Non-U.S. holders
should consult their own tax advisors with respect to the future impact of these
new withholding regulations.
The preceding discussion of certain U.S. federal income tax consequences is
for general information only and is not tax advice. Accordingly, you should
consult your own tax adviser as to particular tax consequences to you of
purchasing, holding and disposing of the debentures and our common stock,
including the applicability and effect of any state, local or foreign tax laws,
and of any proposed changes in applicable laws.
56
SELLING SECURITY HOLDERS
The debentures were originally issued by us and sold by the initial
purchasers in a transaction exempt from the registration requirements of the
Securities Act to persons reasonably believed by the initial purchasers to be
qualified institutional buyers. Selling holders, including their transferees,
pledgees or donees or their successors, may from time to time offer and sell
pursuant to this prospectus any or all of the debentures and common stock into
which the debentures are convertible.
The following table sets forth information, as of January 6, 2000, with
respect to the selling holders and the principal amounts of debentures
beneficially owned by each selling holder that may be offered under this
prospectus. The information is based on information provided by or on behalf of
the selling holders. The selling holders may offer all, some or none of the
debentures or common stock into which the debentures are convertible. Because
the selling holders may offer all or some portion of the debentures or the
common stock, no estimate can be given as to the amount of the debentures or the
common stock that will be held by the selling holders upon termination of any
sales. In addition, the selling holders identified below may have sold,
transferred or otherwise disposed of all or a portion of their debentures since
the date on which they provided the information regarding their debentures in
transactions exempt from the registration requirements of the Securities Act.
PRINCIPAL AMOUNT
OF DEBENTURES COMMON STOCK COMMON STOCK
BENEFICIALLY ISSUABLE UPON OWNED AFTER
OWNED AND CONVERSION OF COMMON STOCK COMPLETION OF
NAME OFFERED THE DEBENTURES OFFERED THE OFFERING
- ------------------------------------------------ ---------------- -------------- -------------- -----------------
Aftra Health Fund............................... $ 750,000.00 23,432 23,432 --
Allstate Insurance Company...................... 2,000,000.00 62,485 62,485 --
Alta Partners Holdings, LDC..................... 500,000.00 15,621 15,621 --
Ashford Capital Management, f/b/o Louviers Land
LLC........................................... 25,000.00 781 781 --
Ashford Capital Management, f/b/o Brandy Trust
Small Cap Partnership Limited Partner......... 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o Katherine
May........................................... 25,000.00 781 781 --
Ashford Capital Management, f/b/o Benjamin
Spencer Fund.................................. 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o
Nancy G. Frederick............................ 100,000.00 3,124 3,124 --
Ashford Capital Management, f/b/o William H.
Frederick, Jr................................. 60,000.00 1,874 1,874 --
Ashford Capital Management, f/b/o
Mary B. Evans Trust........................... 70,000.00 2,186 2,186 --
Ashford Capital Management, f/b/o
Hanna Schweizer............................... 10,000.00 312 312 --
Ashford Capital Management, f/b/o
Hyde & Watson Foundation...................... 100,000.00 3,124 3,124 --
Ashford Capital Management, f/b/o Patricia
Chalphin Trust................................ 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o Gilbert
Spiegel Trust................................. 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o
Jane D. Engel................................. 35,000.00 1,093 1,093 --
57
PRINCIPAL AMOUNT
OF DEBENTURES COMMON STOCK COMMON STOCK
BENEFICIALLY ISSUABLE UPON OWNED AFTER
OWNED AND CONVERSION OF COMMON STOCK COMPLETION OF
NAME OFFERED THE DEBENTURES OFFERED THE OFFERING
- ------------------------------------------------ ---------------- ---------- ---------- ---------
Ashford Capital Management, f/b/o
Frank & Yetta Chaiken Foundation.............. 30,000.00 937 937 --
Ashford Capital Management, f/b/o
Frank L. Chaiken Irrevocable Trust............ 125,000.00 3,905 3,905 --
Ashford Capital Management, f/b/o Ashford
Capital Partners, L.P......................... 200,000.00 6,248 6,248 --
Ashford Capital Management, f/b/o
Sophie Consagra............................... 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o
Susan A. Boyd Trust........................... 20,000.00 624 624 --
Ashford Capital Management, f/b/o
Robert Lovett Trust........................... 100,000.00 3,124 3,124 --
Ashford Capital Management, f/b/o Virginia Q.
Lovett Trust.................................. 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o
Evelyn D. Lovett Trust........................ 50,000.00 1,562 1,562 --
Ashford Capital Management, f/b/o
Mt. Cuba Astronomical Observatory............. 10,000.00 312 312 --
Ashford Capital Management, f/b/o
Robin Foundation.............................. 10,000.00 312 312 --
Ashford Capital Management, f/b/o Wisconsin
Alumni Research
Foundation.................................... 500,000.00 15,621 15,621 --
Ashford Capital Management, f/b/o Dorothy
Lovett........................................ 30,000.00 937 937 --
Ashford Capital Management, f/b/o
Harry Corless Trust........................... 40,000.00 1,249 1,249 --
Ashford Capital Management, f/b/o
Harry Corless IRA............................. 30,000.00 937 937 --
Ashford Capital Management, f/b/o
Jeanne O. Shields............................. 60,000.00 1,874 1,874 --
Ashford Capital Management, f/b/o Kessler
Institute Pension Plan........................ 150,000.00 4,686 4,686 --
Ashford Capital Management, f/b/o
Frank Chaiken Irrevocable Trust............... 20,000.00 624 624 --
Ashford Capital Management, f/b/o
John P. Larmann............................... 100,000.00 3,124 3,124 --
Ashford Capital Management, f/b/o
Karin & Joseph Kirkland....................... 100,000.00 3,124 3,124 --
Ashford Capital Management, f/b/o
Joseph J. Kirkland Charitable Remainder
Trust......................................... 20,000.00 624 624 --
Ashford Capital Management, f/b/o
Judith A. Destefano........................... 30,000.00 937 937 --
BNP Arbitrage SNC............................... 5,000,000.00 156,213 156,213 --
Brown & Williamson Tobacco Master Retirement
Trust......................................... 200,000.00 6,248 6,248 --
58
PRINCIPAL AMOUNT
OF DEBENTURES COMMON STOCK COMMON STOCK
BENEFICIALLY ISSUABLE UPON OWNED AFTER
OWNED AND CONVERSION OF COMMON STOCK COMPLETION OF
NAME OFFERED THE DEBENTURES OFFERED THE OFFERING
- ------------------------------------------------ ---------------- ---------- ---------- ---------
Cirdet (IMA) Limited............................ 1,800,000.00 56,236 56,236 --
Concorde Special Situations Investment Fund..... 100,000.00 3,124 3,124 --
Deutsche Bank Securities........................ 4,000,000.00 124,970 124,970 --
Family Service Life Insurance Company........... 300,000.00 9,372 9,372 --
Fist Franklin Convertible Securities Fund....... 4,000,000.00 124,970 124,970 --
FSS Franklin California Growth Fund............. 6,000,000.00 187,456 187,456 --
FSS Franklin Small Cap Growth Fund.............. 25,000,000.00 781,066 781,066 --
GEM Capital Management, Inc., as investment
advisor to GranGem 23 41 LLC.................. 550,000.00 17,183 17,183 --
GEM Capital Management, Inc., as investment
advisor to Frederic C. Hamilton............... 450,000.00 14,059 14,059 --
GEM Capital Management, Inc., as investment
advisor to Mary Ann Hamilton.................. 450,000.00 14,059 14,059 --
GEM Capital Management, Inc., as investment
advisor to Mount Sinai School of Medicine..... 500,000.00 15,621 15,621 --
GEM Capital Management, Inc., as investment
advisor to Olin Foundation.................... 1,000,000.00 31,242 31,242 --
GEM Capital Management, Inc., as investment
advisor to United States Olympic Foundation... 600,000.00 18,745 18,745 --
General Motors Welfare Benefit Trust............ 1,300,000.00 40,615 40,615 --
Guardian Life Insurance Company................. 6,500,000.00 203,077 203,077 --
Guardian Pension Trust.......................... 200,000.00 6,248 6,248
Mainstay Convertible Fund....................... 2,000,000.00 62,485 62,485 --
Mainstay Strategic Value Fund................... 250,000.00 7,810 7,810 --
Mainstay VP Convertible Portfolio............... 1,000,000.00 31,242 31,242 --
The New York Life Separate Account #7........... 1,175,000.00 36,710 36,710 --
The Retail Clerks Pension Trust................. 2,000,000.00 62,485 62,485 --
SoundShore Holdings, Ltd........................ 4,000,000.00 124,970 124,970 --
Soundshore Strategic Holding Fund, Ltd.......... 1,000,000.00 31,242 31,242
St. Albans Partners, Ltd........................ 1,900,000.00 59,361 59,361 --
The Travelers Indemnity Company................. 2,916,000.00 91,103 91,103 --
The Travelers Insurance Company................. 1,865,000.00 58,267 58,267 --
The Travelers Insurance Company Separate Account
TLAC.......................................... 219,000.00 6,842 6,842 --
Tribeca Investments, LLC........................ 7,250,000.00 226,509 226,509 --
Triton Capital Investments, Ltd................. 3,000,000.00 93,728 93,728 --
Value Line Convertible Fund, Inc................ 500,000.00 15,621 15,621 --
Warburg Dillon Read LLC......................... 1,000,000.00 31,242 31,242 --
None of the selling holders nor any of their affiliates, officers, directors
or principal equity holders has held any position or office or has had any
material relationship with us within the past three years.
59
The selling holders purchased the debentures from us in a private transaction on
October 13, 1999. All of the debentures were "restricted securities" under the
Securities Act prior to this registration.
Information concerning the selling holders may change from time to time and
any changed information will be set forth in supplements to this prospectus if
and when necessary. In addition, the conversion rate and therefore, the number
of shares of common stock issuable upon conversion of the debentures, is subject
to adjustment under certain circumstances. Accordingly, the aggregate principal
amount of debentures and the number of shares of common stock into which the
debentures are convertible may increase or decrease.
PLAN OF DISTRIBUTION
The selling holders and their successors, including their transferees,
pledgees or donees or their successors, may sell the debentures and the common
stock into which the debentures are convertible directly to purchasers or
through underwriters, broker-dealers or agents, who may receive compensation in
the form of discounts, concessions or commissions from the selling holders or
the purchasers. These discounts, concessions or commissions as to any particular
underwriter, broker-dealer or agent may be in excess of those customary in the
types of transactions involved.
The debentures and the common stock into which the debentures are
convertible may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market prices, at varying prices determined at the time of sale, or
at negotiated prices. These sales may be effected in transactions, which may
involve crosses or block transactions:
- on any national securities exchange or U.S. inter-dealer system of a
registered national securities association on which the debentures or the
common stock may be listed or quoted at the time of sale;
- in the over-the-counter market;
- in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
- through the writing of options, whether the options are listed on an
options exchange or otherwise; or
- through the settlement of short sales.
In connection with the sale of the debentures and the common stock into
which the debentures are convertible or otherwise, the selling holders may enter
into hedging transactions with broker-dealers or other financial institutions,
which may in turn engage in short sales of the debentures or the common stock
into which the debentures are convertible in the course of hedging the positions
they assume. The selling holders may also sell the debentures or the common
stock into which the debentures are convertible short and deliver these
securities to close out their short positions, or loan or pledge the debentures
or the common stock into which the debentures are convertible to broker-dealers
that in turn may sell these securities.
The aggregate proceeds to the selling holders from the sale of the
debentures or common stock into which the debentures are convertible offered by
them will be the purchase price of the debentures or common stock less discounts
and commissions, if any. Each of the selling holders reserves the right to
accept and, together with their agents from time to time, to reject, in whole or
in part, any proposed purchase of debentures or common stock to be made directly
or through agents. We will not receive any of the proceeds from this offering.
60
Our outstanding common stock is listed for trading on the Nasdaq National
Market. We do not intend to list the debentures for trading on any national
securities exchange or on the Nasdaq National Market and can give no assurance
about the development of any trading market for the debentures.
In order to comply with the securities laws of some states, if applicable,
the debentures and common stock into which the debentures are convertible may be
sold in these jurisdictions only through registered or licensed brokers or
dealers. In addition, in some states the debentures and common stock into which
the debentures are convertible may not be sold unless they have been registered
or qualified for sale or an exemption from registration or qualification
requirements is available and is complied with.
The selling holders and any underwriters, broker-dealers or agents that
participate in the sale of the debentures and common stock into which the
debentures are convertible may be "underwriters" within the meaning of
Section 2(11) of the Securities Act. Any discounts, commissions, concessions or
profit they earn on any resale of the shares may be underwriting discounts and
commissions under the Securities Act. Selling holders who are "underwriters"
within the meaning of Section 2(11) of the Securities Act will be subject to the
prospectus delivery requirements of the Securities Act. The selling holders have
acknowledged that they understand their obligations to comply with the
provisions of the Exchange Act and the rules thereunder relating to stock
manipulation, particularly Regulation M.
In addition, any securities covered by this prospectus that qualify for sale
pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under
Rule 144 or Rule 144A rather than pursuant to this prospectus. A selling holder
may not sell any debentures or common stock described in this prospectus and may
not transfer, devise or gift these securities by other means not described in
this prospectus.
To the extent required, the specific debentures or common stock to be sold,
the names of the selling holders, the respective purchase prices and public
offering prices, the names of any agent, dealer or underwriter, and any
applicable commissions or discounts with respect to a particular offer will be
set forth in an accompanying prospectus supplement or, if appropriate, a
post-effective amendment to the registration statement of which this prospectus
is a part.
We entered into a registration rights agreement for the benefit of holders
of the debentures to register their debentures and common stock under applicable
federal and state securities laws under specific circumstances and at specific
times. The registration rights agreement provides for cross-indemnification of
the selling holders and us and their and our respective directors, officers and
controlling persons against specific liabilities in connection with the offer
and sale of the debentures and the common stock, including liabilities under the
Securities Act. We will pay substantially all of the expenses incurred by the
selling holders incident to the offering and sale of the debentures and the
common stock.
LEGAL MATTERS
The validity of the debentures and common stock offered hereby is being
passed upon for us by Cooley Godward LLP, Menlo Park, California. As of the date
of this prospectus, certain members and associates of Cooley Godward LLP
beneficially own an aggregate of 300 shares of our common stock.
INDEPENDENT AUDITORS
The financial statements of Inhale Therapeutic Systems, Inc. at
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998, incorporated by reference in this registration statement have
been audited by Ernst & Young LLP, independent auditors, as stated in their
report and are included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
61
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- --------------------------------------------------------------------------------
WE HAVE AUTHORIZED NO ONE TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
THAT ARE NOT CONTAINED IN THIS PROSPECTUS. YOU SHOULD RELY ONLY ON THE
INFORMATION PROVIDED IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE THEREIN.
YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION.
THIS PROSPECTUS DOES NOT OFFER TO SELL OR BUY ANY DEBENTURES OR SHARES OF COMMON
STOCK IN ANY JURISDICTION WHERE IT IS UNLAWFUL. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON
THE FRONT OF THE DOCUMENT.
------------------------
TABLE OF CONTENTS
PAGE
-----------
Summary....................................... 1
Risk Factors.................................. 3
Where You Can Find More Information........... 11
Incorporation by Reference.................... 11
Use of Proceeds............................... 12
Ratio of Earnings to Fixed Charges............ 12
Business...................................... 13
Description of the Debentures................. 32
Description of Capital Stock.................. 47
Certain United States Federal Income Tax
Consequences................................ 49
Selling Security Holders...................... 57
Plan of Distribution.......................... 60
Legal Matters................................. 61
Independent Auditors.......................... 61
INHALE THERAPEUTIC SYSTEMS, INC.
$93,625,000
6 3/4% CONVERTIBLE
SUBORDINATED DEBENTURES
DUE OCTOBER 13, 2006
AND
2,925,095 SHARES
OF COMMON STOCK
ISSUABLE UPON CONVERSION
OF THE DEBENTURES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the debentures and common stock being registered. All the amounts shown are
estimates except for the registration fee and the filing fee.
Registration fee................................................... $ 24,717
Legal fees and expenses............................................ 25,000
Accounting fees and expenses....................................... 10,000
Printing and engraving............................................. 10,000
Nasdaq National Market filing fee.................................. 17,500
Miscellaneous...................................................... 7,783
TOTAL.............................................................. 95,000
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify our directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The Registrant's Certificate of Incorporation, as amended provides for the
elimination of liability for monetary damages for breach of the directors'
fiduciary duty of care to the Registrant and its stockholders. These provisions
do not eliminate the directors' duty of care and, in appropriate circumstances,
equitable remedies such an injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
The Registrant has entered into agreements with its directors and executive
officers that require the Registrant to indemnify such persons against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or officer of the
Registrant or any of its affiliated enterprises, provided such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder.
II-2
ITEM 16. EXHIBITS
(a) Exhibits
2.1(1) Agreement and Plan of Merger between Inhale Therapeutic Systems, a California
corporation, and Inhale Therapeutic Systems (Delaware), Inc., a Delaware
corporation.
3.1(1) Certificate of Incorporation of Registrant.
3.2(1) Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2(2) Restated Investor Rights Agreement among the Registrant and certain other
persons named therein, dated April 29, 1993, as amended October 29, 1993.
4.3(2) Specimen stock certificate.
4.4(3) Stock Purchase Agreement between the Registrant and Pfizer Inc., dated January
18, 1995.
4.5(9) Form of Purchase Agreement between the Registrant and the individual Purchasers,
dated January 28, 1997.
4.6(10) Stock Purchase Agreement between the Registrant and Capital Research and
Management Company, dated December 8, 1998.
4.7(12) Purchase Agreement among the Registrant and Lehman Brothers Inc., Deutsche Bank
Securities Inc. and U.S. Bancorp Piper Jaffray Inc. dated October 6, 1999.
4.8(12) Registration Rights Agreement among the Registrant and Lehman Brothers Inc.,
Deutsche Bank Securities Inc. and U.S. Bancorp Piper Jaffray Inc., dated October
13, 1999.
4.9(12) Indenture between the Registrant as Issuer and Chase Manhattan Bank and Trust
Company, National Association, as Trustee, dated October 13, 1999.
5.1(12) Opinion of Cooley Godward llp.
10.1(4) Registrant's 1994 Equity Incentive Plan, as amended.
10.2(7) Registrant's 1994 Non-Employee Directors' Stock Option Plan, as amended.
10.3(2) Registrant's 1994 Employee Stock Purchase Plan, as amended.
10.4(2) Standard Industrial Lease between the Registrant and W.F. Batton & Co., Inc.,
dated September 17, 1992, as amended September 18, 1992.
10.5(2) Addendum IV dated April 1, 1994 to Lease dated September 17, 1992, between the
Registrant and W.F. Batton and Marie A. Batton, dated September 17, 1992.
10.6(6) Amendment Agreement Number One, dated October 20, 1995, to Lease dated September
17, 1992, between the Registrant and W.F. Batton & Co., Inc.
10.7(6) Amendment Agreement Number Two, dated November 15, 1995, to Lease, dated
September 17, 1992, between Registrant and W.F. Batton and Marie A. Batton,
Trustees of the W.F. Batton and Marie A. Batton Trust UTA dated January 12, 1998
("Batton Trust").
10.8(11) Amendment Agreement Number Three, dated February 14, 1996, to Lease, dated
September 17, 1992, between Registrant and Batton Trust.
10.9(11) Amendment Agreement Number Four, dated September 15, 1996, to Lease, dated
September 17, 1992, between Registrant and Batton Trust.
10.10(2) Senior Loan and Security Agreement between the Registrant and Phoenix Leasing
Incorporated, dated September 15, 1993.
10.11(2) Sublicense Agreement between the Registrant and John S. Patton, dated September
13, 1991.
10.11(5) Stock Purchase Agreement between the Registrant and Baxter World Trade
Corporation, dated March 1, 1996.
10.12(8) Sublease and Lease Agreement, dated October 2, 1996, between the Registrant and
T.M.T. Associates L.L.C. ("Landlord").
II-3
10.13(11) First Amendment, dated October 30, 1996, to Sublease and Lease Agreement, dated
October 2, 1996, between Registrant and Landlord.
10.14(11) Letter Agreement, dated April 9, 1997, amending Sublease and Lease Agreement,
dated October 2, 1996, between the Registrant and Landlord.
10.15(11) Third Amendment, dated April 16, 1997, to Sublease and Lease Agreement, dated
October 2, 1996, between Registrant and Landlord.
10.16(11) Fourth Amendment, dated November 5, 1997, to Sublease and Lease Agreement, dated
October 2, 1996, between Registrant and Landlord.
23.1(12) Consent of Ernst & Young LLP, independent auditors.
23.2(12) Consent of Cooley Godward LLP. (included in Exhibit 5.1)
24.1(12) Power of Attorney (included in signature page).
25.1(12) Form T-1 Statement of Eligibility and Qualification of Trustee.
- ------------------------
(1) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(2) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-1 (No. 33-75942), as amended.
(3) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-1 (No. 33-89502), as amended.
(4) Incorporated by reference to Inhale's Registration Statement on Form S-8
(No. 333-59735).
(5) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
(6) Incorporated by reference to the indicated exhibit in Inhale's Annual Report
on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996.
(8) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(9) Incorporated by reference to Inhale's Registration Statement on Form S-3
(No. 333-20787).
(10) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-3 (No. 333-68897), as amended.
(11) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(12) Filed herewith.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of The
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
II-4
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
PROVIDED, HOWEVER, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of
the Exchange Act) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to
the securities offered therein and the offering of such securities at
that time shall be deemed to be the initial BONA FIDE offering thereof.
(5) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to provisions described in Item 15, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of
such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Carlos, County of San Mateo, State of California
on January 5, 2000.
By: /s/ ROBERT B. CHESS
------------------------------------------
Robert B. Chess
CO-CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert B. Chess and Ajit S. Gill and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments, exhibits thereto and other documents in connection therewith) to
this registration statement and any subsequent registration statement filed by
the registrant pursuant to Securities and Exchange Commission Rule 462, which
relates to this registration statement and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Co-Chief Executive Officer
/s/ ROBERT B. CHESS and Chairman of the
- ------------------------------ Board (Principal January 5, 2000
Robert B. Chess Executive Officer)
Co-Chief Executive
/s/ AJIT S. GILL Officer, President and
- ------------------------------ Director (Principal January 5, 2000
Ajit S. Gill Executive Officer)
/s/ BRIGID A. MAKES Chief Financial Officer
- ------------------------------ (Principal Financial and January 5, 2000
Brigid A. Makes Accounting Officer)
/s/ MARK J. GABRIELSON
- ------------------------------ Director January 5, 2000
Mark J. Gabrielson
/s/ JAMES B. GLAVIN
- ------------------------------ Director January 5, 2000
James B. Glavin
/s/ JOHN S. PATTON
- ------------------------------ Vice President and January 5, 2000
John S. Patton Director
/s/ MELVIN PERELMAN
- ------------------------------ Director January 5, 2000
Melvin Perelman
/s/ IRWIN LERNER
- ------------------------------ Director January 5, 2000
Irwin Lerner
II-5
EXHIBIT NUMBER EXHIBIT INDEX
- ----------------- -------------------------------------------------------------------------------------------------
2.1 (1) Agreement and Plan of Merger between Inhale Therapeutic Systems, a California corporation, and
Inhale Therapeutic Systems (Delaware), Inc., a Delaware corporation.
3.1 (1) Certificate of Incorporation of Registrant.
3.2 (1) Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 (2) Restated Investor Rights Agreement among the Registrant and certain other persons named therein,
dated April 29, 1993, as amended October 29, 1993.
4.3 (2) Specimen stock certificate.
4.4 (3) Stock Purchase Agreement between the Registrant and Pfizer Inc., dated January 18, 1995.
4.5 (9) Form of Purchase Agreement between the Registrant and the individual Purchasers, dated January
28, 1997.
4.6 (10) Stock Purchase Agreement between the Registrant and Capital Research and Management Company,
dated December 8, 1998.
4.7 (12) Purchase Agreement among the Registrant and Lehman Brothers Inc., Deutsche Bank Securities Inc.
and U.S. Bancorp Piper Jaffray Inc. dated October 6, 1999.
4.8 (12) Registration Rights Agreement among the Registrant and Lehman Brothers Inc., Deutsche Bank
Securities Inc. and U.S. Bancorp Piper Jaffray Inc., dated October 13, 1999.
4.9 (12) Indenture between the Registrant as Issuer and Chase Manhattan Bank and Trust Company, National
Association, as Trustee, dated October 13, 1999.
5.1 (12) Opinion of Cooley Godward LLP.
10.1 (4) Registrant's 1994 Equity Incentive Plan, as amended.
10.2 (7) Registrant's 1994 Non-Employee Directors' Stock Option Plan, as amended.
10.3 (2) Registrant's 1994 Employee Stock Purchase Plan, as amended.
10.4 (2) Standard Industrial Lease between the Registrant and W.F. Batton & Co., Inc., dated
September 17, 1992, as amended September 18, 1992.
10.5 (2) Addendum IV dated April 1, 1994 to Lease dated September 17, 1992, between the Registrant and
W.F. Batton and Marie A. Batton, dated September 17, 1992.
10.6 (6) Amendment Agreement Number One, dated October 20, 1995, to Lease dated September 17, 1992,
between the Registrant and W.F. Batton & Co., Inc.
10.7 (6) Amendment Agreement Number Two, dated November 15, 1995, to Lease, dated September 17, 1992,
between Registrant and W.F. Batton and Marie A. Batton, Trustees of the W.F. Batton and Marie A.
Batton Trust UTA dated January 12, 1998 ("Batton Trust").
10.8 (11) Amendment Agreement Number Three, dated February 14, 1996, to Lease, dated September 17, 1992,
between Registrant and Batton Trust.
10.9 (11) Amendment Agreement Number Four, dated September 15, 1996, to Lease, dated September 17, 1992,
between Registrant and Batton Trust.
10.10(2) Senior Loan and Security Agreement between the Registrant and Phoenix Leasing Incorporated, dated
September 15, 1993.
10.11(2) Sublicense Agreement between the Registrant and John S. Patton, dated September 13, 1991.
10.11(5) Stock Purchase Agreement between the Registrant and Baxter World Trade Corporation, dated
March 1, 1996.
10.12(8) Sublease and Lease Agreement, dated October 2, 1996, between the Registrant and T.M.T. Associates
L.L.C. ("Landlord").
10.13(11) First Amendment, dated October 30, 1996, to Sublease and Lease Agreement, dated October 2, 1996,
between Registrant and Landlord.
10.14(11) Letter Agreement, dated April 9, 1997, amending Sublease and Lease Agreement, dated October 2,
1996, between the Registrant and Landlord.
10.15(11) Third Amendment, dated April 16, 1997, to Sublease and Lease Agreement, dated October 2, 1996,
between Registrant and Landlord.
EXHIBIT NUMBER EXHIBIT INDEX
--------- -------------------------------------------------------------------------------------------------
10.16(11) Fourth Amendment, dated November 5, 1997, to Sublease and Lease Agreement, dated October 2, 1996,
between Registrant and Landlord.
23.1 (12) Consent of Ernst & Young LLP, independent auditors.
23.2 (12) Consent of Cooley Godward LLP. (included in Exhibit 5.1)
24.1 (12) Power of Attorney (included in signature page).
25.1 (12) Form T-1 Statement of Eligibility and Qualification of Trustee. Page 18 of 20
- ------------------------
(1) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(2) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-1 (No. 33-75942), as amended.
(3) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-1 (No. 33-89502), as amended.
(4) Incorporated by reference to Inhale's Registration Statement on Form S-8
(No. 333-59735).
(5) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
(6) Incorporated by reference to the indicated exhibit in Inhale's Annual Report
on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996.
(8) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(9) Incorporated by reference to Inhale's Registration Statement on Form S-3
(No. 333-20787).
(10) Incorporated by reference to the indicated exhibit in Inhale's Registration
Statement on Form S-3 (No. 333-68897), as amended.
(11) Incorporated by reference to the indicated exhibit in Inhale's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(12) Filed herewith.