SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2001 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ___________ to ___________ Commission File Number: 000-31135 INSPIRE PHARMACEUTICALS, INC. ----------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 04-3209022 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 4222 Emperor Boulevard, Suite 470 Durham, North Carolina 27703-8466 ---------------------- ---------- (Address of Principal Executive Offices) (zip code) Registrant's Telephone Number, Including Area Code: (919) 941-9777 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO -- ------ Indicate the number of shares outstanding of common stock, as of the latest practical date: 25,729,526 as of August 10, 2001. Inspire Pharmaceuticals (a development stage company) PART I: FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements --------------------- Condensed Balance Sheets (in thousands except share and per share amounts) (Unaudited) June 30, December 31, 2001 2000 ----------------- ----------------- Assets Current assets: Cash and cash equivalents $53,904 $35,109 Short-term investments 14,912 44,026 Other receivables 44 209 Interest receivable 226 364 Prepaid expenses 422 415 ----------------- ----------------- Total current assets 69,508 80,123 Property and equipment, net 1,395 1,214 Other assets 4,363 1,656 ----------------- ----------------- Total assets $75,266 $82,993 ================= ================= Liabilities and stockholders' equity Current liabilities: Accounts payable $1,065 $430 Accrued expenses 565 852 Notes payable 27 26 Capital leases, current portion 368 289 Deferred revenue, current portion 6,642 5,618 ----------------- ----------------- Total current liabilities 8,667 7,215 Capital leases, excluding current portion 700 523 Deferred revenue, excluding current portion 1,917 750 ----------------- ----------------- Total liabilities 11,284 8,488 Stockholders' equity: Common stock, $0.001 par value, 56,000,000 shares authorized; 25,728,809 and 25,515,087 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 26 26 Additional paid-in capital 125,086 126,081 Other comprehensive income 10 51 Deferred compensation (2,124) (3,782) Deficit accumulated during the development stage (59,016) (47,871) ----------------- ----------------- Total stockholders' equity 63,982 74,505 ----------------- ----------------- Total liabilities and stockholders' equity $75,266 $82,993 ================= ================= The accompanying notes are an integral part of these condensed financial statements. 2 Inspire Pharmaceuticals (a development stage company) Condensed Statements of Operations (in thousands except per share amounts) (Unaudited) Cumulative From Inception October THREE MONTHS ENDED SIX MONTHS ENDED (28, 1993) ------------------ ---------------- to June 30, June 30, June 30, June 30, June 30, 2001 2000 2001 2000 2001 ------------ ------------ ------------- ------------ ----------- ------------ ------------ ------------- ------------ ----------- Revenues: Collaborative research agreements $1,404 $1,155 $2,809 $2,309 $9,641 ------------ ------------ ------------- ------------ ----------- Operating expenses: Research and development (includes $128, $235, $269, $462 and $1,690, respectively, of stock-based compensation) 6,798 3,158 13,633 5,702 55,587 General and administrative (includes $169, $170, $338, $339 and $1,919, respectively, of stock-based compensation) 1,532 848 2,773 1,688 15,250 ------------ ------------ ------------- ------------ ----------- Total operating expenses 8,330 4,006 16,406 7,390 70,837 ------------ ------------ ------------- ------------ ----------- Operating loss (6,926) (2,851) (13,597) (5,081) (61,196) ------------ ------------ ------------- ------------ ----------- Other income (expense), net: Interest income 1,065 286 2,533 582 5,762 Interest expense (47) (178) (81) (365) (1,740) Loss on disposal of property and equipment - - - - (366) ------------ ------------ ------------- ------------ ----------- Other income (expense), net 1,018 108 2,452 217 3,656 ------------ ------------ ------------- ------------ ----------- Loss before provision for income taxes (5,908) (2,743) (11,145) (4,864) (57,540) Provision for income taxes: - - - (150) (820) ------------ ------------ ------------- ------------ ----------- Net loss: (5,908) (2,743) (11,145) (5,014) (58,360) Preferred stock dividends: - (257) - (499) (656) ------------ ------------ ------------- ------------ ----------- Net loss available to common stockholders: ($5,908) ($3,000) ($11,145) ($5,513) ($59,016) ============ ============ ============= ============ =========== Net loss per common share-basic and diluted: ($0.23) ($1.15) ($0.43) ($2.16) ============ ============ ============= ============ Weighted average common shares outstanding-basic and diluted: 25,723,157 2,604,134 25,664,602 2,550,319 ============ ============ ============= ============ The accompanying notes are an integral part of these condensed financial statements. 3 Inspire Pharmaceuticals (a development stage company) Condensed Statements of Cash Flows (in thousands) (Unaudited) Cumulative From Inception (October SIX MONTHS ENDED 28, 1993) ---------------- to June 30, June 30, June 30, 2001 2000 2001 -------------- -------------- ------------- Cash flows from operating activities: Net loss ($11,145) ($5,014) ($58,360) Adjustments to reconcile net loss to net cash used in operating activities: Stock issued for exclusive licenses - - 144 Stock issued for consulting services - - 72 Depreciation and amortization 306 276 3,879 Amortization of stock-based compensation 608 801 3,301 Amortization of debt issuance costs 789 320 788 Loss on disposal of property and equipment - - 366 Deferred revenue 2,191 (809) 8,559 Changes in operating assets and liabilities: Other receivables 165 19 (45) Interest receivable 138 (72) (226) Prepaid expenses (7) (633) (422) Other assets 5 (1) (77) Accounts payable 635 (371) 1,067 Accrued expenses (287) 124 567 -------------- -------------- ------------- Net cash (used in) operating activities: (6,602) (5,360) (40,387) -------------- -------------- ------------- Cash flows from investing activities: Purchase of investments (73,128) (3,107) (128,149) Proceeds from sale of investments 98,701 - 109,747 Proceeds from sale of property and equipment - - 127 Sale of certificate of deposit - - (78) Purchases of property and equipment (487) (352) (2,442) -------------- -------------- ------------- Net cash (used in) provided by investing activities: 25,086 (3,459) (20,795) -------------- -------------- ------------- Cash flows from financing activities: Proceeds from bridge loans - - 780 Proceeds from issuance of notes payable and capital lease obligations 401 - 809 Payments on notes payable - - (400) Issuance of common stock 55 21 70,402 Issuance of convertible preferred stock - - 45,061 Payments on capital lease obligations (145) (171) (1,566) -------------- -------------- ------------- Net cash (used in) provided by financing activities: 311 (150) 115,086 -------------- -------------- ------------- Increase (decrease) in cash and cash equivalents: 18,795 (8,969) 53,904 Cash and cash equivalents, beginning of period: 35,109 22,728 - -------------- -------------- ------------- Cash and cash equivalents, end of period: $53,904 $13,759 $53,904 ============== ============== ============= The accompanying notes are an integral part of these condensed financial statements. 4 Inspire Pharmaceuticals (a development stage company) NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - ------------------------------------------------- (amounts in thousands except share and per share amounts) 1. Organization Inspire Pharmaceuticals, Inc. (the "Company") was founded on October 28, 1993 to discover and develop novel pharmaceutical products to treat diseases characterized by deficiencies in the body's innate defense mechanisms of mucosal hydration and mucociliary clearance, as well as other non-mucosal disorders. The Company's technologies are based in part on exclusive license agreements with The University of North Carolina at Chapel Hill for rights to certain developments from the founder's laboratories. Our lead products target respiratory and ophthalmic diseases with inadequate current treatments. The Company is considered a development stage enterprise. Since inception, the Company has devoted substantially all of its efforts towards establishing its business and research and development programs. 2. Summary of Significant Accounting Policies Unaudited Interim Financial Statements The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles and applicable Securities and Exchange Commission regulations for interim financial information. These financial statements are unaudited and, in the opinion of management, include all adjustments necessary to present fairly the balance sheets, statements of operations, and statements of cash flows for the periods presented in accordance with generally accepted accounting principles. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full year. These financial statements and notes should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2000 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2001. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Revenue is recognized under collaborative research agreements when services are performed or when contractual obligations are met. Nonrefundable fees received at the initiation of the collaborative agreements for which the Company has an ongoing research and development commitment are deferred and recognized ratably over the period of the related research and development commitment. Milestone payments under collaboration agreements and research agreements are recognized as revenues ratably over the remaining period of the Company's research and development commitment beginning on the date the Company achieves the indicated milestone and such achievement is acknowledged by the collaborative partner, which generally coincides with the receipt of the milestone payment. Net Income (Loss) Per Share Basic net income (loss) per common share ("basic EPS") is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted net income (loss) per 5 Inspire Pharmaceuticals (a development stage company) common share ("diluted EPS") is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants and conversion of convertible preferred stock. The calculation of diluted EPS for the six months ended June 30, 2001 and 2000 does not include 1,709,903 and 16,885,673, respectively, of potential shares of common stock equivalents, as their impact would be antidilutive. Segment Reporting The Company has determined that it did not have any separately reportable operating segments as of June 30, 2001. Other Comprehensive Income (Loss) At June 30, 2001, the Company had $10 of unrealized gain on investments that is classified as other comprehensive income and is disclosed as a component of stockholders' equity. The Company had no items of other comprehensive income at June 30, 2000. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued FASB Statements Nos. 141 ("SFAS No. 141"), "Business Combinations" and 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets". SFAS No. 141 eliminates pooling- of-interests accounting prospectively and provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. SFAS No. 141 and SFAS No. 142 are effective for all business combinations completed after June 30, 2001. The Company intends to adopt SFAS No. 142 as of January 1, 2002, as required, and as of July 1, 2001 for goodwill and intangible assets acquired after June 30, 2001. The Company does not expect that the adoption of SFAS Nos. 141 and 142 will have any impact on its financial statements or results of operations. 6 Inspire Pharmaceuticals (a development stage company) Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- RESULTS OF OPERATIONS - --------------------- (amounts in thousands except share and per share amounts) Three Months Ended June 30, 2001 and 2000 - ----------------------------------------- Revenues Revenues are derived from collaborative research and development agreements with strategic partners. Revenues were $1,404 for the three months ended June 30, 2001 compared to $1,155 for the same period in 2000, an increase of 22%. This increase was due to revenue recognized during the three months ended June 30, 2001 related to the upfront payment received from Kirin Brewery Co., Ltd. in the fourth quarter of 2000. We also recognized revenues related to milestone payments from Kissei Pharmaceuticals Co., Ltd. and Genentech, Inc., which are recognized over the period of ongoing research and development commitment under the collaborative research agreements with the respective companies. Research and Development Our research and development expenses are comprised of personnel and related costs and the costs of external contract research organizations that are performing research and development activities, including clinical studies, for us, and the costs of filing and maintaining our patent portfolio. Research and development expenses for the three months ended June 30, 2001 were $6,798 compared to $3,158 for the same period in 2000, an increase of 115%. The increase in research and development expenses is due to increased external costs related to research costs, preclinical testing, toxicology studies, clinical supplies, clinical development activities, including continual enrollment in Phase III clinical trials, and increased internal costs necessary to perform and/or manage these activities. We expect to incur increases in future periods as later phases of development typically involve an increase in the scope of studies and the number of patients treated. General and Administrative Expenses General and administrative expenses consist primarily of personnel costs, facilities costs, business development costs and professional expenses, such as legal and accounting fees. General and administrative expenses were $1,532 for the three months ended June 30, 2001 compared to $848 for the same period in 2000, an increase of 81%. The increase in general and administrative expenses is due to increased costs in legal, marketing and operations, which support the Company's strategic business collaborations and operations as a publicly traded company. Other Income (Expense), Net Other income (expense), net consists of interest income earned on cash deposits and investments, reduced by interest expense on notes payable and capital lease obligations, and gains and losses on sales of property and equipment. Other income (expense), net was $1,018 for the three months ended June 30, 2001 compared to $108 for the same period in 2000, an increase of 843%. The increase was due to interest income earned from larger cash balances partially offset by interest expense related to leased equipment. Six Months Ended June 30, 2001 and 2000 - --------------------------------------- Revenues Revenues are derived from collaborative research and development agreements with strategic partners. Revenues were $2,809 for the six months ended June 30, 2001 compared to $2,309 for the same period in 2000, an increase of 22%. This increase was due to revenue recognized during the six months ended June 30, 2001 related to 7 Inspire Pharmaceuticals (a development stage company) an upfront payment received from Kirin Brewery Co., Ltd. in the fourth quarter of 2000. We also recognized revenues related to milestone payments from Kissei Pharmaceuticals Co., Ltd. and Genentech, Inc., which are recognized over the period of ongoing research and development commitment under the collaborative research agreements with the respective companies. Research and Development Our research and development expenses are comprised of personnel and related costs and the costs of external contract research organizations that are performing research and development activities, including clinical studies, for us, and the costs of filing and maintaining our patent portfolio. Research and development expenses for the six months ended June 30, 2001 were $13,633 compared to $5,702 for the same period in 2000, an increase of 139%. The increase in research and development expenses is due to increased external costs related to research costs, preclinical testing, toxicology studies, clinical supplies, clinical development activities, including continual enrollment in Phase III clinical trials, and increased internal costs necessary to perform and/or manage these activities. We expect to incur increases in future periods as later phases of development typically involve an increase in the scope of studies and the number of patients treated. General and Administrative Expenses General and administrative expenses consist primarily of personnel costs, facilities costs, business development costs and professional expenses, such as legal and accounting fees. General and administrative expenses were $2,773 for the six months ended June 30, 2001 compared to $1,688 for the same period in 2000, an increase of 64%. The increase in general and administrative expenses is due to increased costs in legal, marketing and operations, which support the Company's strategic business collaborations and operations as a publicly traded company. Other Income (Expense), Net Other income (expense), net consists of interest income earned on cash deposits and investments, reduced by interest expense on notes payable and capital lease obligations, and gains and losses on sales of property and equipment. Other income (expense), net was $2,452 for the six months ended June 30, 2001 compared to $217 for the same period in 2000, an increase of 1030%. The increase was due to interest income earned from larger cash balances partially offset by interest expense related to leased equipment. Provision for Income Taxes The provision for income taxes was zero for the six months ended June 30, 2001, compared to $150 for the same period in 2000. The decrease in the provision for income taxes is attributable to withholding taxes paid on milestone payments from Japanese collaborative partners during the six months ended June 30, 2000. No milestone payments were received from Japanese collaborative partners during the six months ended June 30, 2001 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company historically has financed its operations through the sale of equity securities, including private sales of preferred stock and the sale of common stock in our initial public offering. The Company will not generate revenues, other than license and milestone payments, from the sale of its products unless or until it or its licensees receive marketing clearance from the FDA and appropriate governmental agencies in other countries. The Company cannot predict the timing of any potential marketing clearance nor can assurances be given that the FDA or such agencies will approve any of the Company's products. As of June 30, 2001, cash and cash equivalents totaled $53,904 compared to $35,109 as of December 31, 2000, an increase of 54%. The increase in cash and cash equivalents is due to a net decrease in investments of $25,573, 8 Inspire Pharmaceuticals (a development stage company) proceeds from notes payable of $401, issuance of common stock of $55 offset by cash used by operations for the six months ended June 30, 2001 of $6,602, purchase of property and equipment of $487, and the payment of capital lease obligations of $145. Cash used by operations of $6,602 in the six months ended June 30, 2001, represented a net loss of $11,145, an increase in prepaid expenses of $7, a decrease in accrued expenses of $287, partially offset by a net increase in non- cash charges, including deferred revenue, of $3,894, a decrease in other receivables, interest receivable and other assets that totals $308 and an increase in accounts payable of $635. Cash used by investing activities for the six months ended June 30, 2001 consisted of net proceeds of $25,573 from the purchase and sale of investment grade securities reduced by the purchase of property and equipment of $487. Cash provided by financing activities for the six months ended June 30, 2001 consisted of the issuance of common stock of $55, the proceeds of a note payable of $401 offset by the payment of capital lease obligations of $145. IMPACT OF INFLATION - ------------------- Although it is difficult to predict the impact of inflation on costs and revenues of our Company in connection with our products, we do not anticipate that inflation will materially impact our cost of operation or the profitability of our products when marketed. CAUTIONARY STATEMENT - -------------------- The Company operates in a highly competitive environment that involves a number of risks, some of which are beyond the our control. Statements contained in Management's Discussion and Analysis of Financial Conditions and Results of Operations which are not historical facts are, or may constitute, forward looking statements. Forward looking statements involve known and unknown risks that could cause the Company's actual results to differ materially from expected results. These risks are discussed in Part II, Item 5 of this report, titled "Other Information - Risk Factors" and in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Although we believe the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Item 3. Quantitative and Qualitative Disclosures about Market Risk ----------------------------------------------------------- The Company's exposure to market risk for changes in interest rates relates to the increase or decrease in the amount of interest income the Company can earn on its investment portfolio and on the increase or decrease in the amount of interest expense it must pay with respect to various outstanding debt instruments. The Company's risk associated with fluctuating interest expense is limited, however, to capital lease obligations. The interest rates are closely tied to market rates and the Company's investments in interest rate sensitive financial instruments. Under the Company's current policies, it does not use interest rate derivative instruments to manage exposure to interest rate changes. The Company ensures the safety and preservation of invested principal funds by limiting default risk, market risk and reinvestment risk. The Company reduces default risk by investing in investment grade securities. A hypothetical 100 basis point drop in interest rates along the entire interest rate yield curve would not significantly affect the fair value of the Company's interest sensitive financial instruments at June 30, 2001 or June 30, 2000. Declines in interest rates over time will, however, reduce the Company's interest income while increases in interest rates over time will increase interest expense. 9 Inspire Pharmaceuticals (a development stage company) PART II: OTHER INFORMATION - --------------------------- Item 2. Changes in Securities and Use of Proceeds ------------------------------------------ (in thousands) (d) On August 2, 2000, the Securities and Exchange Commission declared a Registration Statement on Form S-1, as amended (Registration No. 333-31174) effective, registering 6,325,000 shares of our common stock. The aggregate net proceeds after deduction of expenses were approximately $69,300. Through June 30, 2001, we have used approximately $8,158 of the net proceeds of the offering as follows: Discovery and research programs $6,754 General and Administrative expenses 1,173 Purchase of equipment 86 Payment of debt 145 ------------- Total $8,158 ============= Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On June 1, 2001, we held our annual meeting of stockholders. The results of the proposals submitted for vote at this meeting were as follows: 1. Election of two Directors (there were no abstentions or broker non- votes in connection with the election of directors) . For: Withheld: Christy L. Schaffer, Ph.D.............18,257,315 72,795 Gregory J. Mossinghoff................18,257,315 72,795 2. Ratification of the appointment of PricewaterhouseCoopers LLP as our independent auditors for the fiscal year ending December 31, 2001. For: Against: Abstain: 18,250,495 77,954 1,661 Item 5. Other Information ------------------ Risk Factors ------------ An investment in the shares of our common stock involves a substantial risk of loss. You should carefully read this entire report and should give particular attention to the following risk factors. You should recognize that other significant risks may arise in the future, which we cannot foresee at this time. Also, the risks that we now foresee might affect us to a greater or different degree than expected. There are a number of important factors that could cause our actual results to differ materially from those indicated by any forward-looking statements in this document. These factors include, without limitation, the risk factors listed below and other factors presented throughout this document and any other documents filed by us with the Securities and Exchange Commission. Financial figures are represented in thousands except share and per share amounts. 10 Inspire Pharmaceuticals (a development stage company) IF OUR PRODUCTS FAIL IN CLINICAL STUDIES, WE WILL BE UNABLE TO OBTAIN FDA APPROVAL AND WILL NOT BE ABLE TO SELL THOSE PRODUCTS. To achieve profitable operations, we must, alone or with others, successfully identify, develop, introduce and market proprietary products. Even if we identify potential products, we will have to conduct significant additional development activities and preclinical and clinical tests, and obtain regulatory approval before our products can be commercialized. Product candidates that may appear to be promising at early stages of development may not successfully reach the market for a number of reasons. We have not submitted any products for marketing approval by the United States Food and Drug Administration (FDA) or any other regulatory body. Generally, all of our product candidates are in research or preclinical development, with only five, INS365 Respiratory, INS365 Ophthalmic, INS316 Diagnostic, INS37217 Respiratory and INS37217 Ophthalmic currently in clinical development. We have ended clinical trials on INS365 Respiratory. We are in the process of redesigning the Phase II protocol and intend to initiate another Phase II trial by the end of the year. The results of preclinical and initial clinical testing of our products under development may not necessarily indicate the results that will be obtained from later or more extensive testing. Companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials. Our ongoing clinical studies might be delayed or halted for various reasons, including: . the drug is not effective, or physicians think that the drug is not effective; . patients experience severe side effects during treatment; . patients die during the clinical study because their disease is too advanced or because they experience medical problems that may or may not relate to the drug being studied; . patients do not enroll in the studies at the rate we expect or discontinue enrollment; . drug supplies are not sufficient to treat the patients in the studies; or . we decide to modify the drug during testing. BECAUSE OUR PRODUCT CANDIDATES UTILIZE A NEW MECHANISM OF ACTION, OBTAINING REGULATORY APPROVAL MAY BE DIFFICULT, EXPENSIVE AND PROLONGED, WHICH WOULD DELAY ANY MARKETING OF OUR PRODUCTS. We cannot apply for regulatory approval to market a product candidate until we successfully complete pivotal clinical trials for the product. To complete successful clinical trials, the products must meet the criteria for clinical approval, or endpoints, which we establish for the product in the clinical study. Generally, we will establish these endpoints in consultation with the regulatory authorities, following design guidelines on the efficacy, safety and tolerability measures required for approval of products. Because our existing product candidates utilize a new approach to the treatment of respiratory and eye diseases, we may have trouble establishing endpoints that the regulatory authorities agree sufficiently evaluate the effectiveness of each product candidate. For this and other reasons, we could encounter delays and increased expenses in our clinical trials if the regulatory authorities determine that the endpoints established for a clinical trial do not predict a clinical benefit, and the authorities will not approve the product for marketing without further clinical trials. The regulatory authorities could change their view on clinical trial design and establishment of appropriate standards for efficacy, safety and tolerability and require a change in study design, additional data or even further clinical trials before approval of a product candidate. After initial regulatory approval, regulatory authorities continue to review a marketed product and its manufacturer. They may require us to conduct long-term safety studies after approval. Discovery of previously 11 Inspire Pharmaceuticals (a development stage company) unknown problems through adverse event reporting may result in restrictions on the product, including withdrawal from the market. Additionally, we and our officers and directors could be subject to civil and criminal penalties. IF PHYSICIANS AND PATIENTS DO NOT ACCEPT OUR PRODUCT CANDIDATES, THEY MAY NOT BE COMMERCIALLY SUCCESSFUL. Even if regulatory authorities approve our product candidates, those products may not be commercially successful. Acceptance of and demand for our products will depend largely on the following: . acceptance by physicians and patients of our products as safe and effective therapies; . reimbursement of drug and treatment costs by third-party payors; . safety, effectiveness and pricing of alternative products; and . prevalence and severity of side effects associated with our products. In addition, to achieve broad market acceptance of our product candidates, in many cases we will need to develop, alone or with others, convenient methods for administering product candidates. Physicians have administered our current product candidates, INS365 Respiratory, INS316 Diagnostic and INS37217 Respiratory, for the treatment or diagnosis of respiratory disorders using a jet nebulizer, a device that generates and delivers a fine mist derived from a liquid, which is inhaled into the lungs, in their respective clinical studies. Although the use of a jet nebulizer is an effective and well accepted means for administering products for inhalation with respect to acute use and, to a lesser degree, chronic use, we believe more convenient methods of delivery and administration, such as a hand-held inhalation device, may be necessary in the case of INS365 Respiratory and INS37217 Respiratory, to more fully address chronic use. Our testing of prototype hand-held inhalation devices is at an early stage and we may not be able to develop or find a convenient hand-held device that works in patients with chronic bronchitis. Our current product candidate for the treatment of dry eye disease, INS365 Ophthalmic, is applied from a vial containing a single dose of medication. Patients may prefer to purchase the medication in a bottle containing a sufficient quantity of medication for multiple doses. We have not yet established a plan to develop a multi-dose formulation. Similar challenges exist in identifying and perfecting convenient methods of administration for many of our other product candidates. WE INTEND TO RELY ON THIRD PARTIES TO DEVELOP, MARKET, DISTRIBUTE AND SELL OUR PRODUCT CANDIDATES AND THOSE THIRD PARTIES MAY NOT PERFORM. We do not yet have the ability to independently market, distribute or sell our products and intend to rely on experienced third parties to perform, or assist us in the performance of, all of those functions. We may not identify acceptable partners or enter into favorable agreements with them. If third parties do not successfully carry out their contractual duties or meet expected deadlines, we will be unable to obtain required governmental marketing approvals and will be unable to sell our products. OUR DEPENDENCE ON COLLABORATIVE RELATIONSHIPS MAY LEAD TO DELAYS IN PRODUCT DEVELOPMENT AND DISPUTES OVER RIGHTS TO TECHNOLOGY. Our business strategy depends upon the formation of research collaborations, licensing and/or marketing arrangements. We currently have development collaborations with five collaborators, Genentech, Allergan, Kissei, Santen and Kirin. The termination of any collaboration may lead to delays in product development and disputes over technology rights and may reduce our ability to enter into collaborations with other potential partners. Kirin has the right to terminate our license agreement by giving us 180 days prior notice. Genentech has given us notice, as of June 15, 2001, that they will terminate the agreement on November 12, 2001. If we do not maintain the Allergan, Kissei, Santen or Kirin collaborations or establish additional research and development collaborations or licensing arrangements it will be difficult to develop and commercialize therapeutic or diagnostic products using our technology. Any future collaborations or licensing arrangements may not be on terms favorable to us. Our current or 12 Inspire Pharmaceuticals (a development stage company) any future collaborations or licensing arrangements ultimately may not be successful. Under our current strategy, and for the foreseeable future, we do not expect to develop or market therapeutic or diagnostic products on our own. As a result, we will continue to depend on collaborators and contractors for the preclinical study and clinical development of therapeutic products and for regulatory approval, manufacturing and marketing of therapeutic and diagnostic products which result from our technology. The agreements with collaborators typically will allow them some discretion in electing whether to pursue such activities. If any collaborator were to breach or terminate its agreement with us or otherwise fail to conduct collaborative activities in a timely and successful manner, the preclinical or clinical development or commercialization of product candidates or research programs would be delayed or terminated. Any delay or termination in clinical development or commercialization would delay or eliminate potential product revenues relating to our research programs. We intend to rely on Allergan, Kissei, Santen, Kirin and any future collaborators for significant funding in support of our development efforts. If Allergan, Kissei, Santen or Kirin reduces or terminates its funding, we will need to devote additional internal resources to product development, scale back or terminate certain research and development programs or seek alternative collaborators. Disputes may arise in the future over the ownership of rights to any technology developed with collaborators. These and other possible disagreements between us and our collaborators could lead to delays in the collaborative development or commercialization of therapeutic or diagnostic products. Such disagreement could also result in litigation or require arbitration to resolve. IF WE ARE UNABLE TO CONTRACT WITH THIRD PARTIES FOR SYNTHESIS AND MANUFACTURING OF PRODUCT CANDIDATES FOR PRECLINICAL TESTING AND CLINICAL TRIALS AND FOR LARGE SCALE MANUFACTURING OF ANY OF OUR DRUG CANDIDATES, WE MAY BE UNABLE TO DEVELOP OR COMMERCIALIZE PRODUCTS. We have no experience or capabilities in large scale commercial manufacturing of any of our product candidates or any experience or capabilities in the manufacturing of pharmaceutical products generally. We do not generally expect to engage directly in the manufacturing of products, but instead intend to contract with others for these services. We have relied upon supply agreements with third parties for the manufacture and supply or our product candidates for purposes of preclinical testing and clinical trials. Although we have previously received preclinical and clinical supplies of our product candidates from several suppliers, we presently depend upon Yamasa Corporation as the sole supplier of our supply of product candidates. If we are unable to retain third party manufacturing on commercially acceptable terms, we may not be able to commercialize products as planned. Our manufacturing strategy presents the following risks: . the manufacturing processes for most of our product candidates have not been tested in quantities needed for commercial sales; . delays in scale-up to commercial quantities and any change to a manufacturer other than Yamasa Corporation could delay clinical studies, regulatory submissions and commercialization of our products; . manufacturers of our products are subject to the FDA's good manufacturing practices regulations and similar foreign standards, and we do not have control over compliance with these regulations by third-party manufacturers; . if we need to change to manufacturers other than Yamasa Corporation, FDA and comparable foreign regulators would require new testing and compliance inspections and the new manufacturers would have to be educated in the processes necessary for the production of our product candidates; . without satisfactory long-term agreements with manufacturers, we will not be able to develop or commercialize our product candidates as planned or at all; and . we may not have intellectual property rights, or may have to share intellectual property rights, to any improvements in the manufacturing processes or new manufacturing processes for our product candidates. 13 Inspire Pharmaceuticals (a development stage company) IF WE ARE UNABLE TO SUPPLY KISSEI AND SANTEN WITH SUFFICIENT QUANTITIES OF MATERIALS WE MAY BREACH OUR AGREEMENTS WITH SUCH PARTIES. We are currently a party to a development, license and supply agreement with each of Kissei and Santen, under which we granted each a license to develop and market INS365 Respiratory and INS365 Ophthalmic, respectively. Generally, the agreements with Kissei and Santen will require us to supply such partners with either sufficient quantities of materials or finished products, as applicable, for the purpose of commercial distribution. We will need to establish, alone or with third parties, a manufacturing process in relation to each product. Our dependence upon third parties for the manufacture of products may adversely affect our ability to develop and deliver products on a timely and competitive basis. Our inability to successfully manufacture commercial products could result in our breach of the terms of our agreements with Kissei and Santen. Any of these factors could delay our preclinical studies, clinical trials or commercialization of our product candidates, entail higher costs and result in our inability to effectively sell our product candidates. IF OUR PATENT PROTECTION IS INADEQUATE, THE DEVELOPMENT AND ANY POSSIBLE SALES OF OUR PRODUCT CANDIDATES COULD SUFFER OR COMPETITORS COULD FORCE OUR PRODUCTS COMPLETELY OUT OF THE MARKET. Our business and competitive position depends on our ability to continue to develop and protect our products and processes, proprietary methods and technology. Except for one patent covering new chemical compounds, most of our patents are use patents containing claims covering methods of treating disorders and diseases by administering therapeutic chemical compounds. Use patents, while providing adequate protection for commercial efforts in the United States, may afford a lesser degree of protection in European and possibly other countries due to their particular patent laws. Besides our use patents, we have patents covering pharmaceutical formulations of these chemical compounds. We also have patent applications covering processes for large-scale manufacturing of these chemical compounds. Many of the chemical compounds included in the claims of our use patents, formulation patents and process applications were known in the scientific community prior to our formation. None of our patents cover these previously known chemical compounds themselves, which are in the public domain. As a result, competitors may be able to commercialize products that use the same chemical compounds used by us for the treatment of disorders and diseases not covered by our use patents. In such a case, physicians, pharmacies and wholesalers could possibly substitute these products for our products. Such substitution would reduce any revenues received from the sale of our products. We believe that there may be significant litigation in the pharmaceutical and biotechnology industry regarding patent and other intellectual property rights. A patent does not provide the patent holder with freedom to operate in a way that infringes the patent rights of others. While we are not aware of any patent that we are infringing, nor have we been accused of infringement by any other party, other companies currently have or may acquire patent rights which we might be accused of infringing. If we must defend a patent suit, or if we choose to initiate a suit to have a third party patent declared invalid, we may need to make considerable expenditures of money and management time in litigation. A judgment against us in a patent infringement action could cause us to pay monetary damages, require us to obtain licenses, or prevent us from manufacturing or marketing the affected products. In addition, we may need to initiate litigation to enforce our proprietary rights against others, or we may have to participate in interference proceedings in the United States Patent and Trademark Office (USTPO) to determine the priority of invention of any of our technologies. In general, the development of patent rights in pharmaceutical, biopharmaceutical and biotechnology products to a degree sufficient to support commercial efforts in these areas is typically uncertain and involves complex legal and factual questions. For instance, while the USPTO has recently issued guidelines addressing the requirements for demonstrating utility for biotechnology inventions, USPTO examiners may not follow these guidelines in examining patent applications. Such applications may have to be appealed to the USPTO's Appeals Board for a final 14 Inspire Pharmaceuticals (a development stage company) determination of patentability. IF WE FAIL TO REACH MILESTONE OR OTHER OBLIGATIONS, THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL AND OTHER LICENSORS MAY TERMINATE OUR AGREEMENTS WITH THEM. Our current technologies, discoveries and our original patents are based in part on two exclusive licenses and one non-exclusive license from The University of North Carolina at Chapel Hill (UNC). Generally, if we fail to meet milestones under the respective UNC licenses, UNC may terminate the applicable license. In addition, it may be necessary in the future for us to obtain additional licenses from UNC or other third parties to develop future commercial opportunities or to avoid infringement of third party patents. We do not know the terms on which such licenses may be available, if at all. Failure to license or otherwise acquire necessary technologies may reduce or eliminate our ability to develop product candidates. Even if we acquire all necessary licenses, if we breach any license provision, either intentionally or unintentionally, we may lose our right to continued use of the licensed technology. BECAUSE WE RELY UPON TRADE SECRETS AND AGREEMENTS TO PROTECT SOME OF OUR INTELLECTUAL PROPERTY, THERE IS A RISK THAT UNAUTHORIZED PARTIES MAY OBTAIN AND USE INFORMATION THAT WE REGARD AS PROPRIETARY. We rely upon the laws of trade secrets and non-disclosure agreements and other contractual arrangements to protect our proprietary compounds, methods, processes, formulations and other information for which we are not seeking patent protection. We have taken security measures to protect our proprietary technologies, processes, information systems and data, and we continue to explore ways to further enhance security. However, despite these efforts to protect our proprietary rights, unauthorized parties may obtain and use information that we regard as proprietary. Employees, academic collaborators and consultants with whom we have entered confidentiality and/or non-disclosure agreements, may improperly disclose our proprietary information. In addition, competitors may, through a variety of proper means, independently develop substantially the equivalent of our proprietary information and technologies, gain access to our trade secrets, or properly design around any of our patented technologies. BECAUSE ALL OF OUR PRODUCT CANDIDATES USE RELATED MECHANISMS OF ACTION, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR PRODUCTS IF THE MECHANISM OF ACTION IS NOT EFFECTIVE. Any products resulting from our product development efforts are not expected to be available for sale for a number of years, if at all. Five of our product candidates, INS365 Respiratory, INS365 Ophthalmic, INS316 Diagnostic, INS37217 Respiratory and INS37217 Ophthalmic, operate in a similar manner. If the clinical results of one of the compounds is not favorable, the results of the other compound may not be favorable. Moreover, we have designed all of our product candidates to use related mechanisms of action. If these mechanisms of action are not effective, we may not be able to commercialize any of our product candidates. Even if all of our product candidates prove effective, we may choose not to commercialize all of them. IF WE CONTINUE TO INCUR OPERATING LOSSES FOR A PERIOD LONGER THAN ANTICIPATED, OR IN AN AMOUNT GREATER THAN ANTICIPATED, WE MAY BE UNABLE TO CONTINUE OUR OPERATIONS. We have experienced significant losses since inception. We incurred net losses of $11,145 for the six months ended June 30, 2001, $14,584 for the year ended December 31, 2000, and $8,996 for the year ended December 31, 1999. As of June 30, 2000 our accumulated deficit was approximately $59,016. We expect to incur significant additional operating losses over the next several years and expect cumulative losses to increase substantially in the near-term due to expanded research and development efforts, preclinical studies and clinical trials. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Such fluctuations will be 15 Inspire Pharmaceuticals (a development stage company) affected by the following: . timing of regulatory approvals and commercial sales of our product candidates; . the level of patient demand for our products; . timing of payments to and from licensors and corporate partners; and . timing of investments in new technologies. No regulatory authorities have approved any of our product candidates for marketing, and therefore, we are not generating any revenues from product sales. To achieve and sustain profitable operations, we must, alone or with others, develop successfully, obtain regulatory approval for, manufacture, introduce, market and sell our products. The time frame necessary to achieve market success is long and uncertain. We do not expect to generate product revenues for at least the next few years. We may not generate sufficient product revenues to become profitable or to sustain profitability. If the time required to achieve profitability is longer than we anticipate, we may not be able to continue our business. IF WE ARE NOT ABLE TO OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR EXPANDING CAPITAL REQUIREMENTS, WE MAY BE FORCED TO REDUCE OR ELIMINATE RESEARCH PROGRAMS AND PRODUCT DEVELOPMENT. We have used substantial amounts of cash to fund our research and development activities. In the six months ended June 30, 2001 our operating expenses exceeded $16,000. In the fiscal year ended December 31, 2000 our operating expenses exceeded $20,000. We expect our capital and operating expenditures to increase over the next several years as we expand our research and development activities, address possible difficulties with clinical studies and prepare for commercial sales. Many factors will influence our future capital needs. These factors include: . the progress of our research programs; . the number and breadth of these programs; . our ability to attract collaborators for our products; . achievement of milestones under our existing collaborations with Allergan, Kissei, Santen and Kirin; . our ability to establish and maintain additional collaborations; . progress by our collaborators: Allergan, Kissei, Santen and Kirin; . the level of activities relating to commercialization rights we retain in our collaborations; . competing technological and market developments; . the costs involved in enforcing patent claims and other intellectual property rights; and . the costs and timing of regulatory approvals. We anticipate that our operating expenses will exceed $25,000 for the fiscal year ending December 31, 2001. We also expect to purchase capital equipment at a cost of approximately $2,000 in the same period. Following December 31, 2001, we expect our operating expenses to increase as we continue to develop our product candidates. We intend to rely on Allergan, Kissei, Santen, Kirin, and future collaborators and the proceeds of our initial public offering for significant funding in support of our development efforts. In addition, we may seek additional funding through public or private equity offerings and debt financings. Additional financing may not be available when needed. If available, such financing may not be on terms favorable to us or our stockholders. Stockholders' ownership will be diluted if we raise additional capital by issuing equity securities. If we raise funds through collaborations and licensing arrangements, we may have to give up rights to our technologies or product candidates which are involved 16 Inspire Pharmaceuticals (a development stage company) in these future collaborations and arrangements or grant licenses on unfavorable terms. If adequate funds are not available, we would have to scale back or terminate research programs and product development. WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE WITH BIOTECHNOLOGY COMPANIES AND ESTABLISHED PHARMACEUTICAL COMPANIES. The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Our competitors in the United States and elsewhere are numerous and include, among others, major multinational pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions. These competitors include Abbott, Alcon, Astra Zeneca, Boehringer Ingelheim, Chiron, Genentech, GlaxoSmithKline, Novartis and Pfizer. Many of these competitors employ greater financial and other resources, including larger research and development staffs and more effective marketing and manufacturing organizations, than we or our collaborative partners. Acquisitions of competing companies and potential competitors by large pharmaceutical companies or others could enhance financial, marketing and other resources available to such competitors. As a result of academic and government institutions becoming increasingly aware of the commercial value of their research findings, such institutions are more likely to enter into exclusive licensing agreements with commercial enterprises, including our competitors, to market commercial products. Our competitors may develop technologies and drugs that are safer, more effective or less costly than any we are developing or which would render our technology and future drugs obsolete and non-competitive. The products of our competitors marketed to treat chronic bronchitis include anti-inflammatory products, such as Azmacort(R) and Beclovent(R), bronchodilators such as Atrovent(R) and Proventil(R), combination products such as Advair(TM) and antibiotics such as Biaxin(R) and Zithromax(R). Pulmozyme(R), a Genentech product, and TOBI(R) from Chiron are examples of products used to treat cystic fibrosis. The main current treatments for dry eye disease involve artificial tear replacement drops. In addition, alternative approaches to treating diseases which we have targeted, such as gene therapy, may make our product candidates obsolete. Our competitors may also be more successful in production and marketing. In addition, some of our competitors have greater experience than we do in conducting preclinical and clinical trials and obtaining FDA and other regulatory approvals. Accordingly, our competitors may succeed in obtaining FDA or other regulatory approvals for drug candidates more rapidly than we do. Companies that complete clinical trials, obtain required regulatory approvals and commence commercial sale of their drugs before we do may achieve a significant competitive advantage, including patent and FDA marketing exclusivity rights that would delay our ability to market products. Drugs resulting from our research and development efforts, or from our joint efforts with our collaborative partners may not compete successfully with competitors' existing products or products under development. FAILURE TO HIRE AND RETAIN KEY PERSONNEL MAY HINDER OUR PRODUCT DEVELOPMENT PROGRAMS AND OUR BUSINESS EFFORTS. We depend on the principal members of management and scientific staff, including Christy L. Shaffer, Ph.D., our President, Chief Executive Officer and director; and Gregory J. Mossinghoff, our Senior Vice President, Chief Business Officer and director. If either of these people leave us, we may have difficulty conducting our operations. We have not entered into agreements with any of the above principal members of our management and scientific staff that bind any of them to a specific period of employment. Our future success also will depend in part on our ability to attract, hire and retain additional personnel skilled or experienced in the pharmaceutical industry. There is intense competition for such qualified personnel. We may not be able to continue to attract and retain such personnel. OUR OPERATIONS INVOLVE A RISK OF INJURY FROM HAZARDOUS MATERIALS, WHICH COULD BE VERY EXPENSIVE TO US. Our research and development activities involve the controlled use of hazardous materials and chemicals. We cannot completely eliminate the risk of accidental contamination or injury from these materials. If such an accident were to occur, we could be held liable for any damages that result and any such liability could exceed our resources. In addition, we are subject to laws and regulations governing the use, storage, handling and disposal of these 17 Inspire Pharmaceuticals (a development stage company) materials and waste products. The costs of compliance with these laws and regulations could be substantial. USE OF OUR PRODUCTS MAY RESULT IN PRODUCT LIABILITY CLAIMS FOR WHICH WE MAY NOT HAVE ADEQUATE INSURANCE COVERAGE. Clinical trials or manufacturing, marketing and sale of our potential products by our collaborative partners may expose us to liability claims from the use of those products. Although we carry clinical trial liability insurance, we currently do not carry product liability insurance. We or our collaborators may not be able to obtain or maintain sufficient or even any insurance. If we can, it may not be at a reasonable cost. If we cannot or are unable otherwise to protect against potential product liability claims, we may find it difficult or impossible to commercialize pharmaceutical products we or our collaborators develop. If claims or losses exceed our liability insurance coverage, we may go out of business. IF THIRD PARTY PAYORS WILL NOT PROVIDE COVERAGE OR REIMBURSE PATIENTS FOR ANY PRODUCTS WE DEVELOP, OUR ABILITY TO DERIVE REVENUES WILL SUFFER. Our success will depend in part on the extent to which government and health administration authorities, private health insurers and other third party payors will pay for our products. Reimbursement for newly approved health care products is uncertain. In the United States and elsewhere, third party payors, such as Medicare, are increasingly challenging the prices charged for medical products and services. Government and other third party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new therapeutic products. In the United States, a number of legislative and regulatory proposals aimed at changing the health care system have been proposed in recent years. In addition, an increasing emphasis on managed care in the United States has and will continue to increase pressure on pharmaceutical pricing. While we cannot predict whether legislative or regulatory proposals will be adopted or what effect those proposals or managed care efforts, including those relating to Medicare payments, may have on our business, the announcement and/or adoption of such proposals or efforts could increase our costs and reduce or eliminate profit margins. Third party insurance coverage may not be available to patients for any products we discover or develop. If government and other third party payors do not provide adequate coverage and reimbursement levels for our products, the market acceptance of these products may be reduced. In various foreign markets, pricing or profitability of medical products is subject to government control. BECAUSE OUR MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF THE PROCEEDS FROM OUR INITIAL PUBLIC OFFERING, THE PROCEEDS MAY BE USED IN WAYS STOCKHOLDERS DO NOT DEEM TO BE ADVISABLE. Our management has broad discretion as to the allocation of the proceeds for our initial public offering, including the timing and conditions of the use of the proceeds. Our management may allocate the proceeds to uses that stockholders do not deem advisable. If management spends the funds unwisely, we may not have sufficient working capital to become profitable. OUR EXISTING DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS HOLD A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AND MAY BE ABLE TO PREVENT OTHER STOCKHOLDERS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS. Our directors, executive officers and current 5% stockholders and their affiliates beneficially own approximately 43% of the common stock as of June 30, 2001. These stockholders, if they act together, may be able to direct the outcome of matters requiring approval of the stockholders, including the election of our directors and other corporate actions such as our merger with or into another company, a sale of substantially all of our assets and amendments to our amended and restated certificate of incorporation. The decisions of these stockholders may conflict with our interests or those of our other stockholders. ANTI-TAKEOVER PROVISIONS IN OUR AMENDED AND RESTATED CERTIFICATE OF 18 Inspire Pharmaceuticals (a development stage company) INCORPORATION AND BYLAWS, AND OUR RIGHT TO ISSUE PREFERRED STOCK, MAY DISCOURAGE A THIRD PARTY FROM MAKING A TAKE-OVER OFFER THAT COULD BE BENEFICIAL TO US AND OUR STOCKHOLDERS. Our amended and restated certificate of incorporation and bylaws contain provisions which could delay or prevent a third party from acquiring shares of our common stock or replacing members of our board of directors. Our amended and restated certificate of incorporation allows our board of directors to issue shares of preferred stock. The Board can determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders. As a result, our board of directors could make it difficult for a third party to acquire a majority of our outstanding voting stock . Our amended and restated certificate of incorporation provides that the members of the board will be divided into three classes. Each year the terms of approximately one-third of the directors will expire. Our bylaws will not permit our stockholders to call a special meeting of stockholders. Under the bylaws, only our President, Chairman of the Board or a majority of the board of directors will be able to call special meetings. The bylaws also require that stockholders give advance notice to our Secretary of any nominations for director or other business to be brought by stockholders at any stockholders' meeting. These provisions may delay or prevent changes of control or management. Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. Under this law, if anyone becomes an "interested stockholder" in the company, we may not enter a "business combination" with that person for three years without special approval. These provisions could discourage a third party from making a take-over offer and could delay or prevent a change of control. OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND YOUR INVESTMENT IN OUR STOCK MAY DECLINE IN VALUE. The market price of our common stock is likely to be highly volatile. Factors that could cause volatility and could result in declines in the market price of our common stock include among others: . announcements made by us concerning results of our clinical trials with INS365 Respiratory, INS365 Ophthalmic, INS316 Diagnostic, INS37217 Respiratory, INS37217 Ophthalmic and any other product candidates; . changes in government regulations; . regulatory actions as a result of their therapeutic approach; . changes in concerns of our collaborators, in particular our collaborations with Allergan, Kissei, Santen and Kirin; . developments concerning proprietary rights including patents by us or our competitors; . variations in our operating results; and . litigation. Extreme price and volume fluctuations occur in the stock market from time to time and that can particularly affect the prices of biotechnology companies. These extreme fluctuations are often unrelated to the actual performance of the affected companies. These broad market fluctuations could result in significant declines in the market price of our common stock. FUTURE SALES BY OUR CURRENT STOCKHOLDERS MAY CAUSE OUR STOCK PRICE TO DECLINE. 19 Inspire Pharmaceuticals (a development stage company) Sales of our common stock by our current stockholders in the public market could cause the market price of our stock to fall. Sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable, or at all. As of June 30, 2001, there were 25,729,526 shares of common stock outstanding. Of these outstanding shares of common stock, all of the 6,325,000 shares sold in our initial public offering are freely tradable, without restriction under the Securities Act of 1933, as amended, unless purchased by our "affiliates." The remaining shares of common stock may be resold in the public market only if registered or if there is an exemption from registration, such as Rule 144 under the Securities Act. Certain holders of common stock and options and warrants to purchase shares of common stock are entitled to registration rights. Upon registration, these shares may be freely sold in the public market. On February 28, 2001, we filed a registration statement on Form S-8, which registered shares of common stock under our Amended and Restated 1995 Stock Plan, as amended. The registration statement registered 3,004,220 shares of our common stock that were issued or sold or may be issued and sold under such plan. We may issue additional shares: . to employees, directors and consultants; . in connection with corporate alliances; . in connection with acquisitions; and . to raise capital. As a result of these factors, a substantial number of shares of our common stock could be sold in the public market at any time. 20 Inspire Pharmaceuticals (a development stage company) Item 6. Exhibits and Reports on Form 8-K -------------------------------- a) Exhibits: Exhibit No. Description of Exhibit - ----------- ---------------------- 3.1 Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333- 31174) which became effective on August 2, 2000) 3.2 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S- 1 (Registration No. 333-31174) which became effective on August 2, 2000) 10.1 Sublease between Inspire Pharmaceuticals, Inc. and Circuit City Stores, Inc., dated as of May 7, 2001 10.2 Employee Confidentiality, Invention Assignment and Non-Compete Agreement between Inspire Pharmaceuticals, Inc. and Joseph Schachle dated April 3, 2001 10.3* License, Development and Marketing Agreement between Inspire Pharmaceuticals, Inc. and Allergan, Inc., dated as of June 22, 2001 (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 29, 2001) 99.1 Inspire Pharmaceuticals, Inc. and Allergan, Inc. press release dated June 27, 2001 (Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed on June 29, 2001) - ------------------ * A request for confidential treatment has been submitted with respect to this exhibit. The copy filed as an exhibit omits the information subject to the request for confidential treatment. b)Reports on Form 8-K On April 24, 2001, Inspire filed a Current Report on Form 8-K, dated April 24, 2001, announcing an update on the Phase II trial of INS365 Respiratory for Chronic Bronchitis. On May 3, 2001, Inspire filed a Current Report on Form 8-K, dated May 3, 2001, regarding the presentation of positive Phase II data for INS365 Ophthalmic for Dry Eye and the launch of the first Phase I/II clinical trial for INS37217 Ophthalmic for Retinal Detachment. On June 20, 2001, Inspire filed a Current Report on Form 8-K, dated June 20, 2001, announcing Genentech's return to Inspire of rights to respiratory programs in chronic bronchitis, cystic fibrosis and sinusitis. On June 29, 2001, Inspire filed a Current Report on Form 8-K, dated June 22, 2001, announcing a License, Development and Marketing Agreement between Inspire and Allergan, Inc. 21 Inspire Pharmaceuticals (a development stage company) SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Inspire Pharmaceuticals, Inc. Date: August 8, 2001 By: /s/ Christy L. Shaffer ---------------------- Christy L. Shaffer President and Chief Executive Officer Date: August 8, 2001 By: /s/ Gregory J. Mossinghoff -------------------------- Gregory J. Mossinghoff Senior Vice President, Chief Business Officer, Secretary and Treasurer (principal financial officer) 22 Inspire Pharmaceuticals (a development stage company) EXHIBIT INDEX Exhibit No. Description of Exhibit - --------- ---------------------- 3.1 Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-31174) which became effective on August 2, 2000) 3.2 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-31174) which became effective on August 2, 2000) 10.1 Sublease between Inspire Pharmaceuticals, Inc. and Circuit City Stores, Inc., dated as of May 7, 2001 10.2 Employee Confidentiality, Invention Assignment and Non-Compete Agreement between Inspire Pharmaceuticals, Inc. and Joseph Schachle dated April 3, 2001 10.3* License, Development and Marketing Agreement between Inspire Pharmaceuticals, Inc. and Allergan, Inc., dated as of June 22, 2001 (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 29, 2001) 99.1 Inspire Pharmaceuticals, Inc. and Allergan, Inc. press release dated June 27, 2001 (Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed on June 29, 2001) - -------------- * A request for confidential treatment has been submitted with respect to this exhibit. The copy filed as an exhibit omits the information subject to the request for confidential treatment. 23