1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
Commission file number 0-22332
INSITE VISION INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-3015807
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
965 ATLANTIC AVENUE
ALAMEDA, CA 94501
(Address of Principal Executive Offices, including Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 865-8800
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
----- -----
The number of shares of registrant's common stock, $.01 par value,
outstanding as of June 30, 1996: 12,689,792.
2
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1996
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
June 30, 1996 and December 31, 1995................................... 3
Condensed Consolidated Statements of Operations
For the three and six months ended June 30, 1996 and 1995............. 4
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 1996 and 1995....................... 5
Notes to Condensed Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Shareholders....................... 16
Item 6. Exhibits and Reports on Form 8-K
Exhibits.............................................................. 16
Reports on Form 8-K................................................... 17
2 of 17
3
ITEM 1. FINANCIAL STATEMENTS
INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(in thousands, except share and per share amounts) 1996 1995
- - - -------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 12,726 $ 871
Short-term investments 2,996
Prepaid expenses and other current assets 113 151
-------- --------
Total current assets 12,839 4,018
Property and equipment, at cost:
Laboratory and other equipment 3,888 4,151
Leasehold improvements 1,671 2,931
Furniture and fixtures 355 355
-------- --------
5,914 7,437
Accumulated depreciation 4,015 3,812
-------- --------
1,899 3,625
-------- --------
Total assets $ 14,738 $ 7,643
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 152 $ 452
Accrued liabilities 200 145
Accrued compensation and related expense 279 744
Current portion of notes payable 243 301
-------- --------
Total current liabilities 874 1,642
Accrued rent 62
Notes payable 4 92
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued and outstanding
Common stock, $.01 par value, 30,000,000 shares authorized;
12,689,792 issued and outstanding at June 30, 1996;
9,252,136 issued and outstanding at December 31, 1995 127 93
Paid-in capital 76,081 62,651
Other (3)
Accumulated deficit (62,348) (56,894)
-------- --------
Stockholders' equity 13,860 5,847
-------- --------
Total liabilities and stockholders' equity $ 14,738 $ 7,643
======== ========
See accompanying notes to condensed consolidated financial statements.
3 of 17
4
INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share amounts) 1996 1995 1996 1995
- - - ------------------------------------------------------------------------------------------------------
Royalty revenues $ 12 $ 26 $ 27 $ 37
Operating expenses:
Research and development 1,436 2,139 2,767 4,614
Loss on vacated facilities 1,412 1,412
General and administrative 812 1,172 1,485 2,382
-------- -------- -------- --------
Total 3,660 3,311 5,664 6,996
-------- -------- -------- --------
Loss from operations (3,648) (3,285) (5,637) (6,959)
Interest and other income 143 140 210 321
Interest expense (11) (33) (27) (108)
-------- -------- -------- --------
Net loss $ (3,516) $ (3,178) $ (5,454) $ (6,746)
======== ======== ======== ========
Net loss per share $ (0.29) $ (0.35) $ (0.48) $ (0.74)
Shares used to calculate net loss per share 12,260 9,140 11,376 9,127
No dividends were declared or paid during the periods.
See accompanying notes to condensed consolidated financial statements.
4 of 17
5
INSITE VISION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
(in thousands) 1996 1995
- - - ---------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (5,454) $ (6,746)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on vacated facilities 1,412
Depreciation and amortization 314 431
Deferred compensation 126
Changes in:
Prepaid expenses and other current assets 38 396
Accounts payable and accrued liabilities (710) (511)
-------- --------
Net cash used in operating activities (4,400) (6,304)
INVESTING ACTIVITIES
Maturity of short-term cash investments 3,000 1,450
Purchases of property and equipment (63) (1,232)
-------- --------
Net cash provided from investing activities 2,937 218
FINANCING ACTIVITIES
Principal payments of notes payable (146) (237)
Issuance of common stock, net 13,464 88
-------- --------
Net cash provided (used) by financing activities 13,318 (149)
Net increase (decrease) in cash and equivalents 11,855 (6,235)
Cash and equivalents, beginning of period 871 7,314
-------- --------
Cash and equivalents, end of period $ 12,726 $ 1,079
======== ========
Supplemental disclosures:
Interest paid in cash $ 29 $ 111
======== ========
See accompanying notes to condensed consolidated financial statements.
5 of 17
6
INSITE VISION INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accrual adjustments, considered
necessary for a fair presentation have been included. Operating results for the
three month and six month periods ended June 30, 1996, are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996.
These financial statements and notes should be read in conjunction
with the Company's audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
NOTE 2 - PROPERTY AND EQUIPMENT
In July 1996, the Company and Bausch & Lomb Incorporated (B&L)
announced a strategic alliance covering the manufacture of potential InSite
products, the worldwide marketing of InSite's PilaSite(R) product candidate for
glaucoma, and a joint development program utilizing InSite's proprietary drug
delivery technology. In connection with the alliance, B&L will make a $2.0
million equity investment in the Company, provide up to $2.0 million in new
product development funding, and pay royalties to InSite on future PilaSite(R)
product sales.
As a result of the B&L alliance, the Company ended its relationship
with its previous contract manufacturer and wrote-off its share of equipment and
leasehold improvements installed at the previous supplier's plant. This resulted
in a non-cash charge to the Company's results of operations of $1.4 million
which is reported as a separate line item in the accompanying financial
statements. InSite's share of leasehold improvements at B&L facilities is
expected to be about $500,000.
NOTE 3 - STOCKHOLDERS' EQUITY
In January 1996 the Company received net proceeds of approximately
$4.8 million from a private placement of 1,469,232 shares of its common stock
and 367,308 warrants. Each warrant entitles its holder to purchase one share of
the Company's common stock for $3.25 until January 2001. In April 1996, the
Company received net proceeds of approximately $7.9 million from a public
offering of 1,750,000 shares of its common stock. The Company also received
$654,000 from the exercise of options for 185,041 shares of its common stock in
January 1996.
6 of 17
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto included in this Quarterly Report and in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
Except for the historical information contained herein, the
discussion in this Quarterly Report contains certain forward-looking statements
that involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
Quarterly Report should be read as being applicable to all related
forward-looking statements wherever they appear in this Quarterly Report. The
Company's actual results could differ materially from those discussed here.
OVERVIEW
InSite Vision is developing ophthalmic pharmaceutical products based
on its proprietary DuraSite(R) eyedrop-based drug delivery technology, which is
designed to improve the safety, efficacy and medical value of existing
ophthalmic products and potentially permit the novel ophthalmic application of
drugs that are currently used or being developed for non-ophthalmic indications.
The DuraSite delivery system can be customized to deliver a wide variety of
potential drug candidates having a broad range of molecular weights and other
properties.
To date, InSite Vision has not received any revenues from the sale
of products, although it has received an insignificant small amount of royalties
from the sale of products using the Company's licensed technology. The Company
has been unprofitable since its inception and expects to continue to incur
substantial losses for at least the next several years, due to continuing
research and development efforts, including preclinical studies, clinical trials
and manufacturing of its product candidates. The Company has financed its
research and development activities and operations primarily through private and
public placement of its equity securities and, to a lesser extent, from
collaborative agreements.
In November 1995, InSite restructured its operations and reduced its
staff by approximately 50% to enable it to conserve its financial resources.
Self-funded product development was reduced substantially and the Company
discontinued plans to establish its own sales and marketing organization. The
Company is attempting, through corporate partnering and other potential business
opportunities, to recognize the value of its late-stage product candidates and
its drug delivery technology.
In May 1996, InSite entered into an agreement with CIBA Vision
Ophthalmics (CIBA Vision) whereby InSite regained full U.S. marketing rights to
InSite's PilaSite(R), product candidate for glaucoma. In exchange, CIBA Vision
received royalty-bearing, co-exclusive U.S. marketing rights to InSite's
ToPreSiteTM product candidate for ocular inflammation/infection. CIBA Vision
assumed all subsequent product development, clinical and regulatory
responsibility for ToPreSiteTM. In addition, CIBA Vision received
royalty-bearing, co-exclusive U.S. marketing rights to InSite Vision's ISV-205
product candidate for certain non-glaucoma-related indications.
During July 1996, the Company entered into agreements with Bausch &
Lomb Incorporated (B&L) which provide for:
B&L to manufacture InSite product candidates at B&L's facility in
Tampa, Florida using equipment owned by InSite, and for B&L and
InSite to share the cost of certain leasehold improvements in
connection with the installation and operation of the equipment;
7 of 17
8
B&L to receive, for a fee of $500,000, an exclusive worldwide
royalty-bearing license to manufacture and market PilaSite(R);
A collaboration between the Company and B&L to develop and sell a
new DuraSite(R) based eyedrop formulation; and
A $2 million equity investment by B&L in the Company.
As a result of these agreements, the Company has elected to vacate
its co-tenancy of a clean room at another supplier's plant and in
June 1996 wrote-off the amounts it had previously capitalized
related to that facility. This write-off resulted in a non-cash
charge to the Company's results of operations of $1.4 million which
is reported as a separate line item in the accompanying financial
statements.
As of June 30, 1996, the Company's accumulated deficit was
approximately $62.3 million. There can be no assurance that InSite Vision will
achieve either significant revenues from product sales or profitable operations.
RESULTS OF OPERATIONS
The Company earned royalty income of $12,000 and $26,000 for the
quarters ended June 30, 1996 and 1995, respectively, from sales of AquaSite(R)
by CIBA Vision. To date, the Company has not relied on royalty revenues for
funding its activities, nor has it received revenues from the sale of products.
The Company does not expect to receive significant product revenue or royalties
for several years, if at all.
Research and development expenses declined 35% in the second quarter
of 1996 to $1.4 million from $2.1 million in the second quarter of 1995 with a
40% decline to $2.8 million from $4.6 million during the six months ended June
30, 1996 and 1995, respectively. The decreases are primarily due to lower
expenditures for human clinical studies of the Company's product candidates. As
part of the restructuring described above, the Company has deferred significant
additional expenditures by delaying the filing of new drug applications with the
U.S. Food and Drug Administration for its BetaSite(R) and PilaSite(R) product
candidates to treat glaucoma. As a result, it is presently anticipated that
research and development expenses will be lower in 1996 than in 1995.
The Company has re-prioritized its earlier stage development
activities, placing emphasis on the ongoing Phase II study of its product
ISV-120 for prevention of pterygium recurrence and on the initiation of clinical
studies using ISV-205 for the prevention of steroid-induced glaucoma. Later
stage product development is expected to be conducted through corporate
partnering arrangements, if available and if with acceptable terms.
General and administrative expenses declined 31% during the quarter
ended June 30, 1996 to $812,000 from $1.2 million during the second quarter of
1995, with a 38% decline to $1.5 million from $2.4 million during the six months
ended June 30, 1996 and 1995, respectively. The Company did not replace the
general and administrative employees who voluntarily left the Company during
1995 and, in November 1995, announced that it would not establish its own sales
and marketing organization and that it had made additional staff reductions in
its administration and manufacturing areas. As a result, general and
administrative expenses are expected to be lower in 1996 than in 1995.
8 of 17
9
Interest and other income were $143,000 and $140,000 for the
quarters ended June 30, 1996 and 1995, respectively. Interest earned in the
future will be dependent on the Company's funding cycles and prevailing interest
rates. Interest expense relates primarily to notes payable.
The Company incurred net losses of $3.5 million and $3.2 million for
the three month periods ended June 30, 1996 and 1995, respectively, resulting in
net losses of $5.5 million and $6.7 million for the first six months of 1996 and
1995, respectively. The Company expects to incur substantial additional losses
over the next several years. The losses are expected to fluctuate from period to
period based primarily on the level of clinical activities.
LIQUIDITY AND CAPITAL RESOURCES
InSite Vision has financed its operations primarily through private
placements of preferred stock totaling $32.0 million, an October 1993 public
offering of common stock which resulted in net proceeds of approximately $30.0
million, a January 1996 private placement of common stock and warrants which
raised net $4.8 million and an April 1996 public offering which raised net $7.9
million. At June 30, 1996, the Company had cash and equivalents totaling $12.7
million. It is the Company's policy to invest these funds in highly liquid
securities, such as time deposits, interest bearing money market funds,
commercial paper, Treasury and federal agency notes and corporate debt.
For the six months ended June 30, 1996 and 1995, expenditures for
operating activities and additions to capital equipment were $4.5 million and
$7.5 million, respectively. Of those amounts, $63,000 and $1,232,000 were for
additions to laboratory and other property and equipment in 1996 and 1995,
respectively. The Company expects to expend approximately $500,000 during the
second half of 1996 as its share of leasehold improvements at B&L's facilities
in Tampa, Florida. The timing of future expenditures will correspond to the
timing of clinical trials of potential products and additional product
development.
The Company's future capital uses and requirements will depend on
numerous factors, including the progress of its research and development
programs, the progress of preclinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, changes in the Company's
existing collaborative and licensing relationships, the ability of the Company
to establish additional collaborative arrangements, acquisition of new products
and technologies, the completion of commercialization activities and
arrangements, and the purchase of additional plant and equipment.
The Company anticipates no material capital expenditures to be
incurred for environmental compliance in fiscal year 1996. Based on the
Company's good environmental compliance record to date and its current
compliance with applicable environmental laws and regulations, environmental
compliance is not expected to have a material adverse effect on the Company's
operations.
The Company believes that its cash and equivalents will be
sufficient to meet its operating expenses and cash requirements through 1997.
The Company expects to incur substantial additional development costs prior to
reaching profitability. As a result, InSite Vision will require substantial
additional funds and the Company may seek research funding, private or public
equity investments, and possible future collaborative agreements to meet such
needs. Even if the Company does not have an immediate need for additional cash,
it may seek access to the public equity markets if and when conditions are
favorable. There is no assurance that such additional funds will be available
for the Company to finance its operations on acceptable terms, if at all.
9 of 17
10
EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
InSite is at an early stage of development. Only one product
utilizing the Company's DuraSite technology, an over-the-counter ("OTC") dry eye
treatment, is currently being marketed. Most of the potential products currently
under development by the Company will require significant additional research
and development, and preclinical and clinical testing, prior to submission to
regulatory authorities for marketing approval. The Company's potential products
are subject to the risks of failure inherent in the development of products
based on new technologies. These risks include the possibilities that the
Company's technology or any or all of its potential products will be found to be
unsafe, ineffective, or otherwise fail to receive necessary marketing clearance;
that the potential products, if safe and effective, will be difficult to
manufacture or market; that proprietary rights of third parties will preclude
the Company from marketing products; or that third parties will market superior,
equivalent or more cost-effective products. As a result, there can be no
assurance that the Company's research and development activities will result in
any commercially viable products.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will require substantial additional funds to conduct the
development and testing of its potential products and to manufacture and market
any products that may be developed. As described in Management's Discussion and
Analysis, the Company's future capital requirements will depend on numerous
factors, including the progress of its research and development programs, the
progress of preclinical and clinical testing, the time and costs involved in
obtaining regulatory approvals, the cost of filing, prosecuting, defending and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, changes in the Company's existing
collaborative and licensing relationships, the ability of the Company to
establish corporate partnerships for the manufacture and marketing of its
potential products, and the purchase of additional capital equipment. The
Company intends to seek additional funding through public or private financings,
collaborative or other arrangements, or from other sources. There can be no
assurance that additional financing will be available from any of these sources
or, if available, that it will be available on acceptable terms. If additional
funds are raised by issuing equity securities, significant dilution to existing
stockholders may result. If adequate funds are not otherwise available, the
Company may be required to delay, scale back or eliminate one or more of its
research, discovery or development programs, or to obtain funds through entering
into arrangements with collaborators or others that may require the Company to
relinquish rights to certain of its technologies, product candidates or
products, or to cease operations.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE FINANCIAL RESULTS
The Company has incurred significant operating losses since its
inception in 1986 and it expects to continue to incur significant operating
losses for at least the next several years. The amount of net losses and the
time required by the Company to reach profitability are uncertain. The Company's
ability to achieve profitability depends upon its ability, alone or with others,
to complete successful development of its potential products, conduct clinical
trials, obtain required regulatory approvals and successfully manufacture and
market its products. There can be no assurance that the Company will ever
achieve significant revenue or achieve profitability on a sustained basis.
DEPENDENCE ON THIRD PARTIES
In connection with its restructuring in November 1995, the Company
elected not to proceed with plans to establish a dedicated sales and marketing
organization. In order to successfully commercialize its product candidates, the
Company will be required to enter into arrangements with
10 of 17
11
one or more companies that will: provide for Phase III clinical testing,
commercial scale-up and manufacture of the Company's potential products; obtain
or assist the Company in other activities associated with obtaining regulatory
approvals for its product candidates; and market and sell the Company's
products, if approved.
To date, the Company has entered into agreements with CIBA Vision
for co-exclusive rights with the Company in the United States to manufacture and
market AquaSite, MethaSite(R), ToPreSite and ISV-205 for certain
non-glaucoma-related indications. Of these, only AquaSite, an OTC product for
which regulatory approval is not required, has been marketed. In an agreement
entered into with CIBA Vision in May 1996, the Company regained full U.S.
marketing rights to the Company's PilaSite product candidate for glaucoma. In
exchange, CIBA Vision received royalty-bearing, co-exclusive U.S. marketing
rights to ToPreSite product candidate for ocular inflammation/infection. CIBA
Vision assumed all subsequent product development, clinical and regulatory
responsibility for ToPreSite. In addition, CIBA Vision received royalty-bearing,
co-exclusive U.S. marketing rights to the Company's ISV-205 product candidate
for certain non-glaucoma-related indications. CIBA Vision has no obligation to
fund the further development of MethaSite or ISV-205.
In July 1996 the Company entered into agreements with Bausch & Lomb
Incorporated (B&L) which provide for: B&L to receive an exclusive worldwide
royalty bearing license to manufacture and market PilaSite; a collaboration
between the two parties to develop and sell a new formulation of DuraSite; and
the Company to move its manufacturing equipment to B&L facilities in Tampa,
Florida and to share with B&L the cost of building a new clean room.
There can be no assurance that, even if regulatory approvals are
obtained, products will be successfully marketed, or that the Company will be
able to conclude arrangements with other companies to support the
commercialization of such products on acceptable terms, if at all.
The Company's strategy for research, development and
commercialization of certain of its products requires the Company to enter into
various arrangements with corporate and academic collaborators, licensors,
licensees and others, and is dependent on the subsequent success of these
outside parties in performing their responsibilities. For example, the Company
is dependent upon British Biotechnology plc ("British Biotech") for the supply
of batimastat and lexipafant, the active drugs incorporated into the Company's
ISV-120 and ISV-611 product candidates, respectively. British Biotech is
currently conducting clinical testing of batimastat and lexipafant for
non-ophthalmic indications. Should British Biotech elect not to proceed with the
development of either product candidate, the Company may have no source of
ongoing raw materials for affected product candidates and its business may be
adversely affected. In addition, there can be no assurance that the Company's
collaborators will not take the position that they are free to compete using the
Company's technology without accounting to the Company, or will not pursue
alternative technologies or develop alternative products either on their own or
in collaboration with others, including the Company's competitors, as a means
for developing treatments for the disease or disorders targeted by these
collaborative programs.
UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in large part on its ability to
obtain patents, protect trade secrets and operate without infringing upon the
proprietary rights of others. A substantial number of patents in the field of
ophthalmology have been issued to pharmaceutical, biotechnology and
biopharmaceutical companies. Moreover, competitors may have filed patent
applications, may have been issued patents or may obtain additional patents and
proprietary rights relating to products or processes competitive with those of
the Company. There can be no assurance that the Company's patent applications
will be approved, that the Company will develop additional proprietary products
that
11 of 17
12
are patentable, that any issued patents will provide the Company with adequate
protection for its inventions or will not be challenged by others, or that the
patents of others will not impair the ability of the Company to commercialize
its products. The patent position of firms in the pharmaceutical industry
generally is highly uncertain, involves complex legal and factual questions, and
has recently been the subject of much litigation. No consistent policy has
emerged from the U.S. Patent and Trademark Office or the courts regarding the
breadth of claims allowed or the degree of protection afforded under
pharmaceutical patents. There can be no assurance that others will not
independently develop similar products, duplicate any of the Company's products
or design around any patents of the Company.
A number of pharmaceutical companies and research and academic
institutions have developed technologies, filed patent applications or received
patents on various technologies that may be related to the Company's business.
Some of these technologies, applications or patents may conflict with the
Company's technologies or patent applications. Such conflict could limit the
scope of the patents, if any, that the Company may be able to obtain or result
in the denial of the Company's patent applications. In addition, if patents that
cover the Company's activities have been or are issued to other companies, there
can be no assurance that the Company would be able to obtain licenses to these
patents, at all, or at a reasonable cost, or be able to develop or obtain
alternative technology. If the Company does not obtain such licenses, it could
encounter delays or be precluded from introducing products to the market.
Litigation may be necessary to defend against or assert claims of infringement,
to enforce patents issued to the Company or to protect trade secrets or know-how
owned by the Company, and could result in substantial cost to and diversion of
effort by, and may have a material adverse effect on, the Company. In addition,
there can be no assurance that these efforts by the Company will be successful.
The Company's competitive position is also dependent upon unpatented
trade secrets. There can be no assurance that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets, that such trade secrets
will not be disclosed or that the Company can effectively protect its rights to
unpatented trade secrets. To the extent that the Company or its consultants or
research collaborators use intellectual property owned by others in their work
for the Company, disputes also may arise as to the rights in related or
resulting know-how and inventions.
NO COMMERCIAL MANUFACTURING EXPERIENCE
The Company has no experience in the manufacture of products for
commercial purposes. The Company has a pilot facility licensed by the State of
California to manufacture certain of its products for Phase I and Phase II
clinical trials. Contract manufacturers must adhere to regulations enforced by
the United States Food and Drug Administration ("FDA") on an ongoing basis
through its facilities inspection program. There are a limited number of Good
Manufacturing Processes contract manufacturers which are able to manufacture
products using InSite's technology. In July 1996, the Company entered into an
alliance under which B&L has agreed to manufacture Company products. If the
Company should encounter delays or difficulties in establishing and maintaining
its relationship with B&L or other qualified manufacturers to produce, package
and distribute its finished products, then clinical trials, regulatory filings,
market introduction and subsequent sales of such products would be adversely
affected.
Contract manufacturing facilities must pass a pre-approval plant
inspection before the FDA will approve a new drug application ("NDA"). There can
be no assurance that the FDA or other regulatory agencies will approve the
process or the facilities by which any of the Company's products may be
manufactured. The Company's dependence on third parties for the manufacture of
products may adversely affect the Company's ability to develop and deliver
products on a timely and competitive
12 of 17
13
basis. Should the Company be required to manufacture products itself, the
Company will be subject to the regulatory requirements described above, to
similar risks regarding delays or difficulties encountered in manufacturing any
such products and will require substantial additional capital. There can be no
assurance that the Company will be able to manufacture any such products
successfully or in a cost-effective manner. In addition, certain of the raw
materials the Company uses in formulating its DuraSite drug delivery system are
available from only one source. Any significant interruption in the supply of
these raw materials could delay the Company's clinical trials, product
development or product sales and could have a material adverse effect on the
Company's business.
GOVERNMENT REGULATION AND PRODUCT APPROVAL
FDA and comparable agencies in state and local jurisdictions and in
foreign countries impose substantial requirements upon preclinical and clinical
testing, manufacturing and marketing of pharmaceutical products. Lengthy and
detailed preclinical and clinical testing, validation of manufacturing and
quality control processes, and other costly and time-consuming procedures are
required. Satisfaction of these requirements typically takes several years and
the time needed to satisfy them may vary substantially, based on the type,
complexity and novelty of the pharmaceutical product. The effect of government
regulation may be to delay or to prevent marketing of potential products for a
considerable period of time and to impose costly procedures upon the Company's
activities. There can be no assurance that the FDA or any other regulatory
agency will grant approval for any products developed by the Company on a timely
basis, or at all. Success in preclinical or early stage clinical trials does not
assure success in later stage clinical trials. Data obtained from preclinical
and clinical activities are susceptible to varying interpretations which could
delay, limit or prevent regulatory approval. If regulatory approval of a product
is granted, such approval may impose limitations on the indicated uses for which
a product may be marketed. Further, even if regulatory approval is obtained,
later discovery of previously unknown problems with a product may result in
restrictions on the product, including withdrawal of the product from the
market. Delay in obtaining or failure to obtain regulatory approvals would have
a material adverse effect on the Company's business.
The FDA's policies may change and additional government regulations
may be promulgated which could prevent or delay regulatory approval of the
Company's potential products. Moreover, increased attention to the containment
of health care costs in the United States could result in new government
regulations which could have a material adverse effect on the Company's
business. The Company is unable to predict the likelihood of adverse
governmental regulation which might arise from future legislative or
administrative action, either in the United States or abroad. See "- Uncertainty
of Product Pricing, Reimbursement and Related Matters."
COMPETITION
The Company's success depends upon developing and maintaining a
competitive position in the development of products and technologies in its
areas of focus. There are many competitors of the Company in the United States
and abroad, including pharmaceutical, biotechnology and other companies with
varying resources and degrees of concentration on the ophthalmic pharmaceuticals
market. The Company's competitors may have existing products or products under
development which may be technically superior to those of the Company or which
may be less costly or more acceptable to the market. Competition from such
companies is intense and expected to increase as new products enter the market
and new technologies become available. The Company's competitors, many of whom
have substantially greater financial, technical, marketing and human resources
than the Company, may also succeed in developing technologies and products that
are more effective, safer or more commercially acceptable than any which have
been or are being developed by the Company. The Company's competitors may obtain
cost advantages, patent protection or other intellectual property rights that
13 of 17
14
would block or limit the Company's ability to develop its potential products, or
may obtain regulatory approval for the commercialization of their products more
effectively or rapidly than the Company. To the extent that the Company
determines to manufacture and market its products by itself, it will also
compete with respect to manufacturing efficiency and marketing capabilities,
areas in which it has limited or no experience.
MARKETING AND SALES
The Company plans to market and sell its products through
arrangements with one or more pharmaceutical companies with expertise in the
ophthalmic drug industry. There can be no assurance that the Company will be
able to enter into such arrangements on acceptable terms, if at all. If the
Company is not successful in concluding such arrangements, it may be required to
establish its own sales and marketing organization, although the Company has no
experience in sales, marketing or distribution. There can be no assurance that
the Company will be able to build such a marketing staff or sales force, or that
the Company's sales and marketing efforts will be cost-effective or successful.
To the extent the Company has entered into or enters into co-marketing,
co-promotion or other licensing arrangements for the marketing and sale of its
products, any revenues received by the Company will be dependent on the efforts
of third parties (such as CIBA Vision and B&L), and there can be no assurance
that such efforts will be successful.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on Dr. Chandrasekaran and other
principal members of its scientific and management staff, the loss of whose
services might significantly delay the achievement of planned development
objectives. Furthermore, recruiting and retaining qualified personnel will be
critical to the Company's success. There can be no assurance that the Company
will be able to continue to attract and retain such personnel necessary for the
development of the Company's business.
PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE
The Company's business exposes it to potential product liability
risks which are inherent in the testing, manufacturing, marketing and sale of
human therapeutic products. Product liability insurance for the pharmaceutical
industry generally is expensive. There can be no assurance that the Company's
present product liability insurance coverage is adequate. Such existing coverage
will not be adequate as the Company further develops its products, and no
assurance can be given that adequate insurance coverage against potential claims
will be available in sufficient amounts or at a reasonable cost.
UNCERTAINTY OF PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS
The Company's business may be materially adversely affected by the
continuing efforts of governmental and third party payers to contain or reduce
the costs of health care through various means. For example, in certain foreign
markets the pricing or profitability of health care products is subject to
government control. In the United States, there have been, and the Company
expects there will continue to be, a number of federal and state proposals to
implement similar government control. While the Company cannot predict whether
any such legislative or regulatory proposals or reforms will be adopted, the
announcement of such proposals or reforms could have a material adverse effect
on the Company's ability to raise capital or form collaborations, and the
adoption of such proposals or reforms could have a material adverse effect on
the Company.
14 of 17
15
In addition, in both the United States and elsewhere, sales of
health care products are dependent in part on the availability of reimbursement
from third party payers, such as government and private insurance plans.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and third party payers are increasingly challenging the
prices charged for medical products and services. If the Company succeeds in
bringing one or more products to the market, there can be no assurance that
reimbursement from third party payers will be available or will be sufficient to
allow the Company to sell its products on a competitive basis.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
The Company's research, development and manufacturing processes
involve the controlled use of small amounts of hazardous and radioactive
materials. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result, and any such liability could exceed the resources of the Company.
Moreover, the Company may be required to incur significant costs to comply with
environmental laws and regulations, especially to the extent that the Company
determines to manufacture its own products.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
As of June 30, 1996, the Company's management and principal
stockholders in the aggregate owned beneficially approximately 32.2% of the
Company's outstanding shares of Common Stock. As a result, these stockholders,
acting together, would be able to effectively control most matters requiring
approval by the stockholders of the Company, including the election of a
majority of the directors.
VOLATILITY OF STOCK PRICE; NO DIVIDENDS
The market prices for securities of biopharmaceutical and
biotechnology companies (including the Company) have historically been highly
volatile, and the market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. Future announcements concerning the Company, its
competitors or other biopharmaceutical companies including the results of
testing and clinical trials, technological innovations or new therapeutic
products, governmental regulation, developments in patent or other proprietary
rights, litigation or public concern as to the safety of products developed by
the Company or others and general market conditions may have a significant
effect on the market price of the Common Stock. The Company has not paid any
cash dividends on its Common Stock and does not anticipate paying any dividends
in the foreseeable future.
ANTI-TAKEOVER PROVISIONS
The ability of the Board of Directors of the Company to issue shares
of Preferred Stock without stockholder approval may have certain anti-takeover
effects. The Company also is subject to provisions of the Delaware General
Corporation Law which may make certain business combinations more difficult.
15 of 17
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
On May 29, 1996, the Company held its Annual Meeting of Stockholders at which
the stockholders approved:
(1) The election of S. Kumar Chandrasekaran, Ph.D., Mitchell H. Friedlaender,
M.D., Grant H. Inman, John E. Lucas, Jon S. Saxe and John W. Shell, Ph.D.
to the Board of Directors to serve until the next annual meeting or until
their successors are elected and qualified. The following directors
received the number of votes set opposite their respective names:
For Election Withheld
S. Kumar Chandrasekaran, Ph.D. 9,011,344 20,000
Mitchell H. Friedlaender, M.D. 9,011,144 20,200
Grant H. Inman 9,011,144 20,200
John E. Lucas 9,011,144 20,200
Jon S. Saxe 9,010,144 21,200
John W. Shell 9,010,069 21,275
(2) The ratification of the Company's appointment of Ernst & Young LLP as the
Company's independent certified public accountants for the 1996 fiscal
year. Such proposal received 9,009,484 votes for the ratification, 10,350
against the ratification and 11,510 votes abstained.
There were a total of 1,898,922 broker non-votes for each matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Number Exhibit Table
------ -------------
10.28 ISV-205 License Agreement dated May 28, 1996 by and
between the Company and CIBA Vision Ophthalmics.*
10.29 ToPreSite(TM) License Agreement dated May 28, 1996 by
and between the Company and CIBA Vision Ophthalmics.*
10.30 BetaSite(R) Contract Manufacturing Agreement dated
July 18, 1996 by and between the Company and Bausch
&Lomb Pharmaceuticals, Inc.*
10.31 PilaSite(R)License Agreement dated July 18, 1996 by
and between the Company and Bausch & Lomb
Pharmaceuticals, Inc.*
10.32 Timolol Development Agreement dated July 18, 1996 by
and between the Company and Bausch & Lomb
Pharmaceuticals, Inc.*
10.33 Stock Purchase Agreement dated July 18, 1996 by and
between the Company and Bausch & Lomb Incorporated.*
* Confidential treatment has been applied for with the
Securities and Exchange Commission with respect to certain
portions of this agreement.
16 of 17
17
b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended June 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSITE VISION INCORPORATED
Dated: August 9, 1996 by: /s/ S. Kumar Chandrasekaran
-----------------------------------
S. Kumar Chandrasekaran, Ph.D.
Chairman of the Board,
Chief Executive Officer
and Chief Financial Officer
17 of 17