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 March 31, 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: 25,728,809 as of May 1, 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) -------------- MARCH 31, DECEMBER 31, 2001 2000 -------------- -------------- Assets Current assets: Cash and cash equivalents.................................................. $ 49,495 $ 35,109 Short-term investments..................................................... 23,256 44,026 Accounts receivable........................................................ 56 209 Interest receivable........................................................ 316 364 Prepaid expenses........................................................... 336 415 -------- -------- Total current assets........................................................ 73,459 80,123 Property and equipment, net................................................. 1,445 1,214 Other assets................................................................ 1,262 1,656 Total assets................................................................ $ 76,166 $ 82,993 ======== ======== Liabilities and stockholders' equity Current liabilities: Accounts payable........................................................... $ 95 $ 430 Accrued expenses........................................................... 761 852 Notes payable.............................................................. 26 26 Capital leases, current portion............................................ 293 289 Deferred revenue, current portion.......................................... 4,464 5,618 -------- -------- Total current liabilities................................................... 5,639 7,215 Capital leases, excluding current portion................................... 440 523 Deferred revenue............................................................ 500 750 -------- -------- Total liabilities........................................................... 6,579 8,488 Stockholders' equity: Common stock, $0.001 par value, 56,000,000 shares authorized; 25,677,381 and 25,515,087 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively..................... 26 26 Additional paid-in capital................................................. 125,085 126,081 Other comprehensive income................................................. 26 51 Deferred compensation...................................................... (2,441) (3,782) Deficit accumulated during the development stage........................... (53,109) (47,871) -------- -------- Total stockholders' equity.................................................. 69,587 74,505 -------- -------- Total liabilities and stockholders' equity.................................. $ 76,166 $ 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 28, THREE MONTHS ENDED 1993) to March 31, March 31, March 31, 2001 2000 2001 -------- --------- --------- Revenues: Collaborative research agreements...................................... $ 1,405 $ 1,154 $ 8,237 -------- --------- --------- Operating expenses: Research and development (includes $141, $225, and $1,562, respectively, of stock-based compensation)............................................. 6,835 2,541 48,789 General and administrative (includes $169, $171 and $1,412, respectively, of stock-based compensation).......................................... 1,242 842 13,719 -------- --------- --------- Total operating expenses............................................... 8,077 3,383 62,508 -------- --------- --------- Operating loss......................................................... (6,672) (2,229) (54,271) -------- -------- --------- Other income (expense), net: Interest income........................................................ 1,468 295 4,697 Interest expense....................................................... (34) (186) (1,693) Loss on disposal of property and equipment............................. - - (366) Other income (expense), net............................................ 1,434 109 2,638 -------- --------- --------- Loss before provision for income taxes................................. (5,238) (2,120) (51,633) Provision for income taxes.............................................. 0 150 820 -------- --------- --------- Net loss................................................................ (5,238) (2,270) (52,453) Preferred stock dividends............................................... 0 (242) (656) -------- --------- --------- Net loss available to common stockholders............................... $ (5,238) $ (2,512) $ (53,109) ======== ========= ========= Net loss per common share-basic and diluted............................. $ (0.20) $ (1.01) ======== ========= Weighted average common shares outstanding-basic and diluted............ 25,605 2,497 ======== ========= 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 28, THREE MONTHS ENDED 1993) MARCH 31, MARCH 31, TO MARCH 31, 2001 2000 2001 ----------- ---------- -------------- Cash flows from operating activities: Net loss........................................................................ $ (5,238) $ (2,270) $(52,453) 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.................................................. 147 144 3,720 Amortization of stock-based compensation....................................... 310 396 3,003 Amortization of debt issuance costs............................................ 394 160 394 Loss on disposal of property and equipment..................................... - - 366 Deferred revenue............................................................... (1,405) 346 4,963 Changes in operating assets and liabilities: Accounts receivable........................................................... 153 1 (56) Interest receivable........................................................... 48 - (316) Prepaid expenses.............................................................. 79 (330) (336) Other assets.................................................................. - (5) (82) Accounts payable.............................................................. (333) (113) 97 Accrued expenses.............................................................. (91) 232 763 -------- -------- --------- Net cash (used in) operating activities.......................................... (5,936) (1,439) (39,721) -------- -------- --------- Cash flows from investing activities: Purchase of investments......................................................... (53,906) - (108,927) Proceeds from sale of investments............................................... 74,651 - 85,697 Proceeds from sale of property and equipment.................................... - - 127 Sale of certificate of deposit.................................................. - - (78) Purchases of property and equipment............................................. (378) (379) (2,333) -------- -------- --------- Net cash (used in) provided by investing activities.............................. 20,367 (379) (25,514) -------- -------- --------- Cash flows from financing activities: Proceeds from bridge loans...................................................... - - 780 Proceeds from issuance of notes payable and capital lease obligations........... 408 Payments on notes payable....................................................... - - (400) Issuance of common stock........................................................ 34 21 70,381 Issuance of convertible preferred stock......................................... - - 45,061 Payments on capital lease obligations........................................... (79) (72) (1,500) -------- -------- --------- Net cash (used in) provided by financing activities.............................. (45) (51) 114,730 -------- -------- --------- Increase (decrease) in cash and cash equivalents................................. 14,386 (1,869) 49,495 Cash and cash equivalents, beginning of period................................... 35,109 22,728 - -------- -------- --------- Cash and cash equivalents, end of period......................................... $ 49,495 $ 20,858 $ 49,495 ======== ======== ========= 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 repiratory 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 the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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. 5 Inspire Pharmaceuticals (a development stage company) 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 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 three months ended March 31, 2001 and 2000 does not include 1,695,262 and 15,705,600, 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 March 31, 2001. COMPREHENSIVE INCOME (LOSS) At March 31, 2001, the Company had $26 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 during the same period in 2000. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives"), and for hedging activities. SFAS 133, as amended by SFAS 137 and SFAS 138 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier application encouraged. The Company does not currently nor does it intend in the future to use derivative instruments and therefore does not expect that the adoption of SFAS 133 in fiscal 2001 will have any impact on its financial position 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 Financial figures are represented in thousands except share and per share amounts. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 AND 2000 REVENUES Revenues are derived from collaborative research and development agreements with strategic partners. Revenues were $1,405 for the three months ended March 31, 2001, compared to $1,154 for the same period in 2000, an increase of 22%. This increase was due to revenue recognized during the three months ended March 31, 2001 related to an upfront payment received from Kirin Brewery Co., Ltd. in the fourth quarter of 2000. The Company also has milestone payments from Kissei Pharmaceuticals Co., Ltd. and Genentech, Inc., which are recognized over the period of our 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 were $6,835 for the three months ended March 31, 2001, compared to $2,541 for the same period in 2000, an increase of 169%. The increase in research and development expenses is due to increased external costs related to patent activities, research costs, preclinical testing, toxicology studies, clinical supplies, clinical development activities, including initiation of Phase III clinical trials, and increased internal costs associated with additional personnel costs necessary to perform and/or manage these activities. The Company expects 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 $1,242 for the three month ended March 31, 2001, compared to $842 for the same period in 2000, an increase of 48%. The increase in general and administrative expenses resulted from an increase in headcount in legal, marketing and operations to 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 short-term investments, reduced by interest expense on notes payable, capital lease obligations, gains and losses on sales of property and equipment and amortization of debt issuance costs. Other income (expense), net was $1,434 for the period ended March 31, 2001, compared to $109 for the same period in 2000, an increase of 1,225%. The increase was due to higher interest income earned from higher average cash and investment balances partially offset by increased interest expense related to leased equipment and amortization of debt issuance costs. 7 Inspire Pharmaceuticals (a development stage company) PROVISION FOR INCOME TAXES The provision for income taxes was zero for the three months ended March 31, 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 three months ended March 31, 2000. No milestone payments were received during the three months ended March 31, 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. As of March 31, 2001, cash and cash equivalents totaled $49,495, an increase of $14,386 as compared to December 31, 2000. The increase in cash and cash equivalents is due to the decrease in short-term investments of $20,770 offset by cash used by operations for the three months ended March 31, 2001 of $5,936 purchase of property and equipment of $378, payment of lease obligations of $79, and the issuance of common stock of $34. Cash used by operations of $5,936 in the three months ended March 31, 2001, represented a net loss of $5,238, a decrease in deferred revenue of $1,405, a decrease in accounts payable of $333, and a decrease in accrued expenses of $91, partially offset by a decrease in interest receivable of $48, a decrease in accounts receivable of $153 and a decrease in prepaid expenses of $79. Cash used by investing activities for the three months ended March 31, 2001 consisted of the proceeds of investment grade securities, net of purchases of $20,745 and the purchase of property and equipment totaling $378. Cash used from financing activities for the three months ended March 31, 2001 was comprised of the issuance of common stock of $34 offset by the payment of lease obligations of $79. 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. IMPACT OF INFLATION Although it is difficult to predict the impact of inflation on costs and revenues of the Company in connection with the Company's products, the Company does not anticipate that inflation will materially impact its costs of operation or the profitability of its 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 Company's 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 the Company believes the expectations reflected in the forward looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. 8 Inspire Pharmaceuticals (a development stage company) 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 March 31, 2001 or March 31, 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 (c) During the period covered by this Quarterly Report on Form 10-Q, we issued the following securities that were not registered under the Securities Act: On March 1, 2001, Comdisco, Inc., the holder of warrants to purchase Series A preferred stock, Series B preferred stock and Series F preferred stock, which became warrants to purchase common stock upon the closing of our initial public offering, exercised its warrants and was issued an aggregate of 91,847 shares of our common stock. Pursuant to the terms of the warrants, the transactions were "net issue exercises" in which the shares of common stock were issued upon the cancellation of a portion of the warrants. The issuance of securities in the transactions described above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) and/or Regulation D as transactions not involving any public offering. Where appropriate, the warrant holder represented its intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate legends were affixed to the applicable securities. The warrant holder received adequate information about us or had access to adequate information. (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 (in thousands) after deduction of expenses were approximately $69,300. Through March 31, 2001, we have used approximately $1,327 of the net proceeds of the offering as follows: Discovery and research programs (in thousands)................. $1,327 ------ Total (in thousands)........................................... $1,327 ====== The remainder of the net proceeds of the offering are being temporarily invested in interest bearing investment grade securities and certificates of deposit which are classified as available for sale. 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. 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. 10 Inspire Pharmaceuticals (a development stage company) 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 trials. 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 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. 11 Inspire Pharmaceuticals (a development stage company) 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 four collaborators, Genentech, 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. Genentech has the right, by giving us 150 days prior notice, to terminate our collaboration. Similarly, Kirin has the right to terminate our license agreement by giving us 180 days prior notice. If we do not maintain the Genentech, 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 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 Genentech, Kissei, Santen, Kirin and any future collaborators for significant funding in support of our development efforts. If Genentech, 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 12 Inspire Pharmaceuticals (a development stage company) 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. 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. 13 Inspire Pharmaceuticals (a development stage company) 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 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, 14 Inspire Pharmaceuticals (a development stage company) 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 $5,238 for the three months ended March 31, 2001, $14,584 for the year ended December 31, 2000, and $8,996 for the year ended December 31, 1999. As of March 31, 2000 our accumulated deficit was approximately $53,109. 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 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 three months ended March 31, 2001 our operating expenses exceeded $8,000. 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: 15 Inspire Pharmaceuticals (a development stage company) . 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 Genentech, Kissei, Santen and Kirin; . our ability to establish and maintain additional collaborations; . progress by our collaborators: Genentech, 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 Genentech, Kissei, Santen, Kirin, 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 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, Astra Zeneca, Boehringer Ingelheim, GlaxoSmithKline, 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), 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 16 Inspire Pharmaceuticals (a development stage company) 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 and Chief Business Officer. 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 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. 17 Inspire Pharmaceuticals (a development stage company) 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 over 40% of the common stock as of March 28, 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 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; 18 Inspire Pharmaceuticals (a development stage company) . changes in government regulations; . regulatory actions as a result of their therapeutic approach; . changes in concerns of our collaborators, in particular our collaborations with Genentech, 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. 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 March 31, 2001, there were 25,677,381 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. Holders of 16,340,084 shares of common stock and options and warrants to purchase 356,823 shares of common stock, held as of December 31, 2000, are entitled to registration rights. Upon registration, these shares may be freely sold in the public market. We may issue additional shares: . to employees, directors and consultants; . in connection with corporate alliances; . in connection with acquisitions; and . to raise capital. 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. 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. 19 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 Employee Confidentiality, Invention Assignment and Non-Compete Agreement between Inspire Pharmaceuticals, Inc. and Mary Beth Bennett dated February 27, 2001 b) Reports on Form 8-K No current reports on Form 8-K were filed during the reporting period 20 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: May 11, 2001 By: /s/ Christy L. Shaffer - ------------------ ---------------------- Christy L. Shaffer President, Chief Executive Officer and Director Date: May 11, 2001 By: /s/ Gregory J. Mossinghoff - ------------------ -------------------------- Gregory J. Mossinghoff Senior Vice President, Chief Business Officer, Secretary and Treasurer 21 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 Employee Confidentiality, Invention Assignment and Non-Compete Agreement between Inspire Pharmaceuticals, Inc. and Mary Beth Bennett dated February 27, 2001 22