SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2002
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: 25,804,006 as of April 30, 2002.
Inspire Pharmaceuticals, Inc.
(a development stage company)
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Balance Sheets - March 31, 2002 (unaudited) and December 31, 2001 ....................... 3
Condensed Statements of Operations - Three months ended March 31, 2002 and 2001 (unaudited) ....... 4
Condensed Statements of Cash Flows - Three months ended March 31, 2002 and 2001 (unaudited) ....... 5
Notes to Condensed Financial Statements ........................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................................ 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ......................................................... 14
Item 5. Other Information ................................................................................. 14
Item 6. Exhibits and Reports on Form 8-K .................................................................. 25
Signatures .................................................................................................. 26
2
Inspire Pharmaceuticals, Inc.
(a development stage company)
PART I: FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
--------------------
Condensed Balance Sheets
(in thousands except share amounts)
(Unaudited)
-----------
March 31, December 31,
2002 2001
----------- ------------
Assets
Current assets:
Cash and cash equivalents $ 34,560 $ 29,959
Short-term investments 13,871 22,395
Other receivables 28 104
Interest receivable 107 102
Prepaid expenses 451 531
----------- ------------
Total current assets 49,017 53,091
Property and equipment, net 1,419 1,471
Other assets 5,739 5,525
----------- ------------
Total assets $ 56,175 $ 60,087
=========== ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 716 $ 1,141
Accrued expenses 564 1,367
Capital leases, current portion 373 376
Deferred revenue, current portion 4,900 4,083
----------- ------------
Total current liabilities 6,553 6,967
Capital leases, excluding current portion 427 525
Deferred revenue, excluding current portion 1,100 -
----------- ------------
Total liabilities 8,080 7,492
Stockholders' equity:
Common stock, $0.001 par value, 60,000,000 shares authorized;
25,792,721 and 25,751,468 shares issued and outstanding
at March 31, 2002 and December 31, 2001, respectively 26 26
Additional paid-in capital 125,059 125,099
Other comprehensive income (loss) (46) 1
Deferred compensation (1,179) (1,525)
Deficit accumulated during the development stage (75,765) (71,006)
----------- ------------
Total stockholders' equity 48,095 52,595
----------- ------------
Total liabilities and stockholders' equity $ 56,175 $ 60,087
=========== ============
The accompanying notes are an integral part of these condensed
financial statements.
3
Inspire Pharmaceuticals, Inc.
(a development stage company)
Condensed Statements of Operations
(in thousands except per share amounts)
(Unaudited)
Cumulative
From
Inception
(October 28,
Three Months Ended 1993)
-------------------------------
March 31, March 31, To March 31,
2002 2001 2002
------------- ------------ -------------
Revenues:
Collaborative research agreements $ 1,083 $ 1,405 $ 15,200
------------- ------------ -------------
Operating expenses:
Research and development (includes $125, $141 and $2,065, of
stock-based compensation, respectively) 4,717 6,835 74,861
General and administrative (includes $169, $169 and $2,099, of
stock-based compensation, respectively) 1,379 1,242 19,738
------------- ------------ -------------
Total operating expenses 6,096 8,077 94,599
------------- ------------ -------------
Operating loss (5,013) (6,672) (79,399)
------------- ------------ -------------
Other income (expense), net:
Interest income 280 1,468 7,296
Interest expense (22) (34) (1,813)
Loss on disposal of property and equipment (4) - (373)
------------- ------------ -------------
Other income (expense), net 254 1,434 5,110
------------- ------------ -------------
Loss before provision for income taxes (4,759) (5,238) (74,289)
Provision for income taxes - - 820
------------- ------------ -------------
Net loss (4,759) (5,238) (75,109)
Preferred stock dividends - - (656)
------------- ------------ -------------
Net loss available to common stockholders $ (4,759) $ (5,238) $ (75,765)
============= ============ =============
Net loss per common share-basic and diluted $ (0.18) $ (0.20)
============= ============
Weighted average common shares outstanding-basic and diluted 25,775 25,605
============= ============
The accompanying notes are an integral part of these condensed
financial statements.
4
Inspire Pharmaceuticals, Inc.
(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,
2002 2001 2002
-------------- ------------ -------------
Cash flows from operating activities:
Net loss $ (4,759) $ (5,238) $ (75,109)
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 185 541 5,967
Amortization of deferred compensation 294 310 4,193
Loss on disposal of property and equipment 4 - 373
Changes in operating assets and liabilities:
Other receivables 76 153 (28)
Interest receivable (5) 48 (107)
Prepaid expenses 80 79 (451)
Other assets (16) - (39)
Accounts payable (425) (333) 716
Accrued expenses (803) (91) 560
Deferred revenue 1,917 (1,405) 6,000
-------------- ------------ -------------
Net cash used in operating activities (3,452) (5,936) (57,709)
-------------- ------------ -------------
Cash flows from investing activities:
Purchase of investments (7,223) (53,906) (208,180)
Proceeds from sale of investments 15,500 74,651 188,485
Proceeds from sale of property and equipment - - 127
Purchases of property and equipment (135) (378) (2,586)
-------------- ------------ -------------
Net cash provided by (used in) investing activities 8,142 20,367 (22,154)
-------------- ------------ -------------
Cash flows from financing activities:
Proceeds from bridge loans - - 780
Proceeds from issuance of notes payable - - 408
Payments on notes payable - - (420)
Issuance of common stock, net 12 34 70,428
Issuance of convertible preferred stock, net - - 45,061
Payments on capital lease obligations (101) (79) (1,834)
-------------- ------------ --------------
Net cash (used in) provided by financing activities (89) (45) 114,423
-------------- ------------ --------------
Increase in cash and cash equivalents 4,601 14,386 34,560
Cash and cash equivalents, beginning of period 29,959 35,109 -
-------------- ------------ --------------
Cash and cash equivalents, end of period $ 34,560 $ 49,495 $ 34,560
============== ============ ==============
The accompanying notes are an integral part of these condensed
financial statements.
5
Inspire Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
- -------------------------------------------------
Organization
Inspire Pharmaceuticals, Inc. (the "Company") was founded on October 28,
1993 to develop and commercialize novel pharmaceutical products that treat
diseases which are 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 ("UNC")
for rights to certain developments from the founder's laboratories.
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.
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, 2002 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. These financial statements and notes should be read in
conjunction with the financial statements and notes thereto for the year ended
December 31, 2001 included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 26, 2002.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Investments
Investments consist primarily of U. S. government agency obligations and
other fixed or variable income investments. The Company invests in high-credit
quality investments in accordance with its investment policy which minimizes the
possibility of loss. Investments with original maturities at date of purchase
beyond three months and which mature at or less than twelve months from the
balance sheet date are classified as current. Investments with a maturity beyond
twelve months from the balance sheet date are classified as long-term.
Investments are considered to be available for sale and are carried at fair
value with unrealized gains and losses recognized in other comprehensive income
(loss). Realized gains and losses are determined using the specific
identification method and transactions are recorded on a settlement date basis.
6
Inspire Pharmaceuticals, Inc.
(a development stage company)
Property and Equipment
Property and equipment is primarily comprised of furniture, laboratory and
computer equipment which are recorded at cost and depreciated using the
straight-line method over their estimated useful lives which range from three to
seven years. Property and equipment, which includes certain equipment under
capital leases, and leasehold improvements are depreciated over the shorter of
the lease period or their estimated useful lives.
Other Assets
At March 31, 2002, other assets are primarily comprised of long-term
investments totaling $5.7 million and $39,000 related to deposits. At December
31, 2001, other assets were comprised of $5.5 million in long-term investments
and $25,000 related to deposits and deferred costs. Deferred costs are amortized
using the effective interest rate method over the life of the related
collaborative research agreement or lease.
Deferred Compensation
The Company accounts for deferred compensation ("stock based compensation")
based on the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," which states that no compensation
expense is recorded for stock options or other stock-based awards to employees
that are granted with an exercise price equal to or above the estimated fair
value per share of the Company's common stock on the grant date. In the event
that stock options are granted with an exercise price below the estimated fair
value of the Company's common stock, the difference between the estimated fair
value of the Company's common stock and the exercise price of the stock option
is recorded as deferred compensation. The Company did not recognize any deferred
compensation associated with stock option grants for the three months ended
March 31, 2002 and 2001.
Deferred compensation is amortized over the vesting period of the related
stock option, which is generally four years. The Company recognized $294,000 and
$310,000 of stock based compensation expense related to amortization of deferred
compensation during the three months ended March 31, 2002 and 2001,
respectively. The Company has adopted the disclosure requirements of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" which requires compensation expense to be disclosed based on the
fair value of the options granted at the date of the grant.
Income Taxes
The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for the temporary
differences between financial reporting and tax bases of the Company's assets
and liabilities and for tax carryforwards at enacted statutory tax rates in
effect for the years in which the differences are expected to reverse. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
Revenue Recognition
Revenue is recognized under collaborative research agreements when services
are performed or when contractual obligations are met. Non-refundable fees
received at the initiation of collaboration 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 will
be recognized as revenues, ratably over the remaining period of the 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.
7
Inspire Pharmaceuticals, Inc.
(a development stage company)
Research and Development
Research and development costs include all direct costs, including salaries
for Company personnel, outside consultants, costs of clinical trials, sponsored
research and clinical trials insurance related to the development of drug
compounds. These costs have been charged to operating expense as incurred. Costs
associated with obtaining and maintaining patents on the Company's drug
compounds and license initiation and continuation fees, including milestone
payments by the Company to its licensors, are evaluated based on the stage of
development of the related drug compound and whether the underlying drug
compound has an alternative use. Costs of these types incurred for drug
compounds not yet approved by the United States Food and Drug Administration
("FDA") and for which no alternative use exists are recorded as research and
development expense. In the event the drug compound has been approved by the FDA
or an alternative use exists for the drug compound, patent costs and license
costs are capitalized and amortized over the expected life of the related drug
compound. License milestone payments to the Company's licensors are recognized
when the underlying requirement is met by the Company.
Significant Customers and Credit Risk
All revenues recognized and recorded in the three months ended March 31,
2002 were from two collaborative partners. All revenues recognized and recorded
in the same period in 2001 were from three collaborative partners. Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of short-term cash investments. The Company primarily
invests in short-term interest-bearing investment-grade securities and
certificates of deposits. Cash deposits are all in financial institutions in the
United States.
Cash Flows
The Company made cash payments for interest of $22,000 and $29,000 for the
three months ended March 31, 2002 and 2001, respectively. The Company acquired
property and equipment amounting to $135,000 in the three months ended March 31,
2002. During the same period in 2001, the Company acquired property and
equipment amounting to $378,000, which was later financed through a capital
lease obligation in the second quarter of 2001.
Net Income (Loss) Per Common 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, 2002 and 2001 does not include
1,931,653 and 1,695,262 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, 2002 or 2001.
Other Comprehensive Income (Loss)
At March 31, 2002, the Company had $46,000 of unrealized loss on
investments that is classified as other comprehensive income and is disclosed as
a component of stockholders' equity for 2002. The Company had $26,000 of
unrealized gain on investments during the same period in 2001.
8
Inspire Pharmaceuticals, Inc.
(a development stage company)
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued FASB
Statements Nos. 141 ("SFAS 141"), "Business Combinations" and 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets." SFAS 141 eliminates pooling-of-interests
accounting prospectively and provides guidance on purchase accounting related to
the recognition of intangible assets and accounting for negative goodwill. SFAS
142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. SFAS 141 and SFAS 142 are effective for all business
combinations completed after June 30, 2001. The Company adopted SFAS 142 as of
January 1, 2002, as required, and as of July 1, 2001 for goodwill and intangible
assets acquired after June 30, 2001. Adoption of SFAS 141 and SFAS 142 has not
had any impact on the Company's financial position or results of operations.
In August 2001, the FASB issued FASB Statement 143 ("SFAS 143"),
"Accounting for Asset Retirement Obligations." The objectives of SFAS 143 are to
establish accounting standards for the recognition and measurement of an asset
retirement obligation and its associated asset retirement cost. SFAS 143 is
effective for fiscal years beginning after June 15, 2002. The adoption of SFAS
143 is not expected to have any impact on the Company's financial position or
results of operations.
In October 2001, the FASB issued FASB Statement No. 144 ("SFAS 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." The provisions of SFAS 144 are
required to be applied to fiscal years beginning after December 15, 2001. The
adoption of SFAS 144 has not had any impact on the Company's financial position
or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
CAUTIONARY STATEMENT
- --------------------
The discussion below contains forward-looking statements regarding our
financial condition and results of operations that are based upon our financial
statements, which have been prepared in accordance with accounting principles
generally accepted within the United States. The preparation of these financial
statements requires Inspire management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. Inspire evaluates its
estimates on an ongoing basis. These estimates are based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. The results of these estimates form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources.
We operate in a highly competitive environment that involves a number of
risks, some of which are beyond our control. Statements contained in
Management's Discussion and Analysis of Financial Conditions and Results of
Operations which are not historical facts are, or may constitute, forward
looking statements. Forward looking statements involve known and unknown risks
that could cause our actual results to differ materially from expected results.
These risks are discussed in the section entitled "Other Information - Risk
Factors" as well as in our Annual Report on Form 10-K for the year ended
December 31, 2001. Although we believe the expectations reflected in the forward
looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
9
Inspire Pharmaceuticals, Inc.
(a development stage company)
OVERVIEW
- --------
We were incorporated in October 1993 and commenced operations in March 1995
following our first substantial financing. Since that time, we have been engaged
in the discovery and development of novel pharmaceutical products that treat
diseases which are characterized by deficiencies in the body's innate defense
mechanisms of mucosal hydration and mucociliary clearance as well as other
diseases. Our 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 founders' laboratories.
To date, we have devoted substantially all of our efforts to discovery and
clinical development of our product candidates as well as establishing strategic
partnerships for the development and potential marketing of our products when
approved. Currently, we have six product candidates in clinical development. We
have not derived any commercial revenues from product sales and we do not expect
to receive sales revenues for at least the next several years.
We have incurred significant operating losses since our inception and, as
of March 31, 2002, we had an accumulated deficit of $75.8 million. We have
primarily financed our operations through proceeds received from the sale of
equity securities including private sales of preferred stock and the sale of
common stock in our initial public offering, as well as revenues received under
corporate collaborations. We operate in a single business segment and do not
have any foreign operations.
In June 2001, we entered into a joint license, development and marketing
agreement with Allergan, Inc. ("Allergan") to develop and commercialize INS365
Ophthalmic and Allergan's Restasis(R). Under the agreement, we may receive up to
$39 million in up-front and milestone payments. We will also receive royalty
payments on sales, if any, of INS365 Ophthalmic in the United States and on
Allergan's Restasis(R) worldwide, excluding most Asian markets. The agreement
also provides for potential co-promotion by Inspire of INS365 Ophthalmic and
Restasis(R) and one or more of Allergan's other marketed products in the United
States.
In September 2000, we entered into a License Agreement with Kirin Brewing
Co., Ltd. Pharmaceutical Division ("Kirin") for the development and
commercialization of INS316 Diagnostic. Under the agreement we granted Kirin an
exclusive license to commercialize INS316 Diagnostic in most of Asia. Under the
terms of the agreement, we received an upfront payment in cash and may receive
milestone payments based on clinical success and regulatory approval. We may
also receive royalties on net sales of licensed products.
In December 1999, we entered into a collaboration with Genentech, Inc. to
develop treatments for respiratory disorders, pursuant to which we received in
excess of $16 million in equity and cash payments prior to the termination of
the agreement in November 2001. Upon termination, Genentech, Inc. returned to us
all rights for the use of INS365 Respiratory and our other related P2Y2 agonists
at no charge.
In December 1998, we entered into a Development, License and Supply
Agreement with Santen Pharmaceutical Co., Ltd. ("Santen") for the development of
INS365 Ophthalmic for the therapeutic treatment of ocular surface diseases. We
are obligated to supply Santen with its requirements of INS365 Ophthalmic in
bulk drug substance form for all preclinical studies, clinical trials and
commercial requirements at agreed-upon prices. Under the agreement, we received
an up-front equity investment of $1.5 million for shares of our stock. In
addition, if all milestones are met, we could receive additional payments of up
to $4.75 million, as well as royalties on net sales of licensed products. We
have not received any milestone payments to date under the agreement.
In September 1998, we entered into a Joint Development, License and Supply
Agreement with Kissei Pharmaceutical Co., Ltd. ("Kissei") for the development of
INS365 Respiratory for therapeutic lower respiratory applications in Japan.
Pursuant to the agreement with Kissei, we received an up-front payment of $4.5
million, which included the purchase of shares of our stock. In addition, if all
milestones under the agreement are met, we would receive additional payments of
up to $13 million. We will also receive royalties on net sales of licensed
products. To date, we have received $2.1 million in milestone payments.
10
Inspire Pharmaceuticals, Inc.
(a development stage company)
SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------
Revenue Recognition
We recognize revenue under our collaborative research and development
agreements when we have performed services under such agreements or when we or
our collaborative partner has met a contractual milestone triggering a payment
to us. Non-refundable fees received at the initiation of collaborative
agreements for which we have an ongoing research and development commitment are
deferred and recognized ratably over the period of ongoing research and clinical
development commitment. We are also entitled to receive milestone payments under
our collaborative research and development agreements based upon achievement of
development milestones by us or our collaborative partners. We recognize
milestone payments as revenues ratably over the remaining period of our research
and clinical development commitment. The recognition period begins at the date
the milestone is achieved and acknowledged by the collaborative partner, which
is generally at the date payment is received from the collaborative partner, and
ends on the date that we have fulfilled our research and clinical development
commitment. This period is based on estimates by management and the progress
towards milestones in our collaborative agreements. The estimate is subject to
revision as our development efforts progress and we gain knowledge regarding
required additional development. Revisions in the commitment period are made in
the period that the facts related to the change first become known. This may
cause our revenue to fluctuate from period to period.
Taxes
Significant management judgment is required in determining our provision
for income taxes, deferred tax assets and liabilities and any valuation
allowance recorded against net deferred tax assets. We record valuation
allowances because of uncertainties related to our ability to utilize deferred
tax assets, primarily consisting of certain net operating losses carried
forward, before they expire. The valuation allowance is based on estimates of
taxable income in each of the jurisdictions in which we operate and the period
over which our deferred tax assets will be recoverable. In the event the actual
results differ from these estimates or we adjust these estimates in future
periods we may need to establish an additional valuation allowance which could
materially impact our financial position and results of operations.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended March 31, 2002 and 2001
- ------------------------------------------
Revenues
Our revenues were derived from collaborative research and development
agreements with strategic partners. Revenues were $1.1 million for the three
months ended March 31, 2002, compared to $1.4 million for the same period in
2001, a decrease of 21%. Revenues in each year are primarily derived from
collaborative research and development agreements with strategic partners.
During the three months ended March 31, 2002, revenues were related to an
upfront payment received from Allergan, Inc. in the third quarter of 2001 and
the upfront payment received from Kirin Brewery Co., Ltd. in the fourth quarter
of 2000. Revenues in the same period in 2001 were related to milestone payments
received from Kirin Brewery Co., Ltd., Kissei Pharmaceuticals and Genentech,
Inc. Milestone payments from our collaborative partners are recognized over the
period of ongoing research and development commitment period under the
applicable collaborative research and development agreements with the respective
company.
Research and Development Expenses
Research and development expenses include all direct costs, including
salaries for our research and development personnel, consulting fees, clinical
trial costs, sponsored research and clinical trials insurance, and other fees
and costs related to the development of product candidates. Costs associated
with obtaining and maintaining patents on our drug compounds, and license
initiation and continuation fees, are evaluated based on the stage of
development of the
11
Inspire Pharmaceuticals, Inc.
(a development stage company)
related drug compound and whether the underlying compound has an alternative
use. Costs of these types incurred for drug compounds not yet approved by the
FDA and for which no alternative use exists are recorded as research and
development expense. In the event the drug compound has been approved by the FDA
or an alternative use exists for the drug compound, patent costs and license
costs are capitalized and amortized over the expected life of the related drug
compound. Milestone payments are recognized when the underlying requirement is
met by us.
Research and development expenses were $4.7 million for the three months
ended March 31, 2002, compared to $6.8 million for the same period in 2001, a
decrease of 31%. The decrease in research and development expenses was due to
our efforts to focus resources on our higher priority programs. On January 29,
2002, we announced that we would refocus our efforts on our higher priority
clinical programs in the ophthalmology and respiratory areas. The programs of
primary focus were indications for dry eye, lung cancer diagnostics, upper
respiratory disorders and cystic fibrosis.
For the three months ended March 31, 2002, the research and development
costs were related to patent activities, research costs, preclinical testing,
toxicology studies, clinical supplies, clinical development activities, and
personnel costs necessary to perform and/or manage these activities. We expect
to incur increases in expenses in future periods as later phases of development
typically involve an increase in the scope of studies and the number of patients
treated.
Our research and development expenses from inception through March 31, 2002
were $74.9 million. Of this amount, we have spent the following amounts on
external pre-clinical and clinical development of the indicated product
candidates: $2.8 million on INS316 Diagnostic; $13.2 million on INS365
Ophthalmic; $5.8 million on INS365 Respiratory; $3.3 million on INS37217
Respiratory for cystic fibrosis; $1.2 million on INS37217 Intranasal and $1.6
million on INS37217 Ophthalmic. The balance of our historic research and
development expenses, $47 million, includes internal personnel costs of our
discovery and development programs, internal and external general research
related to the development of our technology, and internal and external expenses
of other drug discovery programs and development programs. We cannot reasonably
predict future research and development expenses for these programs; however,
historical trends indicate that expenses tend to increase in later phases of
development.
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 $1.4 million
for the three month ended March 31, 2002, compared to $1.2 for the same period
in 2001, an increase of 17%. Our general and administrative expenses consist
primarily of personnel and related costs for general corporate functions,
including business development, finance, accounting, legal, human resources,
facilities and information systems. The increase in general and administrative
expenses from year to year resulted primarily from increases in administrative
personnel costs, and increases in insurance and additional professional
services, including legal, accounting and public relations services, to support
our 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, losses on sales of property and equipment
and amortization of debt issuance costs. Other income (expense), net was
$254,000 for the period ended March 31, 2002, compared to $1.4 million for the
same period in 2001, a decrease of 82%. The decrease was due to lower interest
income earned from lower average cash and investment balances partially offset
by interest expense related to leased equipment.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Historically, we have financed our operations through the sale of equity
securities, including private sales of preferred stock and the sale of common
stock in our initial public offering.
12
Inspire Pharmaceuticals, Inc.
(a development stage company)
As of March 31, 2002, cash and cash equivalents totaled $34.6 million, an
increase of $4.6 million as compared to December 31, 2001. The increase in cash
and cash equivalents resulted from the net proceeds of investment grade
securities of $8.3 million, the issuance of common stock of $12,000, partially
offset by $3.5 million in cash used by operations, purchase of property, plant
and equipment of $135,000 and the payment of capital lease obligations of
$101,000.
Cash used by operations of $3.5 million in the three months ended March 31,
2002, represented a net loss of $4.8 million, non-cash expenses of $483,000, a
decrease in other receivables of $76,000 and a decrease in prepaid expenses of
$80,000, partially offset by, an increase in interest receivable of $5,000, an
increase in other assets of $16,000, a decrease in accounts payable of $425,000
and a decrease in accrued expenses of $803,000, and an increase in deferred
revenue of $1.9 million.
Cash provided by investing activities for the three months ended March 31,
2002 consisted of the proceeds of investment grade securities, net of purchases
totaling $8.3 million and the purchase of property and equipment totaling
$135,000.
Cash used from financing activities for the three months ended March 31,
2002 was comprised of the issuance of common stock of $12,000 offset by the
payment of lease obligations of $101,000.
We will not generate revenues, other than license and milestone payments,
from the sale of our products unless or until we or our licensees receive
marketing clearance from the FDA and appropriate governmental agencies in other
countries. We cannot predict the timing of any potential marketing clearance nor
can assurances be given that the FDA or such agencies will approve any of our
products.
IMPACT OF INFLATION
- -------------------
Although it is difficult to predict the impact of inflation on our costs
and revenues in connection with our products, we do not anticipate that
inflation will materially impact our cost of operation or the profitability of
our products when marketed.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued FASB
Statements Nos. 141 ("SFAS 141"), "Business Combinations" and 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets." SFAS 141 eliminates pooling-of-interests
accounting prospectively and provides guidance on purchase accounting related to
the recognition of intangible assets and accounting for negative goodwill. SFAS
142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. SFAS 141 and SFAS 142 are effective for all business
combinations completed after June 30, 2001. The Company adopted SFAS 142 as of
January 1, 2002, as required, and as of July 1, 2001 for goodwill and intangible
assets acquired after June 30, 2001. Adoption of SFAS 141 and SFAS 142 has not
had any impact on the Company's financial position or results of operations
In August 2001, the FASB issued FASB Statement 143 ("SFAS 143"),
"Accounting for Asset Retirement Obligations." The objectives of SFAS 143 are to
establish accounting standards for the recognition and measurement of an asset
retirement obligation and its associated asset retirement cost. SFAS 143 is
effective for fiscal years beginning after June 15, 2002. The adoption of SFAS
143 is not expected to have any impact on the Company's financial position or
results of operations.
In October 2001, the FASB issued FASB Statement No. 144 ("SFAS 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of Business, and
13
Inspire Pharmaceuticals, Inc.
(a development stage company)
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
provisions of SFAS 144 are required to be applied to fiscal years beginning
after December 15, 2001. The adoption of SFAS 144 has not had any impact on the
Company's financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
-----------------------------------------------------------
Our exposure to market risk for changes in interest rates relates to the
increase or decrease in the amount of interest income we can earn on its
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to various outstanding debt instruments. Our
risk associated with fluctuating interest expense is limited, however, to
capital lease obligations. The interest rates are closely tied to market rates
and our investments in interest rate sensitive financial instruments. Under our
current policies, we do not use interest rate derivative instruments to manage
exposure to interest rate changes. We ensure the safety and preservation of
invested principal funds by limiting default risk, market risk and reinvestment
risk. We reduce 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 our interest
sensitive financial instruments at March 31, 2002 or March 31, 2001. Declines in
interest rates over time will, however, reduce our interest income while
increases in interest rates over time will increase interest expense.
PART II: OTHER INFORMATION
- ---------------------------
Item 2. Changes in Securities and Use of Proceeds
------------------------------------------
(d) On August 2, 2000, the Securities and Exchange Commission declared a
Registration Statement on Form S-1, as amended (Registration No. 333-31174)
effective, registering 6,325,000 shares of our common stock. The aggregate net
proceeds after deduction of expenses were approximately $69.3 million. Through
March 31, 2002, we have used approximately $29.3 million of the net proceeds of
the offering as follows:
Discovery and research programs ................. $23,070,000
General and administrative expenses ............. 4,770,000
Purchase of equipment ........................... 820,000
Payment of Debt ................................. 630,000
-----------
Total ........................................... $29,290,000
===========
Except with respect to the compensation of our officers and the
reimbursement of director expenses included in discovery and research programs
and general and administrative expenses, all of the net proceeds of the offering
which have been used to date were payable to parties other than our directors,
officers or their associates of such persons, persons owning ten percent or more
of any class of our equity securities, or our affiliates. Through March 31,
2002, all of the remaining net proceeds of the offering were being invested in
interest bearing investment grade securities and certificates of deposit which
are classified as available for sale.
Item 5. Other Information
------------------
Management
Effective April 12, 2002, Joe Schachle resigned as Vice-President, Sales
and Marketing to pursue another opportunity in the pharmaceutical industry. His
departure does not represent any strategic change in our marketing or product
development plans.
Intranasal Program
In March, we announced the completion of our Phase I clinical trial with
INS37217 Intranasal, which is being
14
Inspire Pharmaceuticals, Inc.
(a development stage company)
developed as a nasal spray for the potential treatment of upper respiratory
disorders involving impaired mucociliary clearance. Results of this trial
demonstrated that INS37217 Intranasal was well tolerated across a wide range of
doses. In addition, the data showed consistent evidence of pharmacological
effect across the study population following single-dose administration, based
on a standard measure of mucociliary clearance and transport.
The trial was a single-center, randomized, double-blind,
placebo-controlled, ascending-dose safety and tolerability study conducted in 60
subjects. One-half of the study subjects were normal, healthy volunteers; the
other half were subjects having a history of chronic rhinitis.
We also recently announced the launch of two Phase IIa studies for INS37217
Intranasal solution in a nasal spray formulation. Both studies are double blind,
placebo-controlled, dose-ranging studies. One of the studies is being conducted
in 60 patients with chronic rhinitis. The other study is being conducted in 90
patients with upper respiratory infection.
INS37217 Intranasal is a P2Y2 agonist designed to enhance mucosal hydration
and mucociliary clearance in upper airway tissues. Originally targeted for the
potential treatment of sinusitis, it is now believed to be potentially useful
across a wide variety of upper respiratory disorders involving impaired
clearance including rhinosinusitis, allergic rhinitis and upper respiratory
viral infections.
Dry Eye Program
We recently announced the initiation of a new Phase III clinical trial,
study 03-108, in our INS365 Ophthalmic program. The study was based on findings
from our first Phase III trial, study 03-104, and discussions with the FDA. The
FDA has confirmed that results from this new trial may be used to support a New
Drug Application for INS365 Ophthalmic for dry eye.
We had previously announced that while patients in study 03-104, the first
of two planned Phase III clinical trials, did show improvement, they did not
demonstrate statistically significant improvement over placebo in the study's
primary endpoints at the prescribed 12-week time point. The trial was a
placebo-controlled, double-masked comparison of the safety and efficacy of
INS365 Ophthalmic to placebo, at concentrations of 1% and 2%. The study enrolled
558 patients in 35 sites across the United States. We have conducted a thorough
review of the study 03-104 data, methods and materials. Based on these analyses,
we launched study 03-108.
Study 03-108 is designed as a placebo-controlled, double-masked comparison
of the safety and efficacy of 2% INS365 Ophthalmic eye drops to placebo in 200
dry eye patients. The study is being conducted in a Controlled Adverse
Environment ("CAE"), which controls for temperature, humidity, and other
factors. Endpoints for the study are similar to those studied in the Phase II
and III trials conducted to date. However, the CAE provides a well-controlled
environment and more precise measurement of patients' signs and symptoms of dry
eye. The CAE is expected to enable consistent measurement of patient responses
to INS365 Ophthalmic compared to placebo. Controlled environments have been in
use for many years in the study of other types of ophthalmic disorders including
allergic conjunctivitis, and such studies have supported more than a dozen U.S.
New Drug Applications. The study is being conducted by ORA Clinical Research and
Development of North Andover, Massachusetts.
Our second Phase III trial in INS365 Ophthalmic, study 03-105, is ongoing.
We plan to meet with the FDA during the second quarter of this year to discuss
detailed findings from the analyses of study 03-104 and to agree on an analysis
plan for study 03-105.
INS365 Ophthalmic is a P2Y2 agonist that activates receptors on the surface
and inner lining of the eyelid to release water, salt, mucin and lipids - the
key components of natural tears. INS365 Ophthalmic's novel mechanism of action
represents a potential breakthrough in the treatment of dry eye. Dry eye is a
painful, burning and irritating condition involving abnormalities and
deficiencies in the tear film due to a variety of causes. Approximately 10
million Americans suffer from dry eye, and the incidence increases markedly with
age and after menopause in women. There are currently no FDA-approved
pharmacologically active treatments for dry eye. Any decision regarding the
15
Inspire Pharmaceuticals, Inc.
(a development stage company)
creation of a sales force or marketing program and the decision whether to
exercise our co-promotion option in dry eye will be determined once our Phase
III dry eye program is completed and the NDA filing date is clarified with the
FDA.
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.
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 U.S. Food and Drug Administration
("FDA") or any other regulatory body.
Generally, all of our product candidates are in research or preclinical
development, with only six, INS365 Ophthalmic, INS316 Diagnostic, INS37217
Respiratory, INS365 Respiratory, INS37217 Intranasal, 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;
. the drug effect is not statistically significant compared to placebo;
. 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;
. 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
16
Inspire Pharmaceuticals, Inc.
(a development stage company)
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.
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 for the treatment or diagnosis of respiratory disorders,
INS365 Respiratory, INS316 Diagnostic and INS37217 Respiratory, 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. INS37217 Intranasal is administered through a nasal mist pump.
Patients may find the pump difficult to operate. 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. INS37217 Ophthalmic is administered through an intraocular
injection. Patients may prefer to a have a sustained delivery device. We have
not yet established a plan for a sustained delivery device. 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.
17
Inspire Pharmaceuticals, Inc.
(a development stage company)
OUR DEPENDENCE ON COLLABORATIVE RELATIONSHIPS MAY LEAD TO DELAYS IN PRODUCT
DEVELOPMENT AND DISPUTES OVER RIGHTS TO TECHNOLOGY.
Our business strategy depends to some extent upon the formation of research
collaborations, licensing and/or marketing arrangements. We currently have
development collaborations with four collaborators, Allergan, Kissei, Santen and
Kirin. The termination of any collaboration may lead to delays in product
development and disputes over technology rights and may reduce our ability to
enter into collaborations with other potential partners. Allergan has the right,
by giving us 180 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 Allergan, Kissei, Santen or Kirin
collaborations or establish additional research and development collaborations
or licensing arrangements it will be difficult to develop and commercialize
therapeutic or diagnostic products using our technology. Any future
collaborations or licensing arrangements may not be on terms favorable to us.
Our current or any future collaborations or licensing arrangements ultimately
may not be successful. Under our current strategy, and for the foreseeable
future, we do not expect to develop or market therapeutic or diagnostic products
on our own. As a result, we will continue to depend on collaborators and
contractors for the preclinical study and clinical development of therapeutic
products and for regulatory approval, manufacturing and marketing of therapeutic
and diagnostic products which result from our technology. The agreements with
collaborators typically will allow them some discretion in electing whether to
pursue such activities. If any collaborator were to breach or terminate its
agreement with us or otherwise fail to conduct collaborative activities in a
timely and successful manner, the preclinical or clinical development or
commercialization of product candidates or research programs would be delayed or
terminated. Any delay or termination in clinical development or
commercialization would delay or eliminate potential product revenues relating
to our research programs.
We intend to rely on Allergan, Kissei, Santen, Kirin and any future
collaborators for significant funding in support of our development efforts. If
Allergan, Kissei, Santen or Kirin reduces or terminates its funding, we will
need to devote additional internal resources to product development, scale back
or terminate certain research and development programs or seek alternative
collaborators.
Disputes may arise in the future over the ownership of rights to any
technology developed with collaborators. These and other possible disagreements
between us and our collaborators could lead to delays in the collaborative
development or commercialization of therapeutic or diagnostic products. Such
disagreement could also result in litigation or require arbitration to resolve.
IF WE ARE UNABLE TO CONTRACT WITH THIRD PARTIES FOR SYNTHESIS AND MANUFACTURING
OF PRODUCT CANDIDATES FOR PRECLINICAL TESTING AND CLINICAL TRIALS AND FOR LARGE
SCALE MANUFACTURING OF ANY OF OUR DRUG CANDIDATES, WE MAY BE UNABLE TO DEVELOP
OR COMMERCIALIZE PRODUCTS.
We have no experience or capabilities in large scale commercial
manufacturing of any of our product candidates or any experience or capabilities
in the manufacturing of pharmaceutical products generally. We do not generally
expect to engage directly in the manufacturing of products, but instead intend
to contract with others for these services. We have relied upon supply
agreements with third parties for the manufacture and supply or our product
candidates for purposes of preclinical testing and clinical trials. Although we
have previously received preclinical and clinical supplies of our product
candidates from several suppliers, we presently depend upon Yamasa Corporation
as the sole manufacturer 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
18
Inspire Pharmaceuticals, Inc.
(a development stage company)
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.
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
19
Inspire Pharmaceuticals, Inc.
(a development stage company)
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.
Two of our six current clinical development programs depend on two
exclusive licenses and one non-exclusive license from The University of North
Carolina at Chapel Hill . Generally, if we fail to meet milestones under the
respective UNC licenses, UNC may terminate the applicable license. In addition,
it may be necessary in the future for us to obtain additional licenses from UNC
or other third parties to develop future commercial opportunities or to avoid
infringement of third party patents. We do not know the terms on which such
licenses may be available, if at all.
Failure to license or otherwise acquire necessary technologies may reduce
or eliminate our ability to develop product candidates. Even if we acquire all
necessary licenses, if we breach any license provision, either intentionally or
unintentionally, we may lose our right to continued use of the licensed
technology.
BECAUSE WE RELY UPON TRADE SECRETS AND AGREEMENTS TO PROTECT SOME OF OUR
INTELLECTUAL PROPERTY, THERE IS A RISK THAT UNAUTHORIZED PARTIES MAY OBTAIN AND
USE INFORMATION THAT WE REGARD AS PROPRIETARY.
We rely upon the laws of trade secrets and non-disclosure agreements and
other contractual arrangements to protect our proprietary compounds, methods,
processes, formulations and other information for which we are not seeking
patent protection. We have taken security measures to protect our proprietary
technologies, processes, information systems and data, and we continue to
explore ways to further enhance security. However, despite these efforts to
protect our proprietary rights, unauthorized parties may obtain and use
information that we regard as proprietary. Employees, academic collaborators and
consultants with whom we have entered confidentiality and/or non-disclosure
agreements, may improperly disclose our proprietary information. In addition,
competitors may, through a variety of proper means, independently develop
substantially the equivalent of our proprietary information and technologies,
gain access to our trade secrets, or properly design around any of our patented
technologies.
BECAUSE ALL OF OUR PRODUCT CANDIDATES USE RELATED MECHANISMS OF ACTION, WE MAY
NOT BE ABLE TO COMMERCIALIZE OUR PRODUCTS IF THE MECHANISM OF ACTION IS NOT
EFFECTIVE.
Any products resulting from our product development efforts are not
expected to be available for sale for at least two years, if at all. Six of our
product candidates, INS365 Ophthalmic, INS365 Respiratory, INS37217 Respiratory,
INS316 Diagnostic, INS37217 Intranasal 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.
20
Inspire Pharmaceuticals, Inc.
(a development stage company)
We have experienced significant losses since inception. We incurred net
losses of $4.8 million for the three months ending March 31, 2002, $23.1 million
for the year ended December 31, 2001 and $14.6 million for the year ended
December 31, 2000. As of March 31, 2002 our accumulated deficit was
approximately $75.8 million. We expect to incur additional significant operating
losses over the next several years and expect cumulative losses to increase 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 ending March 31, 2002 our operating
expenses exceeded $6 million. In the fiscal year ended December 31, 2001 our
operating expenses exceeded $30 million. We expect our capital and operating
expenditures to exceed our revenue over the next several years as we conduct our
research and development activities, address possible difficulties with clinical
studies and prepare for commercial sales. Many factors will influence our future
capital needs. These factors include:
. the progress of our research programs;
. the number and breadth of these programs;
. our ability to attract collaborators for our products;
. achievement of milestones under our existing collaborations with
Allergan, Kissei, Santen and Kirin;
. our ability to establish and maintain additional collaborations;
. progress by our collaborators: Allergan, Kissei, Santen and Kirin;
. the level of activities relating to commercialization rights we retain
in our collaborations;
. competing technological and market developments;
. the costs involved in enforcing patent claims and other intellectual
property rights; and
. the costs and timing of regulatory approvals.
We anticipate that our operating expenses will exceed $25 million in 2002.
We also expect to purchase capital equipment at a cost of approximately $500,000
in 2002. We intend to rely on Allergan, 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.
21
Inspire Pharmaceuticals, Inc.
(a development stage company)
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, Alcon, AstraZeneca, Boehringer Ingelheim, Chiron, Genentech,
GlaxoSmithKline, Novartis, and Pfizer. Most 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),
Beclovent(R) and Flovent(R), bronchodilators such as Atrovent(R), Proventil(R)
and Serevent(R), and antibiotics such as Biaxin(R) and Zithromax(R).
Pulmozyme(R) and TOBI(R) are examples of products used to treat cystic fibrosis.
The main current treatments for dry eye disease involve artificial tear
replacement drops. The main current treatments for colds, allergic rhinitis and
rhinosinusitis include antihistamines, antibiotics, decongestants and
anti-inflammatory steroids. Our competitors market anti-inflammatory steroidal
agents, such as Flonase(R) and Nasonex(R). In addition, alternative approaches
to treating diseases which we have targeted, such as gene therapy, may make our
product candidates obsolete. Our competitors may also be more successful in
production and marketing.
In addition, some of our competitors have greater experience than we do in
conducting preclinical and clinical trials and obtaining FDA and other
regulatory approvals. Accordingly, our competitors may succeed in obtaining FDA
or other regulatory approvals for drug candidates more rapidly than we do.
Companies that complete clinical trials, obtain required regulatory approvals
and commence commercial sale of their drugs before we do may achieve a
significant competitive advantage, including patent and FDA marketing
exclusivity rights that would delay our ability to market products. Drugs
resulting from our research and development efforts, or from our joint efforts
with our collaborative partners may not compete successfully with competitors'
existing products or products under development.
FAILURE TO HIRE AND RETAIN KEY PERSONNEL MAY HINDER OUR PRODUCT DEVELOPMENT
PROGRAMS AND OUR BUSINESS EFFORTS.
We depend on the principal members of management and scientific staff,
including Christy L. Shaffer, Ph.D., our President, Chief Executive Officer and
director; and Gregory J. Mossinghoff, our Senior Vice President, Chief Business
Officer and director. If either of these people leaves us, we may have
difficulty conducting our operations. We have not entered into agreements with
either 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.
22
Inspire Pharmaceuticals, Inc.
(a development stage company)
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 is
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 to do so
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.
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 37% of the common stock as of February 15,
2002. 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
23
Inspire Pharmaceuticals, Inc.
(a development stage company)
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 are 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 HAS BEEN HIGHLY VOLATILE AND YOUR INVESTMENT IN OUR STOCK
MAY DECLINE IN VALUE.
The market price of our common stock has been highly volatile. Factors
that have caused volatility and could cause additional volatility in the market
price of our common stock include among others:
. announcements made by us concerning results of our clinical trials
with INS365 Ophthalmic, INS37217 Ophthalmic, INS316 Diagnostic,
INS37217 Respiratory, INS365 Respiratory, INS37217 Intranasal and any
other product candidates;
. changes in government regulations;
. regulatory actions as a result of their therapeutic approach;
. changes in concerns of our collaborators, in particular our
collaborations with Allergan, Kissei, Santen and Kirin;
. developments concerning proprietary rights including patents by us or
our competitors;
. variations in our operating results; and
. litigation.
Extreme price and volume fluctuations occur in the stock market from time
to time and that can particularly affect the prices of biotechnology companies.
These extreme fluctuations are sometimes 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 April 30, 2002, there were 25,804,006 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 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. Similarly, all of
24
Inspire Pharmaceuticals, Inc.
(a development stage company)
the 3,004,220 shares of our common stock that were registered pursuant to our
registration statement on Form S-8 are, or will be, freely tradable in
accordance with such registration statement.
We may issue additional shares:
. to employees, directors and consultants;
. in connection with corporate alliances;
. in connection with acquisitions; and
. to raise capital.
As a result of these factors, a substantial number of shares of our
common stock could be sold in the public market at any time.
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 Certificate of Amendment of Amended and Restated Certificate of
Incorporation (Incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K filed on March 26, 2002).
3.3 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).
b) Reports on Form 8-K
On January 16, 2002, Inspire filed a Current Report on Form 8-K, dated
January, 16, 2002, announcing the preliminary results on the first Phase III
clinical trial for INS365 Ophthalmic for the treatment of dry eye.
On January 29, 2002, Inspire filed a Current Report on Form 8-K, dated
January 29, announcing the prioritization of its clinical programs and providing
an update on its dry eye program.
25
Inspire Pharmaceuticals, Inc.
(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 10, 2002 By: /s/ Christy L. Shaffer
- ------------------ ---------------------------------
Christy L. Shaffer
President, Chief Executive Officer
(principal executive officer)and Director
Date: May 10, 2002 By: /s/ Gregory J. Mossinghoff
- ------------------ ---------------------------------
Gregory J. Mossinghoff
Senior Vice President,
Chief Business Officer,
Secretary, Treasurer (principal
financial officer and principal
accounting officer) and Director
26