UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
or,
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______________________ to_____________________
COMMISSION FILE NUMBER: 0-23556
INHALE THERAPEUTIC SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3134940
- ------------------------------- --------------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
150 INDUSTRIAL ROAD
SAN CARLOS, CALIFORNIA 94070
(Address of principal executive offices)
650-631-3100
(Registrant's telephone number, including area code)
Not applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required 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. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of outstanding shares of the registrant's Common Stock, $0.0001
par value, was 16,983,335 as of July 30, 1999.
Page 1 of 18
INHALE THERAPEUTIC SYSTEMS, INC.
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements - unaudited .........................3
Condensed Balance Sheets - June 30, 1999 and December 31, 1998......3
Condensed Statements of Operations for the three and six month
periods ended June 30, 1999 and 1998..............................4
Condensed Statements of Cash Flows for the six month periods
ended June 30, 1999 and 1998..................................... 5
Notes to Condensed Financial Statements.............................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................7
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings...................................................16
Item 2. Changes in Securities...............................................16
Item 3. Defaults Upon Senior Securities.....................................16
Item 4. Submission of Matters to a Vote of Security Holders.................16
Item 5. Other Information...................................................16
Item 6. Exhibits and Reports on Form 8-K....................................16
Signatures..........................................................18
Page 2 of 18
ITEM 1. INHALE THERAPEUTICS SYSTEMS, INC.
CONDENSED BALANCE SHEET
(IN THOUSANDS)
JUNE 30, 1999 DECEMBER 31, 1998
(UNAUDITED) *
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,671 $ 24,916
Short-term investments 43,618 57,946
Accounts receivable 13,632 1,013
Other current assets 538 665
------------- -----------------
Total current assests 72,459 85,540
Property and equipment, net 54,136 49,863
Deposits and other assets 93 93
------------- -----------------
$126,688 $134,496
------------- -----------------
------------- -----------------
LIABILITES AND STOCKHOLDERS' EQUITY
Current liabilites:
Accounts payable and accrued liabilities $ 12,468 $ 8,397
Deferred revenue 3,163 4,359
------------- -----------------
Total current liabilities $ 15,631 $ 12,756
Equipment financing obligation 1 9
Tenant improvement loan 4,916 4,931
Accrued rent 1,058 919
Stockholders' equity:
Common stock 2 2
Capital in excess of par value 173,501 172,847
Deferred compensation (1,075) (931)
Accumulated other comprehensive loss (100) (19)
Accumulated deficit (67,246) (56,018)
------------- -----------------
Total stockholders' equity 105,082 115,881
------------- -----------------
$126,688 $134,496
------------- -----------------
------------- -----------------
SEE ACCOMPANYING NOTES
(*) The balance sheet at December 31, 1998 has been derived from the audited
Financial Statements at that date, which are included in the Company's Form
10-K for the year ended December 31, 1998 as filed with the Securities and
Exchange Commission. This balance sheet does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
Page 3 of 18
INHALE THERAPEUTIC SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
----------- ------------ ----------- ----------
Contract research revenue $ 9,877 $ 6,679 $ 17,657 $ 10,544
Operating costs and expenses:
Research and development 14,613 8,645 27,328 15,862
General and administrative 1,933 2,025 3,197 3,950
----------- ------------ ----------- ----------
Total operating costs and expenses 16,546 10,670 30,525 19,812
----------- ------------ ----------- ----------
Loss from operations (6,669) (3,991) (12,868) (9,268)
Interest income, net 663 1,141 1,640 2,269
----------- ------------ ----------- ----------
Net loss $ (6,006) $ (2,850) $(11,228) $ (6,999)
----------- ------------ ----------- ----------
----------- ------------ ----------- ----------
Basic and diluted net loss per share $ (0.35) $ (0.18) $ (0.66) $ (0.45)
----------- ------------ ----------- ----------
----------- ------------ ----------- ----------
Shares used in computing basic and diluted
net loss per share 16,951 15,638 16,940 15,603
----------- ------------ ----------- ----------
----------- ------------ ----------- ----------
SEE ACCOMPANYING NOTES
Page 4 of 18
INHALE THERAPEUTIC SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------------
1999 1998
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash used in operations ($14,912) ($10,815)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments, net of purchases and maturities 14,248 39,352
Purchases of property and equipment (9,925) (16,158)
------------ ----------
Net cash provided by investing activities 4,323 23,194
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of equipment financing obligations (25) (151)
Issuance of common stock, net of issuance costs 369 1,305
------------ ----------
Net cash provided by financing activities 344 1,154
------------ ----------
Net increase (decrease) in cash and cash equivalents (10,245) 13,533
Cash and cash equivalents at beginning of period 24,916 14,948
------------ ----------
Cash and cash equivalents at end of period $14,671 $28,481
------------ ----------
------------ ----------
SEE ACCOMPANYING NOTES.
Page 5 of 18
INHALE THERAPEUTIC SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. Organization and Basis of Presentation
Inhale Therapeutic Systems, Inc. ("Inhale" or the "Company") was
incorporated in the State of California in July 1990 and reincorporated in
the State of Delaware in July 1998. Since inception, Inhale has been engaged
in the development of systems for the pulmonary delivery of macromolecule
drug therapies for systemic and local lung applications.
The accompanying unaudited condensed financial statements of Inhale have
been prepared by management in accordance with generally accepted accounting
principles for interim financial information and the instructions for Form
10-Q and Article 10 of Regulation S-X. The condensed balance sheet as of
June 30, 1999, the condensed statements of operations for the three and six
month periods ended June 30, 1999 and 1998, and the condensed statements of
cash flows for the six month periods ended June 30, 1999 and 1998 have been
prepared by Inhale without audit, but include all adjustments (consisting
only of normal recurring adjustments) which Inhale considers necessary for a
fair presentation of the financial position at such dates and the operating
results and cash flows for those periods. Although Inhale believes that the
disclosures in these financial statements are adequate to make the
information presented not misleading, certain information normally included
in financial statements and related footnotes prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). The accompanying financial statements should
be read in conjunction with the financial statements and notes thereto
included in Inhale's Annual Report on Form 10-K for the year ended December
31, 1998 as filed with the Commission.
Results for any interim period presented are not necessarily indicative
of results for any other interim period or for the entire year.
2. COMPREHENSIVE LOSS
Other comprehensive losses (primarily unrealized losses on available for
sale securities) amounted to $81,000 and $30,000, respectively, for the six
month periods ended June 30, 1999 and 1998.
3. REVENUE RECOGNITION
Contract revenue from collaborative research agreements is recorded when
earned and as the related costs are incurred. Payments received which are
related to future performance are deferred and recognized as revenue when
earned over future performance periods. In accordance with contract terms,
up-front and progress payments from collaborative research agreements are
considered to be payments to support continued research and development
activities under the agreements. In accordance with the Company's revenue
recognition policy, these payments are included in deferred revenue and are
recognized as the related research and development expenditures are incurred.
Contract research revenue from one partner represented 76% of Inhale's
revenue in the six month period ended June 30, 1999. Contract revenue from
three partners accounted for 42%, 25% and 20% of Inhale's total revenue in
the corresponding period in 1998. Costs of contract research revenue
approximate such revenue and are included in operating costs and expenses.
4. NET LOSS PER SHARE
Basic and diluted net loss per common share is computed in conformance
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", which Inhale adopted in 1997. Accordingly, the weighted
Page 6 of 18
average number of common shares outstanding are used while common stock
equivalent shares for stock options and warrants are not included in the per
share calculations as the effect of their inclusion would be antidilutive.
5. SEGMENT INFORMATION
Management has organized Inhale's business in one operating segment
which includes activities related to the development of systems for the
pulmonary delivery of macromolecule drugs. Inhale's operations are presently
located in the United States and Inhale derives all of its revenues from
within the United States.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three and six months ended June 30, 1999 and
1998 should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in
Inhale's Annual Report on Form 10-K for the year ended December 31, 1998. The
following discussion contains forward-looking statements that involve risk
and uncertainties. Inhale's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein under the heading
"Risk Factors" as well as those discussed in Inhale's Annual Report on Form
10-K for the year ended December 31, 1998.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of
the date hereof. Inhale undertakes no obligation to publicly release the
results of any revision to these forward-looking statements which may be made
to reflect events or circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
OVERVIEW
Since its inception in July 1990, Inhale has been engaged in the
development of a pulmonary system for the delivery of macromolecules and
other drugs for systemic and local lung applications. Inhale has been
unprofitable since inception and expects to incur significant and increasing
additional operating losses over the next several years primarily due to
increasing research and development expenditures and expansion of late stage
clinical and early stage commercial manufacturing facilities. To date,
Inhale has not sold any commercial products and does not anticipate receiving
revenue from product sales or royalties in the near future. For the period
from inception through June 30, 1999, Inhale incurred a cumulative net loss
of approximately $67.2 million. The sources of working capital have been
equity financings, financings of equipment acquisitions and tenant
improvements, interest earned on investments of cash, and revenues from
short-term research and feasibility agreements and development contracts.
Inhale typically has been compensated for research and development
expenses during initial feasibility work performed under collaborative
arrangements. Partners that enter into collaborative agreements will pay for
research and development expenses and make additional payments to Inhale as
Inhale achieves certain key milestones. Inhale expects to receive royalties
from its partners based on their revenues received from product sales, and to
receive revenue from the manufacturing of powders and the supply of devices.
In certain cases, Inhale may enter into collaborative agreements under which
Inhale's partners would manufacture or package powders or supply inhalation
devices, thereby potentially limiting one or more sources of revenue for
Inhale. To achieve and sustain profitable operations, Inhale, alone or with
others, must successfully develop, obtain regulatory approval for,
manufacture, introduce, market and sell products utilizing its pulmonary drug
delivery system. There can be no assurance that Inhale can generate
sufficient product or contract research revenue to become profitable or to
sustain profitability.
RESULTS OF OPERATIONS
Revenue in the second quarter of 1999 was $9.9 million compared to $6.7
million in the second quarter of 1998, an increase of approximately 48%.
Revenues for the six months ended June 30, 1999 were $17.7 million as
Page 7 of 18
compared to $10.5 million for the six months ended June 30, 1998, an increase
of 69%. The increase in revenue for both the three and six month periods was
primarily due to the expansion of Inhale's existing collaborative agreement
with Pfizer, Inc. and includes activities associated with the manufacture of
Phase III clinical supplies. Revenue for the first and second quarters of
1999 and 1998 was comprised of reimbursed research and development expenses
as well as the amortization of the pro-rata portion of up-front signing and
progress payments received from Inhale's collaborative partners. Recognition
of up-front signing and progress payments is based on actual efforts
expended. Costs of contract research revenue approximate such revenue and
are included in research and development expenses.
Research and development expenses increased to approximately $14.6
million in the second quarter of 1999 from $8.6 million in the corresponding
period of 1998, an increase of 70%. Research and development expenses for
the six months ended June 30, 1999 were $27.3 million compared to $15.9
million for the six months ended June 30, 1998, an increase of 72%. The
increase for the three and six month periods was due to increased spending
related to the scale-up of technologies and the continuing development of the
Company's manufacturing capabilities in order to support Phase III inhaleable
insulin clinical trials and commercial production. In addition, the Company
hired additional scientific and development personnel to handle an increase
in the number of development projects and incurred increased expenses
associated with device development. The largest components of the 72%
increase in research and development expenses for the six months ended June
30, 1999 compared to the same period in 1998 are the increase in salaries and
employee benefits expense of $4.3 million, $3.1 million in research and
development supplies and services, and $3.2 million in facilities and
administrative expense allocations associated with supporting the research
and development efforts. Inhale expects research, development and process
development spending to increase over the next few years as Inhale continues
to expand its development efforts under collaborative agreements and scales
up its commercial manufacturing facility.
General and administrative expenses decreased slightly to $1.9 million
in the second quarter of 1999 from $2.0 million in the second quarter of
1998. For the six month period ended June 30, 1999, general and
administrative expenses were $3.2 million compared to $4.0 million in the
comparable period of 1998, a decrease of 20%. The decrease for the three and
six month periods was due principally to a change in the Company's
methodology for allocating administrative costs to research and development
expenses. In the third quarter of 1998, the Company began allocating
information systems costs associated with supporting the Inhale organization
including systems infrastructure development, maintenance and support
activities. In 1999 the Company began allocating human resources costs,
including administrative staffing expenses, because these costs were also
associated with supporting the Inhale organization. For the six month period
ended June 30, 1999, the allocation of information systems costs and human
resources costs resulted in a decrease in administrative expenses of $1.1
million and $0.5 million, respectively, which was offset by a net increase in
administrative expenses of $0.8 million related to increased facilities costs
and the allocated share of administrative expenses associated with supporting
the Company's increased research efforts, including administrative staffing
and business development activities. General and administrative expenses
are expected to continue to increase over the next few years to support
increasing levels of research, development and manufacturing activities.
Net interest income decreased to $0.7 million in the second quarter of
1999 compared to $1.1 million in the second quarter of 1998, a decrease of
36%. Net interest income decreased to $1.6 million in the six month period
ended June 30, 1999 compared to $2.3 million for the six months ended June
30, 1998. Interest income was earned on lower cash and investment balances
held by Inhale in the three and six month periods ended June 30, 1999,
compared to the same periods in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Inhale has financed its operations primarily through public and private
placements of its equity securities, contract research and milestone
payments, financing of equipment acquisitions and interest income earned on
its investments of cash. At June 30, 1999, Inhale had cash, cash equivalents
and short-term investments of approximately $58.3 million.
Inhale's operations used cash of $14.9 million in the six months ended
June 30, 1999, as compared to $10.8 million used in the six months ended June
30, 1998. The increase in cash used in operations was due principally to the
continued expansion of research activities resulting from an expanded scope
of the Pfizer collaboration, an increase in the number of research projects
being undertaken and the need to provide general and administrative support
for these
Page 8 of 18
increased research efforts, including increased business development and
marketing expenses. Additionally, the increase in cash used in operations
was attributed to Inhale's increased investment in working capital,
particularly the increase in accounts receivable of $12 million at June 30,
1999 compared to the same period in prior year, which was offset by an
increase in current liabilities of $3 million.
Inhale purchased property and equipment of approximately $9.9 million
during the six months ended June 30, 1999, compared to $16.1 million for the
corresponding period in 1998. The decrease in purchased property and
equipment is due to the fact that 1998 spending included costs related to the
build out of Inhale's headquarters and construction of phase one of its
manufacturing plant located in San Carlos, California, which is now largely
complete.
Inhale expects its cash requirements to continue to increase at an
accelerated rate due to expected increases in costs associated with further
research and development of its technologies, development of drug
formulations, process development for the manufacture and filling of powders
and devices, marketing and general and administrative costs. These expenses
include, but are not limited to, increases in personnel and personnel related
costs, purchases of capital equipment, investments in technologies,
inhalation device prototype construction and facilities expansion, including
the completion of its late stage clinical and commercial manufacturing
facility.
Given the current cash burn rate, the Company believes that it would
have sufficient cash to meet its operating expense requirements for at least
the next 12 months. However, the Company plans to continue to invest heavily
in its growth and the need for cash will be dependent upon the timing of
these investments. Inhale's capital needs will depend on many factors,
including continued scientific progress in its research and development
arrangements, progress with pre-clinical and clinical trials, the time and
costs involved in obtaining regulatory approvals, the costs of developing and
the rate of scale-up of Inhale's powder processing and packaging
technologies, the timing and cost of its late-stage clinical and early
commercial production facility, the costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims, the need to acquire
licenses to new technologies and the status of competitive products. To
satisfy its long-term needs, Inhale intends to seek additional funding, as
necessary, from corporate partners and from the sale of securities. There
can be no assurance that additional funds, if and when required, will be
available to Inhale on favorable terms, if at all.
YEAR 2000 COMPLIANCE
Inhale is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The Year 2000 ("Y2K")
problem is pervasive and complex as virtually every computer operation may be
affected in some way by the rollover of the two digit year value to "00". The
issue is whether systems will properly recognize date sensitive information
when the year changes to 2000. If Inhale's software and firmware with
date-sensitive functions are not Y2K compliant, they may recognize a date
with "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, interruptions in manufacturing operations, a
temporary inability to process transactions, or engage in similar normal
business activities.
Inhale is utilizing both internal and external resources to conduct a
comprehensive review of its systems to identify those systems that could be
affected by the Y2K problem and has developed an implementation plan to
resolve the issue by the end of 1999. The scope of the Y2K effort includes
information technology ("IT") such as software and hardware, non-IT systems
or embedded technology such as microcontrollers contained in various
manufacturing and lab equipment, environmental and safety systems, facilities
and utilities, and the Y2K readiness of key third parties such as suppliers
and financial institutions. A multi-step Y2K readiness plan has been
developed for its internal systems. This plan includes the following
elements: 1) Awareness - raising Inhale's awareness of the Y2K issue; 2)
Discovery - keeping an inventory and monitoring the compliance status of key
financial, informational and operations systems subject to Y2K issues; 3)
Assessment - determining both the business impact of noncompliance and the
likelihood of noncompliance from each of the entities in the inventory; 4)
Validation Remediation - the process of validating entities to ascertain
compliance and remediate non-compliant entities. As of June 30, 1999, Inhale
had completed the Awareness, Discovery and Assessment phases of the plan. The
Remediation and Validation phase is underway with completion of mission
critical and high impact systems by the end of the third quarter of 1999.
Inhale initiated formal communication with significant vendors and
suppliers to determine the extent to which Inhale's operations are vulnerable
to those third parties' failure to remediate their own Y2K issues. Suppliers
of hardware, software or other products that might contain embedded
processors were requested to provide information
Page 9 of 18
regarding Y2K compliance status of their products. Inhale identified mission
critical vendors and suppliers and stockpiling measures are being
implemented. In addition, in order to protect against the acquisition of
additional non-compliant products, Inhale now requires suppliers to warrant
that products sold or licensed to Inhale are Y2K compliant. In the event that
any of Inhale's significant suppliers do not successfully achieve Y2K
compliance in a timely manner, Inhale's business or operations could be
adversely affected. There can be no assurance that the systems of other
companies on which Inhale's systems rely will be converted on a timely basis
and would not have an adverse effect on Inhale's operations.
As of June 30, 1999, Inhale has substantially developed a comprehensive
contingency plan to address situations that may result if Inhale is unable to
achieve Y2K readiness of its critical operations. The contingency plan will
be implemented should situations occur where Inhale is unable to achieve Y2K
readiness in its critical operations. There can be no assurance that Inhale's
contingency plan will adequately address all issues that may arise in the
year 2000. The failure of Inhale to develop and implement, if necessary, an
appropriate contingency plan could have a material impact on the operations
of Inhale. Finally, Inhale is also vulnerable to external forces that might
generally affect industry and commerce, such as utility and transportation
company Y2K compliance failures and related service interruptions. If
Inhale, its suppliers or collaborative partners fail to remedy any Y2K
issues, the most likely worst case scenario would be a delay in Inhale's
research programs and efforts to scale-up to manufacturing capacity. Certain
chemicals and products could also be spoiled in the event of an extended
power outage. If either of these events occur, this in turn could result in
the incurrence of material costs or loss of revenue. Presently, Inhale is
unable to reasonably estimate the duration and extent of any such
interruption, or quantify the effect it may have on it's future revenues and
results of operations.
Inhale anticipates completing the mission critical, high impact Y2K
issues by the third quarter of 1999, which is prior to any anticipated impact
on its operating systems and expects the Y2K project to continue beyond the
year 2000 with respect to the upgrading, replacement and testing of
non-critical systems. These dates are contingent upon the timeliness and
accuracy of software and hardware upgrades from vendors, adequacy and quality
of resources available to work on completion of the project and any other
unforeseen factors. The total expense of the Y2K project is currently
estimated at approximately $750,000, of which approximately $400,000 has been
spent through June 30, 1999, which is not material to Inhale's business
operations or financial condition. The expenses of the Y2K project are being
funded through operating cash flows.
The costs of the project and the date on which Inhale believes it will
complete the Y2K modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification
plans and other factors. There can be no assurance that these estimates will
be achieved and actual results could differ materially from those anticipated.
RISK FACTORS
WE DO NOT KNOW IF OUR DEEP LUNG DRUG DELIVERY SYSTEM IS TECHNICALLY FEASIBLE.
We are in an early stage of development. There is a risk that our deep
lung delivery technology will not be technically feasible. Even if our deep
lung delivery technology is technically feasible, it may not be commercially
accepted across a range of large and small molecule drugs. We have tested six
of our thirteen deep lung delivery formulations in humans. The deep lung
formulations tested in humans are insulin, interleukin-1 receptor, salmon
calcitonin, an osteoporosis drug and two small molecules.
Many of the underlying drug compounds contained in our deep lung
formulations have been tested in humans by other companies using alternative
delivery routes. Our potential products require extensive research,
development and pre-clinical (animal) and clinical (human) testing. Our
potential products also may involve lengthy regulatory review before they can
be sold. We do not know if and cannot assure that any of our potential
products will prove to be safe and effective or meet regulatory standards.
There is a risk that any of our potential products will not be able to be
produced in commercial quantities at acceptable cost or marketed
successfully. Our failure to achieve technical feasibility, demonstrate
safety, achieve clinical efficacy, obtain regulatory approval or, together
with partners, successfully market products will seriously impact the amount
of our revenue and our results of operations.
Page 10 of 18
WE DO NOT KNOW IF OUR DEEP LUNG DELIVERY SYSTEM IS EFFICIENT.
We may not be able to achieve the total system efficiency needed to be
competitive with alternative routes of delivery. System efficiency is the
product of the deep lung bioavailability of a potential product and the
percentage of each drug dose lost at various stages of the manufacturing and
deep lung delivery process. Deep lung bioavailability is the percentage of a
drug that is absorbed into the bloodstream when that drug is delivered
directly to the lungs. This is the initial screen for whether deep lung
delivery of any systemic drug is feasible.
WE DO NOT KNOW IF OUR DEEP LUNG DRUG FORMULATIONS ARE STABLE.
We may not be able to identify and produce powdered versions of drugs
that retain the physical and chemical properties needed to work with our
delivery device. Formulation stability is the physical and chemical stability
of the drug over time and under various storage conditions. Formulation
stability will vary with each deep lung formulation and the type and amount
of ingredients that are used in the formulation. We would not consider a drug
to be a good candidate for development and commercialization if its dose loss
is excessive at any one stage or cumulatively in the manufacturing and
delivery process or if its deep lung bioavailability is too low. Problems
with powdered drug stability would seriously impact our ability to develop
and market our potential products.
WE DO NOT KNOW IF OUR DEEP LUNG SYSTEM IS SAFE.
We may not be able to prove potential products to be safe.
Our products require lengthy laboratory, animal and human testing. For
most of our products we are in the early stage of human testing. If we find
that any product is not safe, we will not be able to commercialize the
product. The safety of our deep lung formulations will vary with each drug
and the ingredients used in its formulation.
WE DO NOT KNOW IF OUR DEEP LUNG SYSTEM PROVIDES CONSISTENT DOSES OF MEDICINE.
We may not be able to provide reproducible dosages of stable
formulations sufficient to achieve clinical success. Reproducible dosing is
the ability to deliver a consistent and predictable amount of drug into the
bloodstream over time both for a single patient and across patient groups.
Reproducible dosing requires the development of:
- an inhalation device that consistently delivers predictable amounts
of dry powder formulations to the deep lung;
- accurate unit dose packaging of dry powder formulations; and
- moisture resistant packaging.
We may not be able to develop reproducible dosing of any potential
product. The failure to do so means that we would not consider it a good
candidate for development and commercialization.
WE DO NOT KNOW IF OUR TECHNOLOGIES CAN BE INTEGRATED IN TIME TO BRING PRODUCT
TO MARKET.
We may not be able to integrate all of the relevant technologies to
provide an integrated deep lung delivery system. Our integrated approach to
systems development relies upon several different but related technologies:
- dry powder formulations;
- dry powder processing technology;
- dry powder packaging technology; and
- deep lung delivery devices.
Page 11 of 18
At the same time we must:
- establish collaborations with partners;
- perform laboratory and clinical testing of potential products; and
- scale-up our manufacturing processes.
We must accomplish all of these steps without delaying any aspect of
technology development. Any delay in one component of product or business
development could delay our ability to develop, obtain approval of or market
therapeutic products using our deep lung delivery technology.
OUR DEEP LUNG DELIVERY SYSTEM MAY NOT BE COMMERCIALLY ACCEPTED.
We may not be able to achieve commercial viability of our deep lung
delivery system. In order to sell any potential product, we must make it
commercially acceptable to the market. This means that we must:
- further refine our device prototype;
- complete scale-up of our powder processing system; and
- complete scale-up of our automated packaging system.
The failure to demonstrate deep lung bioavailability, achieve total
system efficiency, provide safe, reproducible dosages of stable formulations
or advance on a timely basis the numerous aspects of product and business
development will seriously impact the amounts of our revenues and our results
of operations.
WE EXPECT TO CONTINUE TO LOSE MONEY FOR THE NEXT SEVERAL YEARS.
We have never been profitable and, through June 30, 1999, have incurred
a cumulative deficit of approximately $67.2 million. We expect to continue to
incur substantial and increasing losses over at least the next several years
as we expand our research and development efforts, testing activities and
manufacturing operations, and as we complete our late stage clinical and
early commercial production facility. All of our potential products are in
research or in the early stages of development except for our insulin
collaboration. We have generated no revenues from approved product sales. Our
revenues to date have consisted primarily of payments under short-term
research and feasibility agreements and development contracts. To achieve and
sustain profitable operations, we must, alone or with others, successfully
develop, obtain regulatory approval for, manufacture, introduce, market and
sell products using our deep lung drug delivery system. There is a risk that
we will not generate sufficient product or contract research revenue to
become profitable or to sustain profitability.
WE DEPEND ON PARTNERS FOR REGULATORY APPROVALS AND COMMERCIALIZATION OF OUR
PRODUCTS.
Since Inhale is in the business of developing technology for delivering
drugs to the lungs and licensing this technology to companies that make and
sell drugs, we do not have the people and other resources to do the following
things:
- make bulk drugs to be used as medicines;
- design and carry out large scale clinical studies;
- prepare and file documents necessary to obtain government approval to
sell a given drug product; and
- market and sell our products when and if they are approved.
When Inhale signs a license agreement to develop a product with a drug
company, the drug company agrees to do some or all of the things described
above. If our partner fails to do any of these things, Inhale cannot complete
the development of the product.
Page 12 of 18
WE DO NOT KNOW IF WE WILL BE ABLE TO PRODUCE OUR PRODUCTS IN COMMERCIAL
QUANTITIES.
We must scale-up our current powder processing and filling facilities
and comply with the good manufacturing practice standards prescribed by the
United States Food and Drug Administration and other standards prescribed by
other regulatory agencies to achieve drug production levels that are adequate
to support late stage human clinical testing and early commercial sales.
We have no experience manufacturing products for large scale clinical
testing or commercial purposes. We have only performed powder processing on
the small scale needed for testing formulations and for early stage and
larger clinical trials. We may encounter manufacturing and control problems
as we attempt to scale-up powder processing facilities. We may not be able to
achieve such scale-up in a timely manner or at a commercially reasonable
cost, if at all. Our failure to solve any of these problems could delay or
prevent late stage clinical testing and commercialization of our products and
could seriously impact the amount of our revenues and our results of
operations.
To date, we have relied on one particular method of powder processing.
There is a risk that this technology will not work with all drugs or that the
drug losses will prohibit the commercial viability of certain drugs.
Additionally, there is a risk that any alternative powder processing methods
we may pursue will not be commercially practical for aerosol drugs or that we
will not have or be able to acquire the rights to use such alternative
methods.
Our fine particle powders and small quantity packaging require special
handling. We have designed and qualified small scale automated filling
equipment for small quantity packaging of fine powders. We face significant
technical challenges in scaling-up an automated filling system that can
handle the small dose and particle sizes of our powders in commercial
quantities. There is a risk that we will not be able to scale-up our
automated filling equipment in a timely manner or at commercially reasonable
costs. Any failure or delay in such scale-up would delay product development
or bar commercialization of our products and will impact the level of our
revenues and results of operations.
We face many technical challenges in further developing our inhalation
device to work with a broad range of drugs, to produce such a device in
sufficient quantities and to adapt the device to different powder
formulations. There is a risk that we will not successfully achieve any of
these things. Our failure to overcome any of these challenges will impact our
revenues and results of operations.
For late stage clinical trials and initial commercial production, we
intend to use one or more contract manufacturers to produce our drug delivery
device. There is a risk that we will not be able to enter into or maintain
arrangements with any potential contract manufacturers, and that the failure
to do so will impact our revenues and results of operations.
WE DO NOT KNOW IF THE MARKET WILL ACCEPT INHALE'S DEEP LUNG DELIVERY SYSTEM.
The commercial success of our potential products depends upon market
acceptance by health care providers, third-party payors like health insurance
companies and Medicare, and patients. Our products under development use a
new method of drug delivery and there is a risk that our potential products
will not be accepted by the market. Market acceptance will depend on many
factors, including
- the safety and efficacy results of our clinical trials;
- favorable regulatory approval and product labeling;
- the frequency of product use;
- the availability of third-party reimbursement;
- the availability of alternative technologies; and
- the price of our products relative to alternative technologies.
Page 13 of 18
There is a risk that health care providers, patients or third-party
payors will not accept our deep lung drug delivery system. If the market does
not accept our potential products, our revenues and results of operations
will be seriously impacted if our potential products are not accepted by the
market.
OUR PATENTS MAY NOT PROTECT OUR PRODUCTS AND OUR PRODUCTS MAY INFRINGE ON
THIRD PARTY PATENT RIGHTS.
Inhale has filed patent applications covering certain aspects of our
device, powder processing technology, and powder formulations and deep lung
route of delivery for certain molecules, and we plan to file additional
patent applications. As of June 30, 1999, we have 37 issued U.S. and foreign
patents that cover certain aspects of our technology and we have a number of
patent applications pending. There is a risk that any of the patents applied
for will not issue, or that any patents that issue or have issued will not be
valid and enforceable. Enforcing our patent rights would be time consuming
and costly.
We are aware of an alternate dry powder processing technology that we
are not using for our current products under development but may desire to
use for certain products in the future. The ownership of this powder
processing technology is unclear. We are aware that multiple parties,
including Inhale, claim patent, trade secret and other rights in the
technology. If we determine that this alternate powder processing technology
is relevant to the development of future products and further determine that
a license to this alternate powder processing technology is needed, we cannot
be certain that we can obtain a license from the relevant party or parties on
commercially reasonable terms, if at all.
Our access or our partners' access to the drugs to be formulated will
affect our ability to develop and commercialize our technology. Many drugs,
including powder formulations of certain drugs that are presently under
development by us, are subject to issued and pending United States and
foreign patents that may be owned by our competitors. We know that there are
issued patents and pending patent applications relating to the deep lung
delivery of large molecule drugs, including several for which we are
developing deep lung delivery formulations. This situation is highly complex,
and the ability of any one company, including Inhale, to commercialize a
particular drug is unpredictable.
We intend generally to rely on the ability of our partners to provide
access to the drugs that are to be formulated by us for deep lung delivery.
There is a risk that our partners will not be able to provide access to such
drug candidates. Even if such access is provided, there is a risk that our
partners or we will be accused of, or determined to be, infringing a
third-party's patent rights and will be prohibited from working with the drug
or be found liable for damages that may not be subject to indemnification.
Any such restriction on access to drug candidates or liability for damages
would impact the level of our revenues and results of operations.
WE MAY NOT OBTAIN REGULATORY APPROVAL.
There is a risk that we will not obtain regulatory approval for our
products on a timely basis, or at all. Our product must undergo rigorous
animal and human testing and an extensive review process mandated by the FDA
and equivalent foreign authorities. This process generally takes a number of
years and requires the expenditure of substantial resources although the time
required for completing such testing and obtaining such approvals is
uncertain. We have not submitted any of our products to the FDA for marketing
approval. We have no experience obtaining such regulatory approval.
In addition, we may encounter delays or rejections based upon changes in
the United States Food and Drug Administration policy, including policy
relating to good manufacturing practice compliance, during the period of
product development. We may encounter similar delays in other countries.
Even if regulatory approval of a product is granted, the approval may
limit the indicated uses for which we may market our product. In addition,
our marketed product, our manufacturing facilities and Inhale, as the
manufacturer, will be subject to continual review and periodic inspections.
Later discovery from such review and inspection of previously unknown
problems may result in restrictions on our product or on us, including
withdrawal of our product from the market. The failure to obtain timely
regulatory approval of our products, any product marketing limitations or a
product withdrawal would impact the level of our revenue and results of
operations.
Page 14 of 18
IF OUR PRODUCTS ARE NOT COST EFFECTIVE, GOVERNMENT AND PRIVATE INSURANCE
PLANS WILL NOT PAY FOR OUR PRODUCTS.
In both domestic and foreign markets, sales of our products under
development will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
managed care providers, private health insurers and other organizations. In
addition, such third-party payors are increasingly challenging the price and
cost effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
Legislation and regulations affecting the pricing of pharmaceuticals may
change before our proposed products are approved for marketing. Adoption of
such legislation and regulations could further limit reimbursement for
medical products. A government third party payor decision to not provide
adequate coverage and reimbursements for our products would limit market
acceptance of such products.
OUR COMPETITORS MAY DEVELOP AND SELL BETTER DRUG DELIVERY SYSTEMS.
We are aware of other companies engaged in developing and
commercializing pulmonary drug delivery systems and enhanced injectable drug
delivery systems. Many of these companies have greater research and
development capabilities, experience, manufacturing, marketing, financial and
managerial resources than we do and represent significant competition for us.
Acquisitions of competing drug delivery companies by large pharmaceutical
companies could enhance our competitors' financial, marketing and other
resources. Accordingly, our competitors may succeed in developing competing
technologies, obtaining United States Food and Drug Administration approval
for products or gain market acceptance before us. We cannot assure that
developments by others will not make our products or technologies
uncompetitive or obsolete.
WE EXPECT OUR STOCK PRICE TO REMAIN VOLATILE.
Our stock price is volatile. In the last twelve months our stock price
ranged from $20.13 to $35.25. We expect it to remain volatile. A variety of
factors may have a significant effect on the market price of our common
stock, including:
- fluctuations in our operating results;
- announcements of technological innovations or new therapeutic
products;
- announcement or termination of collaborative relationships by Inhale
or our competitors;
- governmental regulation;
- clinical trial results;
- developments in patent or other proprietary rights;
- public concern as to the safety of drug formulations developed by
Inhale or others; and
- general market conditions.
Any litigation instigated against us as a result of this volatility
could result in substantial costs and a diversion of our management's
attention and resources, which could impact our revenues and results of
operations.
INVESTORS SHOULD BE AWARE OF INDUSTRY-WIDE RISKS.
In addition to the risks associated specifically with Inhale described
above, investors should also be aware of general risks associated with drug
development and the pharmaceutical industry. These include but are not
limited to:
- handling of hazardous materials;
- hiring and retaining qualified people; and
- insuring against product liability claims.
Page 15 of 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the reported market risks since
December 31, 1998.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
A. The annual meeting of the stockholders was held on June 8, 1999.
B. The following matters were voted upon at the annual meeting:
1. To elect the following directors to hold office until the 2002
Annual Meeting of Stockholders:
For Withheld
--- --------
Ajit S. Gill 13,297,312 20,560
Melvin Perelman 13,289,337 28,535
2. To ratify the selection of Ernst & Young LLP as independent
auditors for the Company for its fiscal year ending December 31, 1999.
For - 13,301,305 Against - 9,292 Abstain - 7,275
Item 5. Other Information
Effective April 27, 1999, Terry Opdendyk resigned as Director and
Chairman of the Board of Directors. Irwin Lerner was elected a
Director of the Company and Robert Chess was elected Chairman of
the Board of Directors. Ajit Gill was named President of the
Company.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith or incorporated by
reference:
EXHIBIT EXHIBIT TITLE
- -------------------------------------------------------------------------------------
2.1 (1) Agreement and Plan of Merger between Inhale Therapeutic Systems, a
California corporation, and Inhale Therapeutic Systems (Delaware),
Inc., a Delaware corporation.
3.1 (1) Certificate of Incorporation of Registrant.
3.2 (1) Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 (2) Restated Investor Rights Agreement among the Registrant and certain
other persons named therein, dated April 29, 1993, as amended
October 29, 1993.
4.3 (2) Specimen stock certificate.
4.4 (3) Stock Purchase Agreement between the Registrant and Pfizer Inc.,
dated January 18, 1995.
4.5 (9) Form of Purchase Agreement between the Registrant and the
individual Purchasers, dated January 28, 1997.
4.6 (10) Stock Purchase Agreement between the Registrant and Capital
Research and Management Company, dated December 8, 1998.
10.1 (4) Registrant's 1994 Equity Incentive Plan, as amended,
10.2 (7) Registrant's 1994 Non-Employee Directors' Stock Option Plan, as
amended
10.3 (2) Registrant's 1994 Employee Stock Purchase Plan, as amended.
10.4 (2) Standard Industrial Lease between the Registrant and W.F. Batton &
Co., Inc., dated September 17, 1992, as amended September 18, 1992.
10.5 (2) Addendum IV dated April 1, 1994 to Lease dated September 17, 1992,
between the Registrant and W.F. Batton and Marie A. Batton, dated
September 17, 1992.
10.6 (6) Amendment Agreement Number One, dated October 20, 1995, to Lease
dated September 17, 1992, between the Registrant and W.F. Batton &
Co., Inc.
10.7 (6) Amendment Agreement Number Two, dated November 15, 1995, to Lease,
dated September 17, 1992, between Registrant and W.F. Batton and
Marie A. Batton, Trustees of the W.F. Batton and Marie A. Batton
Trust UTA dated January 12, 1998 ("Batton Trust").
Page 16 of 18
10.8 Amendment Agreement Number Three, dated February 14, 1996, to
Lease, dated September 17, 1992, between Registrant and Batton
Trust.
10.9 Amendment Agreement Number Four, dated September 15, 1996, to
Lease, dated September 17, 1992, between Registrant and Batton
Trust.
10.10 (2) Senior Loan and Security Agreement between the Registrant and
Phoenix Leasing Incorporated, dated September 15, 1993.
10.11 (2) Sublicense Agreement between the Registrant and John S. Patton,
dated September 13, 1991.
10.11 (5) Stock Purchase Agreement between the Registrant and Baxter World
Trade Corporation, dated March 1, 1996.
10.12 (8) Sublease and Lease Agreement, dated October 2, 1996 between the
Registrant and T.M.T. Associates L.L.C. ("Landlord").
10.13 First Amendment, dated October 30, 1996, to Sublease and Lease
Agreement, dated October 2, 1996, between Registrant and Landlord.
10.14 Letter Agreement, dated April 9, 1997, amending Sublease and Lease
Agreement, dated October 2, 1996, between the Registrant and
Landlord.
10.15 Third Amendment, dated April 16, 1997, to Sublease and Lease
Agreement, dated October 2, 1996, between Registrant and Landlord.
10.16 Fourth Amendment, dated November 5, 1997, to Sublease and Lease
Agreement, dated October 2, 1996, between Registrant and Landlord.
27.1 Financial Data Schedule
- ------------------
(1) Incorporated by reference to the indicated exhibit in Inhale's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(2) Incorporated by reference to the indicated exhibit in Inhale's
Registration Statement on Form S-1 (No. 33-75942), as amended.
(3) Incorporated by reference to the indicated exhibit in Inhale's
Registration Statement on Form S-1 (No. 33-89502), as amended.
(4) Incorporated by reference to Inhale's Registration Statement on Form
S-8 (No. 333-59735).
(5) Incorporated by reference to the indicated exhibit in Inhale's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(6) Incorporated by reference to the indicated exhibit in Inhale's Annual
Report on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the indicated exhibit in Inhale's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
(8) Incorporated by reference to the indicated exhibit in Inhale's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.
(9) Incorporated by reference to Inhale's Registration statement on
Form S-3 (No. 333-20787).
(10) Incorporated by reference to the indicated exhibit in Inhale's
Registration Statement on Form S-3 (No. 333-68897), as amended.
(b) Reports on Form 8-K.
None.
Page 17 of 18
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto.
INHALE THERAPEUTIC SYSTEMS, INC.
DATE: August 16, 1999 BY: /S/Robert B. Chess
-------------------------
Robert B. Chess
Chairman and Co-Chief Executive Officer and
Director
(Duly Authorized Officer)
BY: /S/Ajit S. Gill
-------------------------
Ajit S. Gill
President and Co-Chief Executive Officer and
Director
(Duly Authorized Officer)
BY: /S/Brigid A. Makes
-------------------------
Brigid A. Makes
Vice President of Finance and Administration
and Chief Financial Officer
(Chief Accounting Officer)
Page 18 of 18