<PAGE>
As filed with the Securities and Exchange Commission on July 24, 2000
Registration No. 333-31174
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1/A-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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Inspire Pharmaceuticals, Inc.
(Exact Name of Registrant as Specified in its Charter)
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Delaware 2834 04-3209022
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
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4222 Emperor Boulevard Gregory J. Mossinghoff
Suite 470 4222 Emperor Boulevard
Durham, North Carolina 27703-8466 Suite 470
(919) 941-9777 Durham, North Carolina 27703-8466
(Address, including zip code, and (919) 941-9777
telephone number, including area (Name, address, including zip code,
code, of registrant's principal and telephone number, including area
executive office) code, of agent for service)
--------------
Copies to:
Diane M. Frenier, Esq. Jeffrey E. Cohen, Esq.
Edward P. Bromley III, Esq. Carol B. Stubblefield, Esq.
Smith, Stratton, Wise, Heher & Coudert Brothers
Brennan 1114 Avenue of the Americas
600 College Road East New York, NY 10036-7703
Princeton, NJ 08540 (212) 626-4400
(609) 924-6000
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Approximate date of commencement of proposed sale to the public: As soon as
possible after the effective date of this Registration Statement
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated July , 2000
[LOGO OF INSPIRE]
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5,500,000 Shares
Common Stock
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This is the initial public offering of Inspire Pharmaceuticals, Inc. and we
are offering 5,500,000 shares of our common stock. We anticipate that the
initial public offering price will be between $10.00 and $12.00 per share.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "ISPH."
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
<TABLE>
<S> <C> <C> <C>
Underwriting Proceeds to
Price to Discounts and Inspire
Public Commissions Pharmaceuticals
Per Share $ $ $
Total $ $ $
</TABLE>
We have granted the underwriters the right to purchase 825,000 additional
shares to cover over-allotments.
Deutsche Banc Alex. Brown Chase H&Q
U.S. Bancorp Piper Jaffray
The date of this prospectus is , 2000.
<PAGE>
Inside Front Cover:
The Inspire logo is followed by two diagrams:
Description of the first diagram: The upper portion of the page contains a
diagram showing Inspire's product opportunities relating to lung diseases, eye
diseases and other diseases. The diagram is preceded by a caption reading "Our
products are based on our proprietary technology targeted at respiratory, eye
and other diseases."
Description of the second diagram (located under the first diagram): A bar
chart setting forth information regarding the products in development as
follows:
Inspire Product Development Chart
<TABLE>
<CAPTION>
Clinical Trials
--------------------------
Products Preclinical Phase I Phase II Phase III
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INS365 Respiratory for Chronic
Bronchitis XXXXX XXXXX OOOO
INS37217 Respiratory for Cystic Fibro-
sis XXXXO OOOOO OO
INS316 Diagnostic Aid for Lung Disease XXXXX XXXXX XXXOO OOO
INS365 Ophthalmic for Dry Eye XXXXX XXXXX XXXOO O
INS37217 Ophthalmic for Retinal Disease XXXOO OOOOO OOO
</TABLE>
XXX Current Development as of June 30, 2000
OOO Expected Stage of Development within 12 months
The expected stage of development within 12 months is based on our current
plans for development and depends on a variety of factors. None of our products
have been approved for marketing by any regulatory authority. See "Risk
Factors."
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and our common stock being sold in this
offering and our financial statements and the notes to our financial statements
appearing elsewhere in this prospectus before making an investment decision.
You should also consider the information discussed in "Risk Factors."
We discover and develop new drugs to treat diseases characterized by
deficiencies in the body's innate defense mechanisms of mucosal hydration and
mucociliary clearance. These mechanisms are the natural way that the body
defends its mucosal surfaces against dust, pollutants, bacteria and viruses.
Mucosal hydration involves the moistening of the body's mucosal surfaces, and
mucociliary clearance involves a blanket-like movement of fluid and particles
from the lungs and sinuses. Mucosal surfaces are tissues containing specialized
cells that lubricate and protect surfaces of organs that are directly exposed
to the outside environment, such as the lungs, eyes and sinuses. Our lead
products target respiratory and ophthalmic diseases with inadequate current
treatments and which represent large therapeutic market opportunities. We
currently have three product candidates in advanced clinical development, and
we have entered into development and commercialization alliances with
Genentech, Inc., Kissei Pharmaceutical Co., Ltd. and Santen Pharmaceutical Co.,
Ltd. Our products are based on our proprietary technology relating to P2Y
receptors. A receptor is a protein in a cell membrane that, when stimulated by
a compound, leads to a biological response. We are exploring other target
diseases where we believe P2Y receptors play important biological roles.
Our Products
INS365 Respiratory for Chronic Bronchitis. We are developing INS365
Respiratory in an inhaled form for the treatment of chronic bronchitis and
expect this product to enter Phase II clinical trials later this year. In Phase
I clinical trials, INS365 Respiratory was well tolerated and significantly
enhanced the clearance of retained fluid and mucus in the airways. Chronic
bronchitis, which affects approximately 31 million patients in the major
international pharmaceutical markets, is a serious and potentially life-
threatening lung condition characterized by airway inflammation and obstruction
and a mucus-producing cough. The current drugs for chronic bronchitis, which
generally relieve symptoms but do not cure the disease, generated approximately
$1.3 billion of annual sales in 1996 and sales of these products have been
estimated to reach approximately $2.0 billion in 2001. Currently, there is no
FDA approved pharmaceutical agent that effectively clears the retained mucous
secretions which contribute to lung infections in patients with chronic
bronchitis. We expect that our product will address this need and may therefore
reduce the use of antibiotics, steroids and bronchodilators, and may reduce the
frequency and length of flare-ups of the illness and related hospitalizations.
In December 1999, we entered into a comprehensive strategic alliance with
Genentech to develop treatments for respiratory disorders, including chronic
bronchitis and cystic fibrosis, worldwide outside of Japan. Upon signing, we
received $15 million comprised of license fees and an equity investment. We may
receive future payments based on the attainment of development milestones,
which could total up to an additional $63 million, as well as royalties on net
sales of licensed products. We have also retained joint development and
commercialization rights for cystic fibrosis in the United States. In September
1998, we entered into an agreement with Kissei for INS365 Respiratory in Japan.
We received an upfront payment of $4.5 million, which included an equity
investment. In addition, if milestones are met, we could receive additional
payments of up to $13 million, as well as royalties on net sales of licensed
products.
1
<PAGE>
INS365 Ophthalmic for Dry Eye Disease. We are developing INS365 Ophthalmic
as an eye drop for dry eye disease, and are currently conducting Phase IIb
clinical trials. In preclinical studies conducted by us and our corporate
partner, Santen, INS365 Ophthalmic was well tolerated and produced a
statistically significant increase in tear secretion. In early clinical
testing, the product was well tolerated in healthy subjects and patients with
dry eye disease. We estimate, based on an extrapolation from data regarding the
U.S. population, that moderate to severe cases of dry eye affect approximately
nine million people in the major international pharmaceutical markets. Dry eye
disease is the general term for a condition in which abnormalities in the eye's
tear film--a mixture of salt, water and proteins that coat and protect the
surface of the eye--lead to red, irritated and dry eyes. These abnormalities
are typically characterized by a decrease in tear production, an increase in
tear evaporation or an improper mixture of the eye's tear film components. If
left untreated, dry eye disease can result in severe corneal damage and visual
impairment. The main current treatments for dry eye disease involve artificial
tear replacement therapy, such as eye drops that are made to be similar to
natural tears. There are currently no FDA approved pharmacological treatments
for dry eye disease. We expect that by promoting natural mucosal hydration and
proper lubrication of the eye, our product will be the first drug that works by
stimulating the P2Y\\2\\ receptor to treat the symptoms of dry eye disease,
restore a natural corneal tear film and help prevent long-term corneal damage.
In December 1998, we entered into an agreement with Santen for INS365
Ophthalmic for the treatment of dry eye disease in Japan and parts of Asia,
under which we received an up-front equity investment of $1.5 million, and we
could receive development milestone payments of up to $4.75 million, as well as
royalties on net sales of licensed products.
INS316 Diagnostic Aid for Lung Disease. We are developing INS316 Diagnostic
in an inhaled form to assist in diagnostic tests and we expect this product to
enter Phase III clinical trials in 2000. We have designed INS316 Diagnostic to
assist a patient in producing a specimen containing adequate material from the
lower part of the lung. Physicians use specimens of such material for
diagnosing lung cancer and lung infections. In a trial in patients at risk of
developing lung cancer, INS316 Diagnostic significantly enhanced the production
of an adequate specimen of such material when compared with placebo. Many
patients have difficulty producing adequate specimens spontaneously, and there
are no FDA approved agents to enhance the production of a specimen. To obtain a
specimen from deep in the lung, or deep-lung specimen, physicians sometimes use
a costly and invasive bronchoscopy or non-approved inhaled agents that are
generally ineffective and can cause irritation. We expect our product to be the
first approved agent to address the need to enhance the production of an
adequate deep-lung specimen, which may facilitate the diagnosis of lung cancer
or lung infection.
Other Products. In addition to our clinical-stage products, we have several
preclinical products, two of which we expect to enter clinical trials within
the next twelve months: INS37217 Respiratory to treat cystic fibrosis, a life-
threatening hereditary respiratory disease, and INS37217 Ophthalmic to treat
retinal disease, an ophthalmic disorder that can lead to serious visual
impairment.
Our Technology
We have focused our discovery efforts on our P2Y receptor technology. The
P2Y receptor family plays an important role in a number of biological processes
and we are currently studying a number of P2Y receptor subtypes for potential
targets that can be used to treat diseases. We have initially focused on a
subtype of the P2Y receptor family, the P2Y\\2\\ receptor, which coordinates
mucosal hydration and mucociliary clearance, the body's natural
2
<PAGE>
mechanisms for cleansing and protecting mucosal surfaces. We believe our
P2Y\\2\\ receptor agonists, which are compounds that stimulate the P2Y\\2\\
receptor, can regulate these processes and represent a new pharmacological
approach to the treatment of diseases characterized by deficiencies in these
mechanisms. Importantly, we are developing our lead product candidates in forms
applied directly to the mucosal surfaces, such as inhaled aerosols or eye drops
where they are rapidly metabolized. This minimizes the potential for systemic
side effects.
Our Strategy
Our objective is to become a leading biopharmaceutical company focused on
developing new treatments for diseases involving impaired mucosal hydration or
inadequate mucociliary clearance. The principal elements of our strategy
include:
. aggressively advance our lead products;
. establish collaborative relationships with market leaders while
selectively retaining marketing rights;
. use our proprietary technology relating to P2Y receptors to develop new
products; and
. protect and enhance our technology leadership position.
Inspire was incorporated in Delaware in October 1993. Our principal office
is located at 4222 Emperor Boulevard, Suite 470, Durham, North Carolina, and
our telephone number is (919) 941-9777.
3
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock to be offered by Inspire........ 5,500,000 shares
Common stock to be outstanding after this
offering.................................... 24,523,399 shares
Use of proceeds.............................. We plan to use the net proceeds
from this offering for clinical
development, product
commercialization, discovery
research, preclinical
activities, working capital,
general corporate purposes and
possible future acquisitions
Proposed Nasdaq National Market symbol....... ISPH
</TABLE>
The share amounts in this table are based on shares outstanding as of May
31, 2000. This table excludes:
. 1,976,527 shares of our common stock that are reserved for the exercise
of options granted to executive officers, employees and consultants
under our stock plan with a weighted average exercise price of $3.78 per
share;
. 265,397 shares of our common stock that are reserved for the exercise of
outstanding warrants with a weighted average exercise price of $7.72 per
share;
. the sale of up to $2,000,000 of our common stock, at a per share price
determined using the 20-day trailing average close price of common stock
as quoted on an established stock exchange, to Genentech upon the
occurrence of certain milestone events and up to 50,793 shares of common
stock to Genentech upon exercise of warrants to be issued upon the
occurrence of certain milestone events with a weighted average exercise
price of $7.88 per share; and
. 208,170 shares of our preferred stock that are reserved for the exercise
of outstanding warrants for preferred stock that will convert into
warrants to purchase 118,954 shares of our common stock at the time of
the closing of this offering with a weighted average exercise price of
$2.10 per share.
The information in this prospectus is based on the following assumptions:
. 15,469,104 shares of our common stock will be issued upon the automatic
conversion of the outstanding shares of our Series A, B, C, D and E
preferred stock at the time of the closing of this offering;
. a 1-for-1.75 reverse-split in our common stock will take effect just
before the closing of this offering;
. 950,160 shares of common stock will be issued upon the automatic
conversion of the outstanding shares of our Series G preferred stock
owned by Genentech at the time of the closing of this offering, assuming
the accrual of dividends through May 31, 2000, and a conversion ratio
based on an initial public offering price of $11.00 per share; provided,
however, the actual number of shares of common stock issued to Genentech
will be the number obtained by dividing the aggregate Series G preferred
stock purchase price of $10,000,000, plus accrued dividends, by the
initial public offering price of our common stock in this offering;
. the milestone events which trigger the sale to Genentech of up to
$2,000,000 of our common stock and warrants for up to 50,793 shares of
common stock do not occur; and
. the underwriters do not exercise the over-allotment option to purchase
up to 825,000 shares.
4
<PAGE>
Summary Financial Data
(in thousands, except per share data)
The following table presents summary financial and operating data for our
company. The data presented in this table are derived from "Selected Financial
Data," and the financial statements and notes elsewhere in this prospectus. You
should read those sections for a further explanation of the financial data
summarized here. You should also read "Management's Discussion and Analysis of
Financial Condition and Results of Operations," on page 26 which describes a
number of factors which have affected our financial results.
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ -- $ -- $ -- $ 360 $ 1,104 $ 270 $ 1,154
------- ------- ------- ------- ------- ------- -------
Operating Expenses:
Research and
development (excludes
$0, $0, $0, $68, $671,
$99 and $266,
respectively, of stock
based compensation)... 1,539 4,207 6,569 5,529 7,179 801 2,316
General and
administrative
(excludes $0, $0, $0,
$46, $363, $73 and
$130, respectively, of
stock based
compensation)......... 1,050 1,531 1,494 1,921 1,887 595 671
Stock based
compensation.......... -- -- -- 114 1,034 172 396
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 2,589 5,738 8,063 7,564 10,100 1,568 3,383
------- ------- ------- ------- ------- ------- -------
Operating loss.......... (2,589) (5,738) (8,063) (7,204) (8,996) (1,298) (2,229)
Other income (expense),
net.................... (115) (44) 116 36 122 5 109
------- ------- ------- ------- ------- ------- -------
Loss before provision
for income taxes....... (2,704) (5,782) (7,947) (7,168) (8,874) (1,293) (2,120)
Provision for income
taxes.................. -- -- -- 360 60 -- 150
------- ------- ------- ------- ------- ------- -------
Net loss................ (2,704) (5,782) (7,947) (7,528) (8,934) (1,293) (2,270)
Preferred stock
dividends.............. -- -- -- -- (62) -- (242)
------- ------- ------- ------- ------- ------- -------
Net loss available to
common stockholders.... $(2,704) $(5,782) $(7,947) $(7,528) $(8,996) $(1,293) $(2,512)
======= ======= ======= ======= ======= ======= =======
Net loss per common
share--basic and
diluted................ $ (1.73) $ (3.22) $ (4.01) $ (3.65) $ (3.75) $ (0.58) $ (1.01)
======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding--
basic and diluted...... 1,567 1,798 1,981 2,061 2,401 2,232 2,497
Pro forma net loss per
common share--basic and
diluted................ $ (0.57) $ (0.12)
======= =======
Pro forma weighted
average common shares
outstanding--basic and
diluted................ 15,569 18,886
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......................... $20,858 $20,858 $75,823
Total assets...................................... 24,157 24,157 79,122
Convertible preferred stock....................... 45,895 -- --
Common stock...................................... 2 19 24
Total stockholders' equity........................ 13,939 14,221 69,186
</TABLE>
See the financial statements and notes included in this prospectus for a
description of the computation of the historical and pro forma net loss per
share and the number of shares used in the historical and pro forma per share
calculations in the statement of operations data above.
5
<PAGE>
The pro forma column of the balance sheet data shows 19,007,959 shares of
our common stock outstanding immediately after the automatic conversion, at the
time of the closing of this offering, of all of our outstanding shares of
preferred stock.
The pro forma as adjusted column of the balance sheet data shows 24,507,959
shares of our common stock outstanding immediately after the automatic
conversion, at the time of the closing of this offering, of all of our
outstanding shares of preferred stock and our receipt of the net proceeds from
the sale of the 5,500,000 shares of our common stock offered in this offering
at an assumed initial public offering price of $11.00 per share. See "Use of
Proceeds" and "Capitalization" for a discussion about how we intend to use the
net proceeds from this offering and about our capitalization.
6
<PAGE>
RISK FACTORS
The shares of common stock offered by this prospectus involve a substantial
risk of loss. Before making an investment in our common stock, you should
carefully read this entire prospectus 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 prospectus. These factors include, without limitation, the
risk factors listed below and other factors presented throughout this
prospectus.
If our products fail in clinical studies, we will be unable to obtain FDA
approval and will not be able to sell those products.
To achieve profitable operations, we must, alone or with others,
successfully identify, develop, introduce and market proprietary products. Even
if we identify potential products, we will have to conduct significant
additional development activities and preclinical and clinical tests, and
obtain regulatory approval before our products can be commercialized. Product
candidates that may appear to be promising at early stages of development may
not successfully reach the market for a number of reasons. We have not
submitted any products for marketing approval by the United States Food and
Drug Administration (FDA) or any other regulatory body.
Generally, all of our product candidates are in research or preclinical
development, with only three, INS365 Respiratory, INS365 Ophthalmic and INS316
Diagnostic, currently in clinical trials. The results of preclinical and
initial clinical testing of our products under development may not necessarily
indicate the results that will be obtained from later or more extensive
testing. Companies in the pharmaceutical and biotechnology industries have
suffered significant setbacks in advanced clinical trials, even after obtaining
promising results in earlier trials. Our ongoing clinical studies might be
delayed or halted for various reasons, including:
. the drug is not effective, or physicians think that the drug is not
effective;
. patients experience severe side effects during treatment;
. patients die during the clinical study because their disease is too
advanced or because they experience medical problems that may or may not
relate to the drug being studied;
. patients do not enroll in the studies at the rate we expect;
. 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
successfully clinical trials, the products must meet the criteria for clinical
approval, or endpoints, which we establish for the product in the clinical
study.
7
<PAGE>
Generally, we will establish these endpoints in consultation with the
regulatory authorities, following design guidelines on the efficacy, safety and
tolerability measures required for approval of products.
Because our existing product candidates utilize a new approach to the
treatment of respiratory and eye diseases, we may have trouble establishing
endpoints that the regulatory authorities agree sufficiently evaluate the
effectiveness of each product candidate. For this and other reasons, we could
encounter delays and increased expenses in our clinical trials if the
regulatory authorities determine that the endpoints established for a clinical
trial do not predict a clinical benefit, and the authorities will not approve
the product for marketing without further clinical trials. The regulatory
authorities could change their view on clinical trial design and the
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 factors:
. 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 and INS316 Diagnostic, 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, will be necessary in the case of INS365
Respiratory, to more fully address chronic use. Although we have successfully
completed a test of a prototype hand-held inhalation device in 12 healthy
patients, our testing of such devices is at an early stage and we may not be
able to develop or find a convenient hand-held device that works in patients
with chronic bronchitis. Our current product candidate for the treatment of dry
eye disease, INS365 Ophthalmic, is applied from a vial containing a single dose
of medication. Patients may prefer to purchase the medication in a bottle
containing a sufficient quantity of medication for multiple doses. We have not
yet established a plan to develop a multi-dose formulation. Similar challenges
exist in identifying and perfecting convenient methods of administration for
many of our other product candidates.
8
<PAGE>
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 have the ability to independently conduct clinical studies, obtain
regulatory approvals, market, distribute or sell our products and intend to
rely on experienced third parties to perform, or assist us in the performance
of, all of those functions. We may not identify acceptable partners or enter
into favorable agreements with them. If third parties do not successfully carry
out their contractual duties or meet expected deadlines, we will be unable to
obtain required governmental marketing approvals and will be unable to sell our
products.
Our dependence on collaborative relationships may lead to delays in product
development and disputes over rights to technology.
Our business strategy depends upon the formation of research collaborations,
licensing and/or marketing arrangements. We currently have development
collaborations with three collaborators, Genentech, Kissei and Santen. The
termination of any collaboration may lead to delays in product development and
disputes over technology rights and may reduce our ability to enter into
collaborations with other potential partners. Genentech has the right, by
giving us 150 days prior notice, to terminate our collaboration. If we do not
maintain the Genentech, Kissei or Santen 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 products
revenues relating to our research programs.
We intend to rely on Genentech, Kissei, Santen and any future collaborators
for significant funding in support of our development efforts. If Genentech,
Kissei or Santen 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.
See "Risk Factors--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" and "Business--Corporate
Collaborations."
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.
9
<PAGE>
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 of our
product candidates for purposes of preclinical testing and clinical trials.
Although we have previously received preclinical and clinical supplies of our
product candidates from several suppliers, we presently depend upon Yamasa
Corporation as the sole supplier for our supply of product candidates. If we
are unable to obtain or retain third party manufacturing on commercially
acceptable terms, we may not be able to commercialize products as planned. Our
manufacturing strategy presents the following risks:
. the manufacturing processes for most of our product candidates have not
been tested in quantities needed for commercial sales;
. delays in scale-up to commercial quantities and any change to a
manufacturer other than Yamasa Corporation could delay clinical studies,
regulatory submissions and commercialization of our products;
. manufacturers of our products are subject to the FDA's good manufacturing
practices regulations and similar foreign standards, and we do not have
control over compliance with these regulations by the 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. See "Business--
Corporate Collaborations." 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.
10
<PAGE>
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 upon 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 judgement against us in a patent infringement action could cause
us to pay monetary damages, require us to obtain licenses, or prevent us from
manufacturing or marketing the affected products. In addition, we may need to
initiate litigation to enforce our proprietary rights against others, or we may
have to participate in interference proceedings in the United States Patent and
Trademark Office (USPTO) to determine the priority of invention of any of our
technologies.
In general, the development of patent rights in pharmaceutical,
biopharmaceutical and biotechnology products to a degree sufficient to support
commercial efforts in these areas is typically uncertain and involves complex
legal and factual questions. For instance, while the USPTO has recently issued
guidelines addressing the requirements for demonstrating utility for
biotechnology inventions, USPTO examiners may not follow these guidelines in
examining patent applications. Such applications may have to be appealed to the
USPTO's Appeals Board for a final determination of patentability.
If we fail to reach milestone or other obligations, The University of North
Carolina at Chapel Hill and other licensors may terminate our agreements with
them.
Our current technologies, discoveries and our original patents are based in
part on two exclusive licenses and one non-exclusive license from The
University of North Carolina at Chapel Hill. See "Business--Patents and
Proprietary Rights." 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.
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<PAGE>
Failure to license or otherwise acquire necessary technologies may reduce or
eliminate our ability to develop product candidates. Even if we acquire all
necessary licenses, if we breach any license provision, either intentionally or
unintentionally, we may lose our right to continued use of the licensed
technology.
Because we rely upon trade secrets and agreements to protect some of our
intellectual property there is a risk that unauthorized parties may obtain and
use information that we regard as proprietary.
We rely upon the laws of trade secrets and non-disclosure agreements and
other contractual arrangements to protect our proprietary compounds, methods,
processes, formulations and other information for which we are not seeking
patent protection. We have taken security measures to protect our proprietary
technologies, processes, information systems and data, and we continue to
explore ways to further enhance security. However, despite these efforts to
protect our proprietary rights, unauthorized parties may obtain and use
information that we regard as proprietary. Employees, academic collaborators
and consultants with whom we have entered confidentiality and/or non-disclosure
agreements, may improperly disclose our proprietary information. In addition,
competitors may, through a variety of proper means, independently develop
substantially the equivalent of our proprietary information and technologies,
gain access to our trade secrets, or properly design around any of our patented
technologies.
Because all of our product candidates use related mechanisms of action, we may
not be able to commercialize our products if the mechanism of action is not
effective.
Any products resulting from our product development efforts are not expected
to be available for sale for a number of years, if at all. Two of our product
candidates, INS365 Respiratory and INS37217 Respiratory, operate in a similar
manner. If the clinical results of one of the compounds is not favorable, the
results of the other compound may not be favorable. Moreover, we have designed
all of our product candidates to use related mechanisms of action. If these
mechanisms of action are not effective, we may not be able to commercialize any
of our product candidates. Even if all of our product candidates prove
effective, we may choose not to commercialize all of them.
If we continue to incur operating losses for a period longer than anticipated,
or in an amount greater than anticipated, we may be unable to continue our
operations.
We have experienced significant losses since inception. We incurred net
losses of $2.3 million for the three months ended March 31, 2000, $8.9 million
for the year ended December 31, 1999, $7.5 million for the year ended December
31, 1998 and $7.9 million for the year ended December 31, 1997. As of March 31,
2000, our accumulated deficit was approximately $35.8 million. We expect to
incur significant additional operating losses over the next several years and
expect cumulative losses to increase substantially in the near term due to
expanded research and development efforts, preclinical studies and clinical
trials. We expect that losses will fluctuate from quarter to quarter and that
such fluctuations may be substantial. Such fluctuations will be affected by the
following:
. timing of regulatory approvals and commercial sales of our product
candidates;
. the level of patient demand for our products;
. timing of payments to and from licensors and corporate partners; and
. timing of investments in new technologies.
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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 1999, our operating expenses exceeded $9.0 million.
We expect our capital and operating expenditures to increase over the next
several years as we expand our research and development activities, address
possible difficulties with clinical studies and prepare for commercial sales.
Many factors will influence our future capital needs. These factors include:
. the progress of our research programs;
. the number and breadth of these programs;
. our ability to attract collaborators for our products;
. achievement of milestones under our existing collaborations with
Genentech, Kissei and Santen;
. our ability to establish and maintain additional collaborations;
. progress by our collaborators: Genentech, Kissei and Santen;
. the level of our 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 $20.0 million over the
next twelve months. We also expect to purchase capital equipment at a cost of
approximately $1.0 million. Following the twelve month period, we expect our
operating expenses to increase as we continue to develop our product
candidates. We intend to rely on Genentech, Kissei, Santen, future
collaborators and the proceeds of this offering for significant funding in
support of our development efforts. In addition, we may seek additional funding
through public or private equity offerings and debt financings. Additional
financing may not be available when needed. If available, such financing may
not be on terms favorable to us or our stockholders. Stockholders' ownership
will be diluted if we raise additional capital by issuing equity securities. If
we raise additional 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. As of June 23,
2000, we had cash on hand of approximately $18.0 million.
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<PAGE>
We may not be able to successfully compete with biotechnology companies and
established pharmaceutical companies.
The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. Our competitors in
the United States and elsewhere are numerous and include, among others, major
multinational pharmaceutical and chemical companies, specialized biotechnology
firms and universities and other research institutions. These competitors
include Abbott, Astra Zeneca, Aventis, Boehringer Ingelheim, Glaxo Wellcome,
Pfizer and SmithKline Beecham. Many of these competitors employ greater
financial and other resources, including larger research and development staffs
and more effective marketing and manufacturing organizations, than we or our
collaborative partners. Acquisitions of competing companies and potential
competitors by large pharmaceutical companies or others could enhance
financial, marketing and other resources available to such competitors. As a
result of academic and government institutions becoming increasingly aware of
the commercial value of their research findings, such institutions are more
likely to enter into exclusive licensing agreements with commercial
enterprises, including our competitors, to market commercial products. Our
competitors may develop technologies and drugs that are safer, more effective
or less costly than any which we are developing or which would render our
technology and future drugs obsolete and non-competitive. The products of our
competitors marketed to treat chronic bronchitis include anti-inflammatory
products, such as Azmacort(R) and Beclovent(R), bronchodilators such as
Atrovent(R) and Proventil(R), and antibiotics such as Biaxin(R) and
Zithromax(R). Pulmozyme(R), a Genentech product, and TOBI(R) from PathoGenesis
are examples of products used to treat cystic fibrosis. The main current
treatments for dry eye disease involve artificial tear replacement drops. In
addition, alternative approaches to treating diseases which we have targeted,
such as gene therapy, may make our product candidates obsolete. Our competitors
may also be more successful in production and marketing. See "Business--
Competition" for a discussion of competitors and the advantages of their
products.
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 development efforts.
We depend on the principal members of our management and scientific staff,
including Christy L. Shaffer, Ph.D., our President, Chief Executive Officer and
director; and Gregory J. Mossinghoff, our Chief Business Officer. If any of
these people leaves us, we may have difficulties conducting our operations. We
have not entered into agreements with any of the above principal members of our
management and scientific staff that bind any of them to a specific period of
employment. We do not maintain key person life insurance. 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.
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Our operations involve a risk of injury from hazardous materials, which could
be very expensive to us.
Our research and development activities involve the controlled use of
hazardous materials and chemicals. We cannot completely eliminate the risk of
accidental contamination or injury from these materials. If such an accident
were to occur, we could be held liable for any damages that result and any such
liability could exceed our resources. In addition, we are subject to laws and
regulations governing the use, storage, handling and disposal of these
materials and waste products. The costs of compliance with these laws and
regulations could be substantial.
Use of our products may result in product liability claims for which we may not
have adequate insurance coverage.
Clinical trials or manufacturing, marketing and sale of our potential
products by our collaborative partners may expose us to liability claims from
the use of those products. Although we carry clinical trial liability
insurance, we currently do not carry product liability insurance. We or our
collaborators may not be able to obtain or maintain sufficient or even any
insurance. If we can, it may not be at a reasonable cost. If we cannot or are
unable otherwise to protect against potential product liability claims, we may
find it difficult or impossible to commercialize pharmaceutical products we or
our collaborators develop. If claims or losses exceed our liability insurance
coverage, we may go out of business.
If third party payors will not provide coverage or reimburse patients for any
products we develop, our ability to derive revenues will suffer.
Our success will depend in part on the extent to which government and health
administration authorities, private health insurers and other third party
payors will pay for our products. Reimbursement for newly approved health care
products is uncertain. In the United States and elsewhere, third party payors,
such as Medicare, are increasingly challenging the prices charged for medical
products and services. Government and other third party payors are increasingly
attempting to contain health care costs by limiting both coverage and the level
of reimbursement for new therapeutic products. In the United States, a number
of legislative and regulatory proposals aimed at changing the health care
system have been proposed in recent years. In addition, an increasing emphasis
on managed care in the United States has and will continue to increase pressure
on pharmaceutical pricing. While we cannot predict whether legislative or
regulatory proposals will be adopted or what effect those proposals or managed
care efforts, including those relating to Medicare payments, may have on our
business, the announcement and/or adoption of such proposals or efforts could
increase our costs and reduce or eliminate profit margins. Third party
insurance coverage may not be available to patients for any products we
discover or develop. If government and other third party payors do not provide
adequate coverage and reimbursement levels for our products, the market
acceptance of these products may be reduced. In various foreign markets,
pricing or profitability of medical products is subject to government control.
Because our management will have broad discretion over the use of the proceeds
from this offering, the offering proceeds may be used in ways stockholders do
not deem to be advisable.
The net proceeds of this offering are estimated to be approximately $55.0
million, or about $63.4 million if the underwriters exercise their over-
allotment option in full. This calculation assumes that the initial public
offering price is $11.00 per share and the underwriting discounts and
commissions and our estimated offering expenses are $5.5 million. Our
management will retain broad discretion as to the allocation of the proceeds of
this offering,
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<PAGE>
including the timing and conditions of the use of the proceeds. Our management
may allocate the proceeds to uses that stockholders do not deem advisable. If
management spends the funds unwisely, we may not have sufficient working
capital to become profitable.
Our existing directors, executive officers and principal stockholders will
retain a substantial amount of our common stock even after this offering and
may be able to prevent other stockholders from influencing significant
corporate decisions.
After this offering, our directors, executive officers and current 5%
stockholders and their affiliates will beneficially own approximately 59.7% of
the common stock. These stockholders, if they all act together, may be able to
direct the outcome of matters requiring approval of the stockholders, including
the election of our directors and other corporate actions such as our merger
with or into another company, a sale of substantially all of our assets and
amendments to our amended and restated certificate of incorporation. The
decisions of these stockholders may conflict with our interests or those of our
other stockholders.
Anti-takeover provisions in our amended and restated certificate of
incorporation and bylaws, and our right to issue preferred stock, may
discourage a third party from making a take-over offer that could be beneficial
to us and our stockholders.
Our amended and restated certificate of incorporation and bylaws contain
provisions which could delay or prevent a third party from acquiring shares of
our common stock or replacing members of our board of directors. Our amended
and restated certificate of incorporation allows our board of directors to
issue shares of preferred stock. The Board can determine the price, rights,
preferences and privileges of those shares without any further vote or action
by the stockholders. As a result, our board of directors could make it
difficult for a third party to acquire a majority of our outstanding voting
stock.
Effective simultaneously with the closing of this offering, our amended and
restated certificate of incorporation will provide that the members of the
board will be divided into three classes. Each year the terms of approximately
one-third of the directors will expire. Our bylaws will not permit our
stockholders to call a special meeting of stockholders. Under the bylaws, only
our President, Chairman of the Board or a majority of the board of directors
will be able to call special meetings. The bylaws also require that
stockholders give advance notice to our secretary of any nominations for
director or other business to be brought by stockholders at any stockholders'
meeting. These provisions may delay or prevent changes of control or
management.
Further, we are subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law. Under this law, if anyone becomes an
"interested stockholder" in the company, we may not enter a "business
combination" with that person for three years without special approval.
These provisions could discourage a third party from making a take-over
offer and could delay or prevent a change of control.
Our common stock price is likely to be highly volatile and your investment in
our stock may decline in value.
The market price of our common stock is likely to be highly volatile. In
addition to various risks described elsewhere in this prospectus, the following
factors could also cause volatility and could result in declines in the market
price of our common stock:
. announcements made by us concerning the results of our clinical trials
with INS365 Respiratory, INS365 Ophthalmic, INS316 Diagnostic and any
other product candidates;
. changes in government regulations;
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<PAGE>
. regulatory actions as a result of their new therapeutic approach;
. changes in concerns of our collaborators, in particular our
collaborations with Genentech, Santen and Kissei;
. developments concerning proprietary rights including patents by us or our
competitors;
. variations in our operating results; and
. litigation.
Extreme price and volume fluctuations occur in the stock market from time to
time and that can particularly affect the prices of biotechnology companies.
These extreme fluctuations are often unrelated to the actual performance of the
affected companies. These broad market fluctuations could result in significant
declines in the market price of our common stock.
Future sales by our current stockholders may cause our stock price to decline.
Sales of our common stock by our current stockholders in the public market
after this offering 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. Upon the completion of this offering, we will have
24,523,399 shares of common stock outstanding, assuming no exercise of options
or warrants and assuming no exercise of the underwriters' over-allotment
option. Of these outstanding shares of common stock, the 5,500,000 shares sold
in this offering will be freely tradable, without restriction under the
Securities Act of 1933, as amended, unless purchased by our "affiliates."
Existing stockholders, who hold the remaining 19,023,399 shares of common
stock, hold "restricted securities" which 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.
Immediately following the completion of this offering, holders of 16,411,237
shares of common stock and options and warrants to purchase 356,823 shares of
common stock will be entitled to registration rights. Upon registration, these
shares may be freely sold in the public market.
All of our officers, directors and holders of at least one percent of our
stock have signed lock-up agreements, in which they agreed that they will not,
directly or indirectly, offer, sell or agree to sell, or otherwise dispose of
any shares of our common stock or other securities in the public market without
the prior written consent of Deutsche Bank Securities Inc. for a period of 180
days after the final prospectus relating to this offering. The lock-up
agreements do not apply to any shares acquired in this offering through the
directed share program. The agreement of one of the stockholders excludes
118,264 shares currently held and all shares acquired in the future. Upon
expiration of the lock-up agreements approximately 16,975,000 shares of common
stock covered by these agreements will be immediately eligible for resale,
subject to the requirements of Rule 144.
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.
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<PAGE>
Purchasers in this offering will suffer immediate dilution in the net tangible
book value of the common stock that is purchased.
If you purchase common stock in this offering, the value of your shares
based upon the actual book value of the company will immediately be less than
the offering price you paid. This is known as "dilution." Based upon the net
tangible book value of the common stock at March 31, 2000, your shares will be
worth $8.26 less per share than the price you paid in the offering. If holders
of our outstanding options and warrants exercise any of their options and
warrants, additional dilution is likely to occur.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "could,"
"will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "intend," "potential," or "continue," the negative of such terms or
other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider various factors, including the risks outlined
under "Risk Factors." These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the forward-
looking statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus, to conform such statements to
actual results or to note any changes or exceptions.
SPECIAL NOTE REGARDING MARKET DATA
Statistical market data contained in "Prospectus Summary" and in "Business"
come from or are based on estimates prepared by us using data from various
sources. In certain cases we have made assumptions based on such data and our
knowledge of the specific diseases, which assumptions we believe to be
reasonable. References to prevalence and market size in the major international
pharmaceutical markets refer to the United States, Canada, Japan, Germany,
France, Italy, Spain and the United Kingdom, except that figures for chronic
bronchitis exclude Canada. With respect to chronic bronchitis, we have relied
on data from a Decision Resources report published in 1998, reporting 1996
prevalence and market size and estimated 2001 market size. With respect to
cystic fibrosis, prevalence data is based, in the case of the United States, on
a Cystic Fibrosis Foundation report published in 1999 and, in the case of the
major international pharmaceutical markets, on a 1994 Decision Resources
report; market size solely for the United States was estimated from patient
usage data from a Cystic Fibrosis Foundation report published in 1998. With
respect to sinusitis, we estimated prevalence solely in the United States based
on data contained in a 1998 report from the Centers for Disease Control and
Prevention projected for the U.S. population as a whole. With respect to dry
eye disease, we have estimated market size based on 1996 data published in a
1997 IMS report, and we estimated prevalence in the major international
pharmaceutical markets by extrapolating, based on population, from U.S. figures
set forth in Lacrimal Gland, Tear Film, and Dry Eye Syndrome (New York, 1998).
With respect to retinal detachment, we have estimated prevalence in the major
international pharmaceutical markets by extrapolating, based on population,
from a twenty year study ending in 1995 conducted by the Department of
Ophthalmology, Mayo Clinic in a metropolitan area in the United States.
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USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $55.0 million, or approximately $63.4 million if the underwriters
exercise their over-allotment option in full. For purposes of this calculation,
we have assumed an initial public offering price of $11.00 per share. We have
estimated that the underwriting discounts and commissions and our offering
expenses will be approximately $5.5 million.
We estimate that we will use approximately 50% of the net proceeds of this
offering for the clinical development of our product candidates and product
commercialization. We estimate that we will use approximately 25% of the net
proceeds of this offering for discovery research and preclinical activities. We
estimate that we will use approximately 20% of the net proceeds on working
capital and general corporate purposes. We may also use approximately 5% of the
net proceeds to acquire businesses, technologies or products complementary to
our business even though we do not currently have any specific plans.
The information above represents our best estimate of our use of the net
proceeds of this offering based upon the current state of our business
operations, our current business plan and strategy and current economic and
industry conditions. Actual allocation of the net proceeds may differ from the
estimates set forth above. The amount and timing of our expenditures will vary
depending on the following:
. the progress of our clinical and preclinical development projects;
. signing of new corporate partners and the attainment of milestones with
our existing corporate partners;
. the progress of our research and development activities;
. technological changes;
. competitive conditions; and
. general industry and economic conditions.
Pending use of the net proceeds for the purposes described above, we intend
to invest the net proceeds in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. Following
this offering, our board of directors will determine and may change from time
to time our dividend practices with respect to our common stock. Any payment of
dividends will be based upon our earnings, financial condition, capital
requirements and other factors considered important by our board of directors.
Under Delaware law and our amended and restated certificate of incorporation,
our board of directors is not required to declare dividends on our common
stock. We expect to retain all earnings, if any, generated by our operations
for the development and growth of our business and do not anticipate paying any
dividends to our stockholders in the foreseeable future.
Since December 17, 1999, dividends have been accruing on our Series G
preferred stock at prime rate plus 1%. Such accrued dividends will be paid to
the holders of Series G preferred stock in shares of common stock upon the
automatic conversion of the Series G preferred stock into common stock upon the
closing of this offering.
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CAPITALIZATION
You should read the following table with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes included elsewhere in this prospectus. The table shows
as of March 31, 2000:
. our actual capitalization;
. our pro forma capitalization after giving effect to the automatic
conversion, at the time of the closing of this offering, of our
outstanding shares of preferred stock into 16,403,825 shares of our
common stock and a 1-for-1.75 reverse-split of our common stock that will
take effect before the closing date of this offering; and
. our pro forma as adjusted capitalization, adjusted to show the sale of
5,500,000 shares of common stock sold in this offering at an assumed
initial public offering price of $11.00 per share after deducting
underwriting discounts and commissions and our estimated offering
expenses.
<TABLE>
<CAPTION>
March 31, 2000
-------------------------------
Pro forma
Actual Pro forma As Adjusted
-------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Notes payable and capital leases, excluding
current portion............................... $ 445 $ 445 $ 445
Stockholders' equity:
Convertible preferred stock, $0.001 par
value; 52,000,000 shares authorized;
28,059,666 shares issued and outstanding
(actual); no shares issued or outstanding
(pro forma and pro forma as adjusted)....... 45,895 -- --
Common stock, $0.001 par value; 56,000,000
shares authorized;
2,604,134 shares issued and outstanding
(actual); 19,007,959 shares issued and
outstanding (pro forma); 60,000,000 shares
authorized; 24,507,959 shares issued and
outstanding (pro forma as adjusted)......... 2 19 24
Additional paid-in capital................... 8,772 54,932 109,892
Accumulated deficit.......................... (35,799) (35,799) (35,799)
Deferred compensation........................ (4,931) (4,931) (4,931)
-------- ------- -------
Total stockholders' equity................. 13,939 14,221 69,186
-------- ------- -------
Total capitalization........................... $ 14,384 $14,666 $69,631
======== ======= =======
</TABLE>
This table assumes no exercise of stock options or warrants outstanding as
of March 31, 2000. As of March 31, 2000, there were options outstanding under
our stock plan to purchase a total of 1,906,241 shares of common stock with a
weighted average exercise price of $3.45 per share, 265,397 shares of common
stock issuable upon the exercise of outstanding warrants with a weighted
average exercise price of $7.72 per share, and 208,170 shares of preferred
stock reserved for the exercise of outstanding warrants for preferred stock
that will convert into warrants to purchase 118,954 shares of our common stock
at the time of the closing of this offering with a weighted average exercise
price of $2.10 per share.
21
<PAGE>
DILUTION
Our historical net tangible book value as of March 31, 2000 was
approximately $11.9 million, or $4.58 per share, based on the number of common
shares outstanding as of March 31, 2000. Historical net tangible book value per
share is equal to the amount of our total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding as of
March 31, 2000.
As of March 31, 2000, our pro forma net tangible book value was
approximately $12.2 million or $0.64 per share after taking into account the
delivery of 16,403,825 shares of common stock upon the automatic conversion, at
the time of the closing of this offering, of our outstanding shares of
preferred stock. Without taking into account any other changes in our net
tangible book value after March 31, 2000, other than to give effect to this
offering at an assumed initial offering price of $11.00 per share and our
receipt of the estimated net proceeds from the offering, our net tangible book
value, pro forma as adjusted at March 31, 2000, would have been approximately
$67.2 million or $2.74 per share. This represents an immediate increase in net
tangible book value of $2.10 per share of our common stock to present
stockholders and an immediate dilution of $8.26 per share to new investors. The
following table shows this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $11.00
Historical net tangible book value per share at March 31,
2000.......................................................... $4.58
Decrease per share attributed to the conversion of preferred
stock......................................................... 3.94
-----
Pro forma net tangible book value per share before this
offering...................................................... 0.64
Increase per share attributable to new investors............... 2.10
------
Pro forma as adjusted net tangible book value per share after
this offering................................................... 2.74
------
Dilution per share to new investors.............................. $ 8.26
======
</TABLE>
If the underwriters exercise their over-allotment in full, there will be an
increase in pro forma as adjusted net tangible book value to $2.34 per share to
existing stockholders and an immediate dilution in pro forma as adjusted net
tangible book value of $8.02 to new stockholders. Our existing stockholders
would own 75.0%, and our new public investors would own 25.0% of the total
number of shares of our common stock outstanding after this offering.
The following table summarizes, on a pro forma basis as of March 31, 2000,
the differences between existing stockholders and investors in this offering
including the number and percentage of shares of our common stock purchased
from us, the amount and percentage of consideration paid and the average price
paid per share of our common stock, before deduction of underwriting discounts
and commissions and our estimated offering expenses:
<TABLE>
<CAPTION>
Shares Owned Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 19,007,959 77.6% $ 47,174,230 43.8% $ 2.48
New investors............. 5,500,000 22.4 60,500,000 56.2 $11.00
---------- ----- ------------ -----
Total................... 24,507,959 100.0% $107,674,230 100.0% $ 4.39
========== ===== ============ =====
</TABLE>
The discussion and tables above assume no exercise of stock options or
warrants outstanding as of March 31, 2000. As of March 31, 2000, there were
options outstanding under our stock plan to purchase a total of 1,906,241
shares of common stock with a weighted average exercise price of $3.45 per
share, 265,397 shares of common stock reserved for the exercise of outstanding
warrants with a weighted average exercise price of $7.72 per share
22
<PAGE>
and 208,170 shares of preferred stock reserved for the exercise of outstanding
warrants for preferred stock with a weighted average exercise price of $1.20
per share, which will convert into warrants to purchase 118,954 shares of our
common stock at the time of the closing of this offering with a weighted
average exercise price of $2.10 per share. To the extent that any of these
options or warrants are exercised, there will be further dilution to new
investors.
23
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial data should be read with our financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The statement of operations data for the years ended December 31,
1997, 1998 and 1999, and the balance sheet data at December 31, 1998 and 1999
are derived from financial statements included elsewhere in this prospectus
that have been audited by PricewaterhouseCoopers LLP, independent auditors. The
statement of operations data for the fiscal years ended December 31, 1995 and
1996 and the balance sheet data at December 31, 1995, 1996 and 1997 are derived
from our audited financial statements that are not included in this prospectus.
The statement of operations data for the three months ended March 31, 1999 and
2000 and the balance sheet data as of March 31, 2000 have been derived from our
unaudited financial statements included elsewhere in this prospectus. These
unaudited interim financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for the fair presentation of financial
position, results of operations and cash flows. Historical results do not
necessarily show future results.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ----------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ -- $ -- $ -- $ 360 $ 1,104 $ 270 $ 1,154
------- ------- ------- ------- ------- ------- -------
Operating Expenses:
Research and
development (excludes
$0, $0, $0, $68,
$671, $99 and $266,
respectively, of
stock based
compensation)........ 1,539 4,207 6,569 5,529 7,179 801 2,316
General and
administrative
(excludes $0, $0, $0,
$46, $363, $73 and
$130, respectively,
of stock based
compensation)........ 1,050 1,531 1,494 1,921 1,887 595 671
Stock based
compensation......... -- -- -- 114 1,034 172 396
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 2,589 5,738 8,063 7,564 10,100 1,568 3,383
------- ------- ------- ------- ------- ------- -------
Operating loss.......... (2,589) (5,738) (8,063) (7,204) (8,996) (1,298) (2,229)
Other income (expense),
net.................... (115) (44) 116 36 122 5 109
------- ------- ------- ------- ------- ------- -------
Loss before provision
for income taxes....... (2,704) (5,782) (7,947) (7,168) (8,874) (1,293) (2,120)
Provision for income
taxes.................. -- -- -- 360 60 -- 150
------- ------- ------- ------- ------- ------- -------
Net loss................ (2,704) (5,782) (7,947) (7,528) (8,934) (1,293) (2,270)
Preferred stock
dividends.............. -- -- -- -- (62) -- (242)
------- ------- ------- ------- ------- ------- -------
Net loss available to
common stockholders.... $(2,704) $(5,782) $(7,947) $(7,528) $(8,996) $(1,293) $(2,512)
======= ======= ======= ======= ======= ======= =======
Net loss per common
share--basic and
diluted................ $ (1.73) $ (3.22) $ (4.01) $ (3.65) $ (3.75) $ (0.58) $ (1.01)
======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding--
basic and diluted...... 1,567 1,798 1,981 2,061 2,401 2,232 2,497
Pro forma net loss per
common share--basic and
diluted................ $ (0.57) $ (0.12)
======= =======
Pro forma weighted
average common shares
outstanding--basic and
diluted................ 15,569 18,886
<CAPTION>
December 31, March 31,
------------------------------------------- -----------
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 6,537 $ 843 $ 5,826 $ 4,138 $22,728 $20,858
Total assets............ 7,953 2,568 7,229 5,446 25,620 24,157
Convertible preferred
stock.................. 9,100 9,100 22,067 24,467 45,895 45,895
Common stock............ 2 2 2 2 2 2
Total stockholders'
equity................. 6,277 508 5,546 664 16,035 13,939
</TABLE>
24
<PAGE>
See the financial statements and notes included elsewhere in this prospectus
for a description of the computation of the historical and pro forma net loss
per share and the number of shares used in the historical and pro forma per
share calculations in the statement of operations data above.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this section with the financial statements and notes
included elsewhere in this prospectus.
Overview
We were founded in October 1993 under the name Innovative Pharmaceuticals,
Inc. We changed our name to Inspire Pharmaceuticals in June 1994. In March
1995, we commenced operations following to our first substantial financing.
Since that time, we have engaged in research and development efforts related to
the P2Y\\2\\ receptor, which coordinates the body's innate defense mechanisms
of mucosal hydration and mucociliary clearance. To date, we have three product
candidates in advanced clinical development. Our collaborators include
Genentech, Kissei and Santen.
To date, we have devoted substantially all of our efforts to research,
clinical development and establishing strategic partnerships for the
development and potential marketing of our product candidates when they are
approved. 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
recognized $360,000 and $1.1 million in revenues from a collaborative research
and development agreement with Kissei in 1998 and 1999, respectively, and will
recognize revenues in 2000 from our collaborative research and development
agreements with Kissei and Genentech. We have incurred significant operating
losses since our inception in 1993 and, as of March 31, 2000, we had an
accumulated deficit of $35.8 million. We have funded our losses by raising
$45.9 million, net of issuance costs, in private sales of equity securities.
There can be no assurance if or when we will become profitable. We expect that
our losses will fluctuate from quarter to quarter and that such fluctuations
may be substantial. Our achieving profitability depends upon our ability, alone
and with others, to successfully complete the development of our product
candidates, obtain required regulatory clearances and successfully manufacture
and market our products.
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 the 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 beginning 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.
Results of Operations
Three Months Ended March 31, 2000 and March 31, 1999
Revenues. Revenues are derived from collaborative research and development
agreements with strategic partners. We receive milestone payments under these
collaborative research and development agreements based both on achievement by
us and our partners of defined development milestones.
26
<PAGE>
Our revenues increased $930,000 in the three months ended March 31, 2000 to
$1.2 million from $270,000 in the three months ended March 31, 1999. This
increase was due to $858,000 in revenue recognized during the three months
ended March 31, 2000 related to the up front payments received from Kissei in
1998 and Genentech in December 1999 as well as $72,000 in revenues recognized
related to the milestone payments we received from Kissei in the fourth quarter
of 1999 and the first quarter of 2000. These amounts are being recognized as
revenues over the period of our ongoing research and development commitment
under the collaborative research agreements with Kissei and Genentech. The
development milestones which were achieved in the fourth quarter of 1999 and
the first quarter of 2000 related to our completion of Phase I clinical trial
and initiation of clinical trials by Kissei.
Research and Development. Our research and development expenses are
comprised of personnel and related costs and costs of contract research
organizations that are performing research and development activities,
including clinical studies, for us, and costs of filing and maintaining our
patent portfolio.
Research and development expenses increased $1.5 million to $2.3 million in
the three months ended March 31, 2000 from $800,000 in the three months ended
March 31, 1999. This increase was due to an increase of $600,000 in contract
research costs related to clinical studies, an increase of $600,000 in costs
related to preclinical activities as we added research personnel to support our
increased discovery activity related to new compounds and potential new
indications for existing compounds and an increase of $290,000 in personnel and
related costs. We have contractual arrangements or purchase commitments with
various clinical research organizations, manufacturers of drug products and
others related to our research and development activities. The amount of our
financial commitments under these arrangements totals approximately $4.8
million.
General and Administrative. Our general and administrative expenses consist
primarily of personnel and related costs for general corporate functions,
including finance, accounting, legal, human resources, facilities and
information systems expenses.
General and administrative expense increased $80,000 to $670,000 in the
three months ended March 31, 2000 from $590,000 in the three months ended March
31, 1999. This increase resulted from higher facilities and equipment costs and
to a lesser extent from increased employee related costs due to our increased
business activities.
Stock Based Compensation. Stock based compensation expense consists of the
amortization of deferred compensation, related to stock options granted to
employees with an exercise price below the estimated fair market value of our
common stock at the date of the grant.
Stock based compensation expense increased $230,000 to $400,000 in the three
months ended March 31, 2000 from $170,000 in the three months ended March 31,
1999. This increase relates to the amortization of deferred compensation
recorded related to stock option grants made subsequent to March 31, 1999. We
expect to recognize approximately $1.6 million, $1.6 million, $1.5 million and
$600,000 of stock based compensation expense in each of the years ended
December 31, 2000, 2001, 2002 and 2003, respectively.
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 and capital lease obligations and gains and
losses on sales of property and equipment.
Other income (expense), net increased by $100,000 to income of $110,000 in
the three months ended March 31, 2000 from $10,000 in the three months ended
March 31, 1999. The increase was due to higher interest income earned from
higher average cash and investment balances partially offset by increased
expense on leased equipment.
27
<PAGE>
Provision For Income Taxes. Provision for income taxes increased to $150,000
in the three months ended March 31, 2000 from zero in the three months ended
March 31, 1999. The increase in income tax expense relates to withholding taxes
paid on the milestone payment received from Kissei in the first quarter of
2000.
Year Ended December 31, 1999 and 1998
Revenues. Our revenues increased $740,000 to $1.1 million in 1999 from
$360,000 in 1998. Revenue for 1998 and 1999 included $360,000 and $1.1 million
in revenues recognized related to the receipt of a non-refundable license fee
from Kissei which we are recognizing as revenue ratably over the period of our
future research and development commitment. In December 1999, we received a
$5.0 million payment from Genentech in connection with the signing of our
collaborative research agreement. This amount was deferred and will be
recognized ratably as revenue over the period of our research commitment for
our development of INS365 Respiratory, which is expected to occur in 2000 and
2001. Revenue for 1999 also includes $24,000 in revenue recognized related to a
$600,000 milestone payment received under our collaborative research and
development agreement with Kissei which is related to a development milestone
reached by us on behalf of Kissei. This milestone payment is being recognized
as revenue ratably over the remaining period of our research and development
commitment.
Research and Development. Research and development expense increased by
approximately $1.7 million to $7.2 million in 1999 from $5.5 million in 1998.
This increase was due to an increase of approximately $400,000 in contract
research costs related to clinical studies $185,000 in increased personnel and
related costs as we added personnel to support the expansion of our clinical
study activities and an increase of $1.2 million in costs related to
preclinical activities as we added research personnel to support our increased
discovery activity related to new compounds and potential new indications for
existing compounds.
General and Administrative. General and administrative expenses increased by
approximately $30,000 to $1.9 million in 1999. The increase in general and
administrative expense is primarily due to increased facilities and equipment
costs in 1999 as a result of the increase in our business activities.
Stock Based Compensation. We recorded deferred compensation of approximately
$2.7 million in 1998 and $3.4 million in 1999. Deferred compensation is
amortized to operating expense over the vesting period of the related stock
options which is generally four years. Stock based compensation expense
increased to $1.0 million in 1999 as compared to $110,000 in 1998.
Other Income (Expense), Net. Other income (expense), net increased by
approximately $80,000 to income of $120,000 in 1999 as compared to income of
$40,000 in 1998. The increase is primarily due to an increase in interest
income of $60,000 due to higher average cash and investment balances in 1999 as
compared to 1998 and a decrease in interest expense of approximately $20,000
resulting from the lower average notes payable balance in 1999 as compared to
1998.
Provision For Income Taxes. Provision for income taxes decreased by
approximately $300,000 to $60,000 in 1999 from $360,000 in 1998. Income taxes
in 1999 and 1998 are comprised of Japanese withholding taxes on license
payments received from Kissei. The decrease in income tax expense is due to the
reduction in license payments received from Kissei in 1999 as compared to 1998.
Year Ended December 31, 1998 and 1997
Revenues. Our revenues increased to $360,000 in 1998 from zero in 1997. This
increase was the result of the receipt of a non-refundable license fee from
Kissei in 1998 which is being
28
<PAGE>
recognized ratably as revenue over the estimated period of our ongoing research
and development commitment.
Research and Development. Research and development expense decreased by
approximately $1.1 million to $5.5 million in 1998 from $6.6 million in 1997.
This decrease was due primarily to the fact that in 1997, we were required to
make milestone payments of $500,000 to entities from which we licensed some of
our drug compounds while we made only $30,000 of such license payments in 1998.
In addition, in 1998 we had a decline of approximately $800,000 in costs
related to clinical and preclinical studies as compared to 1997.
General and Administrative. General and administrative expenses increased by
approximately $400,000 to $1.9 million in 1998 from $1.5 million in 1997. The
increase in general and administrative expenses is primarily due to an increase
in personnel costs as we added administrative and finance staff in 1998 to
support the growth in our business.
Stock Based Compensation. Stock based compensation expense increased to
$110,000 in 1998 from zero in 1997 because before 1998 all stock option grants
had been made with an exercise price equal to the fair value of our common
stock at the date of the grant.
Other Income (Expense), Net. Other income (expense), net decreased by
$84,000 to income of $40,000 in 1998 as compared to income of $120,000 in 1997.
The decrease is due to a decrease in interest income of $110,000 due to lower
average cash and investment balances in 1998 as compared to 1997 partially
offset by a decrease in interest expense on capital leases of $50,000.
Provision For Income Taxes. Provision for income taxes increased to $360,000
in 1998 from zero in 1997. Income taxes in 1998 are comprised of Japanese
withholding taxes on the license payment received from Kissei. No such license
payments were received in 1997.
Liquidity and Capital Resources
We have historically derived a significant portion of our liquidity and
operating capital from the private placements of preferred stock and from
payments received under collaboration or license agreements related to our
technologies. At March 31, 2000, cash and cash equivalents totalled $20.8
million, a decrease of $1.9 million as compared to December 31, 1999. This
decrease resulted from cash used to fund our operating loss for the three
months ended March 31, 2000. At December 31, 1999, cash and cash equivalents
totaled $22.7 million, an increase of $18.6 million as compared to December 31,
1998. The increase in cash and cash equivalents resulted from our receipt of
$21.4 million in net proceeds from the private placement of our Series E and
Series G preferred stock in July, October and December 1999. In addition, we
received a non-refundable license fee of $5.0 million upon the signing of a
collaboration agreement with Genentech on December 17, 1999, which was recorded
as deferred revenue, and a milestone payment of $600,000 from Kissei in 1999.
Cash used for operating expenses during 1999 was $7.8 million, excluding the
license fees and milestone payments received from Genentech and Kissei which
totaled $5.6 million.
Cash used by operations of $1.4 million during the three months ended March
31, 2000 represented our net loss of $2.2 million for the three months ended
March 31, 2000 reduced by a $350,000 net increase in deferred revenue related
to the receipt of a $1.5 million milestone payment from Kissei in January 2000
partially offset by $1.1 million in amortization of deferred revenue. Cash used
in investing activities of $380,000 was comprised of purchases of equipment.
Cash used by financing activities of $50,000 represents payments on capital
lease obligations of $70,000 partially offset by receipt of $20,000 in proceeds
from exercise of stock options.
29
<PAGE>
Cash used by operations of $2.2 million during 1999 represented our net loss
of $8.9 million partially offset by the $5.0 million license fee received upon
the signing of the Genentech agreement in December 1999, non-cash charges to
our net loss of $1.7 million and an increase in accounts payable and accrued
liabilities of $510,000. The increase in accounts payable and accrued
liabilities is primarily due to the increase in spending in our clinical and
preclinical activities in 1999 as compared to 1998.
Cash used in investing activities of $150,000 was comprised of purchases of
property and equipment. Cash provided by financing activities of $21.0 million
resulted from the receipt of $11.4 million in net proceeds from the sale of our
Series E preferred stock in July and October 1999 and net proceeds of $10.0
million from the sale of our Series G preferred stock in December 1999
partially offset by payments of $460,000 on our capital lease obligations.
At December 31, 1998, cash and cash equivalents totaled $4.1 million, a
decrease of $1.7 million as compared to December 31, 1997. The decrease in cash
and cash equivalents resulted from cash used in operations of $3.6 million,
which was primarily due to our net loss, and $460,000 in payments on our notes
payable and capital lease obligations partially offset by $2.4 million in
proceeds received from the sale of our Series C and Series D preferred stock in
September and December 1998.
Cash used by operations in 1998 of $3.6 million reflects our net loss of
$7.5 million partially offset by an increase in deferred revenue of $3.6
million related to the upfront payment received from Kissei, non-cash charges
of $800,000 and a decrease in accounts payable and accrued liabilities of
$110,000. The decrease in accounts payable and accrued liabilities resulted
primarily from timing of the receipt of invoices related to our clinical and
preclinical activities.
Cash used by investing activities in 1998 of $40,000 represented the
purchase of property and equipment partially offset by the proceeds from
disposal of property and equipment.
Cash provided by financing activities of $2.0 million resulted from the
receipt of $900,000 in proceeds from the sale of our Series C preferred stock
in September 1998 and the receipt of $1.5 million in proceeds from the sale of
our Series D preferred stock in December 1998 partially offset by $460,000 in
payments on our notes payable and capital lease obligations.
We have experienced a substantial increase in our operating expenses since
our inception in connection with the increase in the number of compounds in
both preclinical and clinical development. We have contractual commitments and
purchase arrangements with various clinical research organizations,
manufacturers of drug products and others. Most of these arrangements are for
periods of less than 12 months. The amount of the Company's financial
commitment under these arrangements totals approximately $4.8 million. Our
capital requirements are expected to continue to increase as we expect to move
more compounds into clinical trials during 2000. The timing and amount of these
expenditures will depend upon numerous factors, including:
. timing of initiation of clinical trials;
. design and duration of clinical trials;
. our ability to negotiate favorable terms with contract research
organizations to perform these clinical trials;
. number of compounds and level of our preclinical activities; and
. timing of achievement by us or our partners of development milestones and
resulting receipt by us of milestone payments under our collaborative
research agreements.
30
<PAGE>
We expect that the proceeds from this offering, combined with our current
cash and cash equivalents, short-term investments and funding from existing
collaborative arrangements will be sufficient to fund our operations for at
least the next two years. This estimate is a forward-looking statement that
involves risks and uncertainties which are described under the caption "Risk
Factors" in this prospectus.
Recently Enacted Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued the Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Standard establishes accounting and
reporting standards for derivatives and hedging activities and supersedes and
amends a number of existing standards. The Standard, as amended by Statement of
Financial Accounting Standard No. 137, is effective for all fiscal quarters in
all fiscal years beginning after June 15, 2000, but earlier application is
encouraged. Upon the Standard's application, all derivatives are required to be
recognized in the statement of financial position as either assets or
liabilities and to be measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented. The Company does
not currently, nor does it intend in the future, to use derivative instruments
and, as a result, it does not expect that the adoption of SFAS 133 will have
any impact on its financial position or results of operations.
Impact Of Year 2000
Many currently installed computer systems and software products were unable
to distinguish between twentieth century dates and twenty-first century dates.
As a result, many companies had to upgrade or replace their software and
computer systems to comply with year 2000 requirements or risk system failure
or miscalculations causing disruptions of normal business activities.
State of Readiness. The majority of the computer programs and hardware we
currently use in our own internal operations did not require replacement or
modification as a result of the year 2000 issue. We have not, to date,
experienced any material year 2000 problem. We believe that our significant
vendors and service providers are year 2000 compliant, and we have not, to
date, been made aware that any of our significant vendors or service providers
have suffered disruptions in their systems.
Costs. To date, we have incurred some expenses, which have not been
significant, related to the operating costs associated with time spent by
employees in the evaluation process and year 2000 compliance testing generally.
We presently do not anticipate that future expenditures will be significant.
Risks. We completed internal assessments of our year 2000 readiness prior to
December 31, 1999, with emphasis on our operating and administrative systems
and are not aware of any year 2000 problems that could reasonably be expected
to have a significant negative effect on our business. Our assessment plans
consisted of internal testing of our systems, contacting third party vendors of
hardware, software and services, assessing and implementing repairs or
replacements as required and developing contingency plans if year 2000 problems
still arise. We contacted our major vendors for software, hardware and related
services. These vendors indicated that they are year 2000 compliant. To date,
we have not experienced any significant year 2000 problems. However, we can not
guarantee that we have identified all year 2000 compliance problems in our
infrastructure that may require substantial revisions and repairs. Also,
despite our testing and reviews, we may experience year 2000 problems related
to the third party software, hardware or other systems on which we are reliant,
and any of these problems may be time consuming or expensive to fix.
31
<PAGE>
Contingency Plan. We have been engaged in an ongoing assessment of our
readiness and have developed contingency plans to address year 2000 problems
that may arise. The results of our analyses and the responses received from
third party vendors and service providers were taken into account in developing
these plans.
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 our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Our risk associated with fluctuating interest expense is limited, however, to
our 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 our 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 December 31, 1998,
December 31, 1999 or March 31, 2000. Declines in interest rates over time will,
however, reduce our interest income while increases in interest rates over time
will increase our interest expense.
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BUSINESS
Overview
We discover and develop new drugs, or pharmaceutical products, to treat
diseases characterized by deficiencies in the body's innate defense mechanisms
of mucosal hydration and mucociliary clearance. Our products are based on our
proprietary technology relating to P2Y receptors. Studies indicate that a
subtype of this family, the P2Y\\2\\ receptor, coordinates the mechanisms of
mucosal hydration and mucociliary clearance. These complex mechanisms, which
involve movement of salt and water, a protein substance made in specialized
cells that act to lubricate surfaces, called mucin, and the movement of cilia,
or hairlike projections on the surface of cells that move together in a
sweeping motion to move liquid and particles forward, can be regulated
therapeutically through the stimulation of this receptor. Our lead products
target respiratory and ophthalmic diseases with inadequate current treatments.
We currently have three product candidates in advanced clinical development:
. INS365 Respiratory for the treatment of chronic bronchitis;
. INS365 Ophthalmic for the treatment of dry eye disease; and
. INS316 Diagnostic to aid in the diagnosis of lung cancer and lung
infection.
In addition, we have two products that are scheduled to enter clinical
trials within the next 12 months: INS37217 Respiratory for the treatment of
cystic fibrosis and INS37217 Ophthalmic for the treatment of retinal disease.
We have entered into development and commercialization alliances with
Genentech, Kissei and Santen. We are also exploring other target diseases where
we believe P2Y receptors play important biological roles.
We commenced operations in March 1995. At that time, we acquired a license
to our initial technology, including patents relating to P2Y receptors and on
method of use for INS316 in the respiratory area, from The University of North
Carolina at Chapel Hill. We initially focused on the clinical development of
INS316 for the treatment of respiratory diseases such as cystic fibrosis and
chronic bronchitis. In early 1996, we initiated a research program to develop
an improved P2Y\\2\\ agonist compound, INS365. A joint patent for this compound
was granted to us and The University of North Carolina at Chapel Hill. We began
preclinical studies of INS365 for respiratory uses in 1997, and clinical
testing of INS365 for respiratory uses in early 1998. We filed an
investigational new drug application (IND) in the United States in the spring
of 1998. We acquired an exclusive license to use INS365 to treat respiratory
disease from The University of North Carolina at Chapel Hill in 1998. During
the development of INS365 for respiratory uses, our scientists began to
recognize the potential for using INS365 to treat eye diseases such as dry eye.
We initiated ophthalmic clinical testing of INS365 in the United Kingdom in
early 1999 and filed an IND in the United States in the fall of 1999. Our
chemistry lab also synthesised INS37217, a new P2Y\\2\\ receptor agonist, in
1998. We began preclinical testing of INS37217 for respiratory uses in 1998,
and for ophthalmic uses in 1999. This preclinical work for the respiratory uses
necessary for initial clinical testing is completed; the preclinical testing
for ophthalmic uses is ongoing.
Industry Background
Mucosal hydration and mucociliary clearance processes are observed at a
number of human mucosal surfaces including those in the respiratory tract, eyes
and sinuses. Mucosal hydration and mucociliary clearance are natural mechanisms
for cleansing and protecting mucosal surfaces and require a coordinated balance
of salt, water and mucus. Studies indicate that P2Y\\2\\ receptors regulate
these mechanisms on epithelial cells that line mucosal surfaces.
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Diseases that are characterized by impairment of mucosal hydration and
mucociliary clearance include chronic bronchitis, sinusitis, cystic fibrosis
and dry eye disease.
Respiratory
For lungs to function normally, airway surfaces must be kept properly
hydrated and clear of particles. Airway liquid, including salt and water, is
secreted through channels in the membranes of respiratory epithelial cells.
Mucus, secreted by goblet cells, traps microorganisms and particulates.
Specialized epithelial cells containing cilia beat synchronously to propel the
overlying "mucociliary blanket" of salt, water and mucus to the mouth and
throat where secretions are swallowed or expelled. This process is the
principal mechanism by which the body keeps airway surfaces free of dust,
pollutants, bacteria and viruses. Genetic and environmental factors can lead to
a breakdown in the normal process of mucosal hydration and mucociliary
clearance that is observed in many debilitating respiratory diseases, including
chronic bronchitis and cystic fibrosis. Studies indicate that stimulating
P2Y\\2\\ receptors with effective agonists can help restore the respiratory
system's innate defense mechanisms.
Chronic Bronchitis
Chronic bronchitis is a serious and potentially life-threatening lung
condition characterized by acute and chronic airway inflammation, chronic
obstruction of airflow and a mucus-producing cough. Patients with chronic
bronchitis experience shortness of breath, labored breathing, excessive and
chronic coughing and production and retention of excessive mucus. Chronic
bronchitis can be caused by smoking, environmental toxins, and viral or
bacterial infections. Chronic bronchitis is defined by the American Thoracic
Society as the presence of a mucus-producing cough most days of the month,
three months of the year, for at least two successive years without obvious
alternative explanation. Patients with chronic bronchitis experience acute
flare-ups of the illness, their medication usage increases and they may require
hospitalization. If left untreated, these patients experience progressive
deterioration in lung function, which can eventually result in respiratory
failure and death.
The American Thoracic Society guidelines for the treatment of chronic
bronchitis recommend three main objectives to pharmaceutical intervention:
dilation of the airways, reduction of airway inflammation, and clearance of
retained respiratory secretions. Current management of chronic bronchitis
treats the symptoms, but does not cure the disease, and is based on the degree
of airflow obstruction and the extent of the patient's disability. Physicians
generally prescribe bronchodilators, which act to open airways in the lungs.
These are usually inhaled medications such as Serevent(R), Ventolin(R),
Atrovent(R), or Combivent(R). Physicians may also prescribe inhaled steroids
such as Beclovent(R) and Azmacort(R) to reduce the inflammation in the airways.
Additionally, physicians often use antibiotics during acute flare-ups of the
illness if they diagnose or suspect bacterial infections. There is currently no
FDA approved pharmaceutical agent that effectively clears retained mucous
secretions in this disease.
Approximately 31 million patients have been diagnosed with chronic
bronchitis in the eight major international prescription pharmaceutical
markets, including 14 million in the United States, making it more prevalent
than asthma. Chronic bronchitis is estimated to account for approximately $14
billion in direct costs annually. In the United States, there are estimated to
be 500,000 hospitalizations per year due to acute flare-ups of the illness of
chronic bronchitis and it is the fourth leading cause of death. In the eight
major international prescription pharmaceutical markets, sales of
ethical/proprietary pharmaceutical products to treat chronic bronchitis were
approximately $1.3 billion in 1996 and have been estimated to reach
approximately $2.0 billion in 2001.
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Cystic Fibrosis
Cystic fibrosis is a life-threatening disease involving a genetic mutation
that disrupts the cystic fibrosis transmembrane regulator protein. In healthy
individuals, this protein acts as an ion-specific channel that modulates salt
and water movement. In cystic fibrosis patients, a defect in this channel leads
to poorly hydrated, thickened mucous secretions in the airways and severely
impaired mucociliary clearance. Impairments in these vital lung defense
mechanisms typically begin in early childhood. Chronic secondary infections
invariably occur, resulting in progressive lung dysfunction and deterioration.
Cystic fibrosis-induced damage to the respiratory tract accounts for more than
95% of the morbidity and mortality associated with this disease. According to
the U.S. Cystic Fibrosis Foundation, the median life expectancy for patients is
32 years.
The current therapeutic approaches to address cystic fibrosis mainly treat
the symptoms, but do not cure the disease, and are aimed at reducing
respiratory infections and breaking up thickened mucous secretions that cause
airflow obstruction and harbor bacteria. For example, TOBI(R) is an inhaled
antibiotic that treats the infection, and Pulmozyme(R) is an inhaled protein
that breaks up excessive DNA in cystic fibrosis mucus which reduces the
thickness and tackiness of the respiratory secretions. While both products are
approved for the treatment of cystic fibrosis, neither product is designed to
address the underlying ion-transport defect, which results in dehydrated mucus
and severely impaired mucociliary clearance.
There are approximately 30,000 diagnosed cystic fibrosis patients in the
United States and approximately 75,000 in the eight major international
prescription pharmaceutical markets. The average annual cost of treating a
cystic fibrosis patient in the United States exceeds $45,000, and the annual
cost for patients in the United States is over $1 billion. We estimate that in
the United States sales of ethical/proprietary pharmaceutical products to treat
cystic fibrosis currently are in excess of $200 million annually.
Respiratory Diagnostics
Physicians use microscopic examination of lung cells to diagnose lung cancer
and lung infections, including pneumonia and tuberculosis. Effective diagnosis
requires the collection of an adequate specimen, one which is enriched with
deep-lung material, a mucous specimen obtained from the lower part of the lung.
Bronchoscopy, an invasive medical procedure, can be performed to obtain a
specimen; however it is a procedure that costs over $1,000 and poses a risk to
patients with impaired lung function. The induction of sputum, either
spontaneously or with inhaled solutions, is a less invasive and less costly
alternative for obtaining a deep-lung specimen. Once the specimens are
collected, they are tested for the presence of cancerous cells or pathogens
associated with lung infections. However, many patients have difficulty
producing adequate specimens on their own, which is a key barrier to early and
effective diagnosis and treatment.
There are no FDA approved agents currently available to enhance the
production of an adequate specimen. In an effort to produce a quality specimen,
non-approved agents are frequently used, including inhaled solutions such as
hypertonic saline and propylene glycol, which cause irritation and excessive
coughing. Because these agents have limited utility and are often poorly
tolerated, pulmonologists and respiratory therapists have expressed a strong
interest in a better tolerated and more effective therapy, which could reduce
the need for bronchoscopies.
Market research conducted by us, including interviews with pulmonologists
and oncologists, indicates that deep-lung specimens are frequently collected
for the diagnosis of lung cancer and lung infections. The testing of specimens
is a recommended component of annual physical examinations in Japan.
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Ophthalmic
The eyes and inner eyelids are surrounded by a mucosal surface which serves
as an important innate defense mechanism, keeping the surface of the eye, or
ocular surface, moist, clear and free from infection. Tears produced by the
mucosal hydration process and the lacrimal glands help maintain eye moisture
and in response to physical stimuli can be greatly increased to flush out
irritants. This tear film is a complex mixture of fluid, ions, mucin and
proteins that, when mixed in the proper proportions, coats the cornea with a
protective film. The mucosal hydration process and the lacrimal glands maintain
an optimal balance of salt, water, mucin and proteins in people with a healthy
ocular surface. Studies indicate that stimulating P2Y\\2\\ receptors with
effective compounds can help restore the eye's innate mucosal defense mechanism
on the ocular surface.
Dry Eye Disease
Dry eye, an ocular surface disease, is the general term for a condition in
which abnormalities in the eye's tear film lead to red, irritated and dry eyes.
These abnormalities are typically characterized by a decrease in tear
production, an increase in tear evaporation or the improper mixture of the
eye's tear film components. If left untreated, dry eye disease can result in
permanent corneal damage and visual impairment.
The current treatments for dry eye disorders in the major markets consist of
artificial tear solutions and lubricant drops. In some cases, small plugs are
inserted by physicians in the corner of the eyes to slow tear drainage.
Artificial tears, which are available as over-the-counter and, in some
countries, as prescription products, provide temporary relief of symptoms, but
also wash out the natural proteins and other components that keep an eye
healthy. There are currently no approved pharmacologically active agents, drugs
that work by affecting a biological process such as stimulation of a receptor,
for dry eye disease.
We estimate, based on an extrapolation from United States data, that
moderate to severe dry eye affects approximately nine million people in the
eight major international prescription pharmaceutical markets and can be caused
by eye stress, aging, environmental factors, autoimmune disorders and various
medications. The market for dry eye treatments consists of both prescription
and over-the-counter products. Because dry eye disease is more prevalent among
the elderly and post-menopausal women, this market is expected to grow as
populations age. We estimate that, in the eight major international
prescription pharmaceutical markets, sales of ethical/proprietary
pharmaceutical products for dry eye treatments exceed $230 million annually.
Inspire's Solution
Mucosal hydration and mucociliary clearance are natural mechanisms for
cleansing and protecting epithelial surfaces and require a coordinated balance
of salt, water and mucus. Studies indicate that P2Y\\2\\ receptors coordinate
these processes that can be regulated therapeutically by the local delivery of
compounds that bind to and stimulate these receptors. We have focused our
efforts on developing P2Y\\2\\ receptor agonists to treat diseases by
activating natural processes of mucosal hydration and mucociliary clearance.
We believe that P2Y\\2\\ agonists represent a new, pharmacological approach
to the treatment of respiratory and eye diseases. We also believe that a
P2Y\\2\\ agonist may be effective as a drug that enhances the production of
deep-lung sputum samples for diagnostic tests. Importantly, our product
candidates can be applied directly to these mucosal surfaces in
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<PAGE>
a topical form such as inhaled aerosols and eye drops. These products act and
are degraded locally, resulting in minimizing the potential for systemic side
effects. Our current products are designed to address the medical need for
effective new products for chronic bronchitis, cystic fibrosis, respiratory
diagnostics, dry eye disease and other diseases that involve impairment of
mucosal hydration and mucociliary clearance on epithelial surfaces. Our
principal products are:
INS365 Respiratory. We are developing INS365 Respiratory as an inhaled
product for the treatment of chronic bronchitis. We believe our product
will be the first FDA approved product that addresses the need for an
effective agent to clear the build-up of mucus in the airways of bronchitis
sufferers. Thus, we believe our product will reduce the need for
antibiotics, steroids and bronchodilators, and may reduce the frequency and
length of flare-ups of the illnesses and hospitalizations. In many cases,
we believe that our product will be complementary to existing treatments.
INS37217 Respiratory. We are developing INS37217 Respiratory as an
inhaled product for the treatment of cystic fibrosis. We believe our
product will be the first FDA approved product that mitigates the
underlying ion-transport defect in the airways of patients with cystic
fibrosis. We believe our product will improve respiratory symptoms, reduce
infections and enhance the health status of patients with this disease and
will be complementary to other currently approved products.
INS316 Diagnostic. We are developing INS316 Diagnostic as an inhaled
diagnostic drug to aid in the detection of lung cancer and lung infection.
We believe that INS316 Diagnostic will be an effective acute-use product to
enhance the production of adequate deep-lung specimens for diagnostic
purposes. As such, we believe our product will facilitate the diagnosis of
lung cancer and lung infection and potentially reduce the need for costly
and invasive bronchoscopies.
INS365 Ophthalmic. We are developing INS365 Ophthalmic as an eye drop
for dry eye disease. We believe that, by promoting the eyes' natural
defense mechanism, INS365 Ophthalmic will be one of the first FDA approved
pharmacologically effective agents to treat the symptoms of dry eye, and
the first one with this mechanism of action. We believe our product will
help restore a natural corneal tear film, reduce dry eye symptoms and help
prevent long-term corneal damage in dry eye sufferers.
Our Strategy
Our objective is to become a leading biopharmaceutical company focused on
developing new treatments for diseases involving impaired mucosal hydration or
inadequate mucociliary clearance. The principal elements of our strategy
include:
Aggressively Advance Our Lead Products. Our focus is on discovering and
developing therapies where current treatments are ineffective and where
large therapeutic market opportunities exist. By the end of 2000, we expect
to have five products in clinical development that target chronic
bronchitis, cystic fibrosis, respiratory diagnostics, dry eye disease and
retinal detachment. We intend to continue to develop and commercialize
rapidly these products and to advance other preclinical product candidates
toward clinical development.
Establish Collaborative Relationships with Market Leaders while
Selectively Retaining Marketing Rights. In order to minimize the costs to
us of late-stage clinical trials and in
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order to more effectively market our products, we will continue to
establish and expand strategic alliances with leading corporations in our
target markets. In general, we seek to advance our compounds into later-
stage clinical trials before partnering such compounds so as to retain
maximum economic benefit to us. Additionally, we may selectively retain
partial or full commercialization rights to our products in some limited
indications. An example is our co-development and co-promotion options
under the Genentech agreement for cystic fibrosis that enable us to retain
additional economic benefit in this opportunity.
Use Our Proprietary Technology Relating to P2Y Receptors to Develop New
Products. Our research focus is to discover new pharmaceutical products
based on our P2Y receptor technology. Studies indicate that a subtype of
this family, the P2Y\\2\\ receptor, has broad applicability as regulators
of the body's innate defense mechanisms of mucosal hydration and
mucociliary clearance. One of our key strengths is our ability to
understand the role and importance of P2Y\\2\\ receptors and, through
research, high-volume screening techniques and pharmacology models, develop
compounds that target a patient's impaired mucosal hydration and clearance
mechanisms. Our discovery group is pursuing opportunities to expand our
base of compounds and therapeutic targets for P2Y\\2\\ agonists and the
biological role of other P2Y receptor subtypes. This group generates
opportunities internally and through collaborative relationships with
academic and governmental organizations and private enterprises.
Protect and Enhance Our Technology Leadership Position. We have a
substantial intellectual property position related to our technology. We
intend to continue to pursue an aggressive patent strategy to protect our
expanding proprietary discoveries.
Product Development Programs
The following table provides a summary of our development programs by
indication, development status and corporate partners.
<TABLE>
<CAPTION>
Indication Product Candidate Development Status Corporate Partners
---------------------------------------------------------------------------------------
<C> <C> <C> <S>
Respiratory:
Chronic bronchitis INS365 Respiratory Phase II planned to Genentech (ex-Japan)
start in 2000 Kissei (Japan)
Cystic fibrosis INS37217 Phase I planned to Genentech (ex-Japan)
Respiratory start in 2000
Sinusitis Unnamed P2Y\\2\\ Preclinical Genentech
agonist (worldwide)
Diagnostic aid INS316 Diagnostic Phase III planned to Uncommitted
for lung disease start in 2000
---------------------------------------------------------------------------------------
Ophthalmic:
Dry eye INS365 Ophthalmic Phase III planned to Santen (Asia)
start in 2000 Uncommitted
outside Asia
Retinal disease INS37217 Ophthalmic Phase I planned to Uncommitted
start in 2001
</TABLE>
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INS365 Respiratory for Chronic Bronchitis
INS365 Respiratory is being developed in an inhaled form for the treatment
of chronic bronchitis. We have completed four Phase I clinical trials of INS365
Respiratory. These trials have evaluated the safety and preliminary efficacy of
INS365 Respiratory in healthy volunteers, chronic smokers who are at a high
risk for developing chronic bronchitis and cystic fibrosis patients with
airflow obstruction. In total, these studies enrolled approximately 200
subjects. These studies have indicated that INS365 Respiratory was well
tolerated and significantly enhanced mucus clearance when compared to placebo.
One of these studies, conducted in 35 chronic smokers, indicated that INS365
Respiratory in single inhaled doses significantly enhanced clearing of mucus
from the lungs, which occurred rapidly following dosing. This effect was dose-
related and was significantly greater than mucus cleared from lungs following
inhalation of a saline placebo; the results were statistically significant. We
have conducted a series of good laboratory practice toxicology studies,
including 28-day inhalation studies, which, together with the Phase I data,
will allow us to progress INS365 Respiratory into a Phase II program.
We are planning, in consultation with our strategic partner, Genentech, to
initiate a Phase II clinical study in patients with chronic bronchitis in the
second half of 2000. This trial is being designed to be a multi-center study
and would enroll patients with mild to moderate chronic bronchitis. We intend
to dose patients for up to one month using standard air-jet nebulizers. The
clinical efficacy measures in this study are intended to include respiratory
symptoms, health status, quality of life using a validated respiratory
questionnaire, lung function and adverse events. Kissei, our partner in Japan,
filed a Japanese IND for INS365 Respiratory in December 1999 and has completed
a Phase I clinical trial in smokers and non-smokers. This study demonstrated
safety and tolerability in the subject population.
We have developed a drug delivery strategy for INS365 Respiratory based on
segmenting the chronic bronchitis patient population by severity of disease--
mild, moderate and severe. We anticipate that each segment may have different
drug delivery needs based on convenience, ease of use, and degree of patient
mobility, such as whether the patient is working, homebound or hospitalized. In
recognizing this variety of needs, we are exploring various delivery options
which will allow for flexibility in dosing across the various segments of the
chronic bronchitis market. One option will be plastic unit-dose vials that are
used with a standard air-jet nebulizer system. Another approach, a new, hand-
held, portable delivery system, has been evaluated in two radio-labeled lung
deposition studies. These studies included 12 healthy volunteers and 12 chronic
smokers. Results from these studies suggest that this new system can be used to
deliver a small volume of concentrated INS365 Respiratory in one to two breaths
providing rapid delivery in a convenient manner to patients. These studies have
also demonstrated that INS365 respiratory significantly enhances mucus
clearance with this new system. These studies have been conducted to assist our
strategic partners to demonstrate that this product can be delivered in a more
convenient device.
In September 1998, we entered into a joint development, license and supply
agreement with Kissei through which Kissei received exclusive rights to develop
and market INS365 Respiratory for respiratory therapeutic indications in Japan.
In December 1999, we entered into a development, supply and license agreement
with Genentech to develop P2Y\\2\\ agonists, including INS365 Respiratory, for
respiratory diseases, including chronic bronchitis, throughout the world
outside Japan. See "--Corporate Collaborations."
INS37217 Respiratory for Cystic Fibrosis
INS37217 Respiratory is a second-generation P2Y\\2\\ agonist with an
extended duration of action. This product is highly stable in the mucous
secretions of cystic fibrosis patients making
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it an attractive product candidate for this disease. The previous studies we
have conducted with INS365 Respiratory provide the scientific rationale for the
use of INS37217 Respiratory for cystic fibrosis. We have completed all
necessary preclinical studies for initial clinical testing. We are planning a
Phase I clinical trial for the development of INS37217 Respiratory for cystic
fibrosis in the second half of 2000. We intend to develop INS37217 Respiratory
for cystic fibrosis as a chronic use agent in an inhaled delivery form.
INS37217 Respiratory is designed to enhance the lung's innate mucosal
hydration and mucociliary clearance mechanisms, which in cystic fibrosis
patients are impaired by a genetic defect. By hydrating airways and stimulating
mucociliary clearance through stimulation of the P2Y\\2\\ receptor, we expect
that INS37217 Respiratory will help keep the lungs of cystic fibrosis patients
clear of thickened mucus, reducing infections and the damage that occurs as a
consequence of the retention of thick and tacky infected secretions. We further
believe that these effects may result in reduced frequency and length of
hospitalizations, reduced need for antibiotics and other medications, reduced
deterioration of respiratory function, and improved respiratory symptoms and
quality of life. In addition, this product is expected to be complementary with
the two approved products, Pulmozyme(R) and TOBI(R), neither of which affects
the underlying ion-transport defects in cystic fibrosis airways.
We expect to receive orphan drug status and an accelerated regulatory
approval process for INS37217 Respiratory for the treatment of cystic fibrosis.
In December 1999, we entered into a co-development partnership with Genentech
to develop P2Y\\2\\ agonists for respiratory diseases, including cystic
fibrosis, throughout the world outside Japan. See "--Corporate Collaborations."
P2Y\\2\\ Agonist for Sinusitis
We plan to select, in collaboration with Genentech, an existing P2Y\\2\\
agonist for development to treat sinusitis, an infectious and inflammatory
condition of the nose and sinuses that often results in painful flare-ups of
the illness. We believe that increasing mucociliary clearance in the nose and
sinuses with a P2Y\\2\\ receptor agonist may be beneficial for treating this
condition. Clinical studies with other P2Y\\2\\ agonists such as INS316 have
already shown that these agents open ion channels in the nasal mucosa thus
hydrating this surface. It is expected that P2Y\\2\\ agonists will also
stimulate mucociliary clearance in the sinuses. We estimate that sinusitis
affects approximately 12% of the U.S. adult population, or approximately 25
million adults. The current market consists of both over-the-counter and
prescription treatments. Our research and development of drug candidates in
this area depends on our collaboration with Genentech. See "--Corporate
Collaborations."
INS316 for Respiratory Diagnostics
INS316 Diagnostic, a P2Y\\2\\ agonist with a short duration of action, is
being developed as an acute-use inhaled solution to stimulate enhanced clearing
of mucus from the lungs and serve as a drug that assists in diagnostic tests
for diagnosing lung diseases and lung infections, called a diagnostic aid. We
have conducted four clinical trials to evaluate INS316 Diagnostic's utility as
an acute use agent. These clinical studies have demonstrated that INS316
Diagnostic is well tolerated and appears to enhance the ability of patients to
produce rapidly an adequate deep-lung specimen. These studies were conducted in
healthy volunteers, as well as chronic smokers and patients with chronic
bronchitis who are at a high risk for developing lung cancer and lung
infections. An additional trial is ongoing in patients with lung cancer.
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INS316 Diagnostic has been administered by inhalation to more than 300
patients during such clinical trials, and has been well tolerated in these
trials. INS316 Diagnostic's safety profile is based on studies including non-
smokers, smokers and patients with obstructive lung diseases, and on the
results of good laboratory practice, genotoxicity and 28-day inhalation
toxicology studies. We believe that INS316 Diagnostic is rapidly degraded in
blood and plasma and, so has minimal systemic absorption. Therefore, the
potential for unwanted side effects is minimized.
These studies have also demonstrated that single inhaled doses of INS316
Diagnostic significantly enhance clearing of mucus from the lungs relative to
that following administration of normal saline solution. These effects occurred
within a few minutes following dosing and were dose-related. Specimens obtained
from individuals exposed to INS316 Diagnostic were found to be highly enriched
with cell types characteristic of deep-lung secretions, including alveolar
macrophages and ciliated epithelial cells, when compared to samples from
individuals exposed to a placebo. These findings were statistically
significant. In a trial in 25 patients with chronic bronchitis who are at high
risk for lung cancer, 90% of the patients produced an adequate deep-lung
specimen following INS316 Diagnostic inhalation versus only 25% following
inhalation of a placebo. These study results were statistically significant.
Based on these encouraging results, we have discussed our Phase III plans with
the pulmonary division of the FDA. We plan to initiate a Phase III clinical
trial program to evaluate the efficacy of INS316 Diagnostic to improve the
diagnostic outcome in lung cancer in the second half of 2000.
INS365 Ophthalmic for Dry Eye Disease
INS365 Ophthalmic is being developed as a topical eye drop for the treatment
of dry eye disease. A series of good laboratory practice ocular toxicology
studies have been completed to support the ongoing clinical program. In
preclinical testing, topically applied INS365 Ophthalmic produced a consistent,
statistically significant increase in tear secretion, relative to that produced
by normal saline controls. INS365 Ophthalmic has also enhanced mucin secretion
on the ocular surface in several preclinical models. Many of these studies were
conducted by our Asian partner, Santen. The preclinical study results were
statistically significant in multiple relevant dry eye models.
We have completed one Phase I clinical trial in 50 healthy subjects and
demonstrated good ocular safety and tolerability. We also have completed a
Phase IIa study in 35 patients with mild to moderate dry eye in the United
Kingdom. This study also showed the product to be well tolerated in the target
patient population. A multi-center Phase IIb clinical trial is ongoing. This
study has enrolled approximately 150 patients with dry eye disease. Patients
will be treated with multiple-daily doses of placebo (saline drops) or INS365
Ophthalmic for up to six weeks. Clinical efficacy measures include ocular
comfort, patient diary cards, rescue with artificial tears, corneal staining
and tear-secretion. We anticipate that this study will be completed and the
results will be available in the second half of 2000.
In December 1998, we entered into a joint development, license and supply
agreement with Santen in Asia. Santen is a premier ophthalmic company and
markets the only approved prescription product for dry eye disease in Japan.
Santen intends to file an IND with Japanese regulatory authorities and begin
clinical trials in late 2000. See "--Corporate Collaborations."
INS37217 Ophthalmic for Retinal Disease
INS37217 Ophthalmic, a second-generation proprietary P2Y\\2\\ receptor
agonist, is being developed as a sterile intravitreal injection for the
treatment of retinal disease, including retinal
41
<PAGE>
detachment, a separation of the retina from the eye. Retinal detachment occurs
when fluid accumulates between the retina and the underlying retinal
epithelium. We estimate, based on an extrapolation from United States data,
that retinal detachment affects approximately 200,000 people in the eight major
international prescription pharmaceutical markets. This condition leads to loss
of vision, and when left untreated, can result in permanent damage to the
retina, a sensory organ at the back of the eye that is responsible for vision,
and irreversible blindness. Previous work conducted in vitro has shown that the
retinal pigment epithelium contains P2Y\\2\\ receptors at the retinal-facing
membrane, which can be stimulated by appropriate agonists to enhance fluid
absorption across the retinal pigment epithelium. Later work conducted in vivo
has demonstrated the ability of INS37217 Ophthalmic to facilitate the
reattachment of the retina to the retinal pigment epithelium in two distinct
animal models. Retinal disease in humans may result from several ophthalmic
diseases, ocular trauma, or side-effects from invasive intraocular surgery.
There is currently no pharmaceutical treatment for retinal detachment.
We have completed a series of preclinical studies with INS37217 Ophthalmic
and have initiated intravitreal toxicology to support initiation of clinical
trials. We intend to file an IND with the FDA and initiate clinical testing in
patients in the first half of 2001.
Corporate Collaborations
Genentech, Inc.
In December 1999, we entered into a collaboration with Genentech to develop
treatments for respiratory disorders, including chronic bronchitis, cystic
fibrosis and sinusitis. Under the terms of the agreement, we granted an
exclusive license to Genentech for the use of INS365 Respiratory and our other
related P2Y\\2\\ agonists existing on the date of the agreement for all human
therapeutic uses for the treatment of respiratory tract disorders throughout
the world, excluding Japan. In addition, Genentech has an exclusive license for
the use of INS365 Respiratory and such existing P2Y\\2\\ agonists for all human
therapeutic uses for the treatment of sinusitis and middle ear infection
worldwide. Finally, Genentech has the right to use related P2Y\\2\\ agonists we
discover and develop during the term of the agreement upon reimbursing us for
discovery costs or funding our discovery efforts leading to those compounds.
However, even if Genentech does not reimburse or fund our discovery efforts, we
have agreed not to develop any such P2Y\\2\\ agonist for use in the therapeutic
respiratory field during the term of our agreement.
We have established joint project teams to oversee and coordinate the joint
development programs and a joint steering committee to establish the strategy
and manage the relationship. Under the terms of the agreement, we provide bulk
active drug substance to Genentech for its requirements, at an agreed-upon
price, through the end of Phase II. After Phase II, Genentech is responsible
for obtaining or manufacturing all of its bulk active drug substance
requirements.
We received an up-front payment of $15 million, comprising a non-refundable
cash license fee, funding for the Phase II clinical trials for chronic
bronchitis and the purchase of our Series G preferred stock. In addition,
depending on whether all milestones in each of the chronic bronchitis, cystic
fibrosis and sinusitis development programs are met, we could receive
additional payments of up to $63 million. Genentech is required to pay us
royalties on net sales of products licensed under the agreement.
In the United States, we will lead the early clinical development of
INS37217 Respiratory for the treatment of cystic fibrosis through the end of
Phase II clinical trials. We then have the option to continue to co-fund the
development of the product in the United States in exchange
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for a share of United States operating profits instead of royalties. In
addition, we have the option, any time before Genentech initiates pre-launch
activities, to choose to co-promote the product in the United States at our own
expense.
We are responsible for conducting, in collaboration with Genentech, the
Phase II clinical trials for INS365 Respiratory for chronic bronchitis. We will
also lead the preclinical program for a P2Y\\2\\ agonist selected by the joint
steering committee for the treatment of sinusitis, and will be responsible for
filing the IND for such compound. We expect our development obligations under
the agreement to be completed by the end of 2001.
Genentech is responsible for all other development conducted under the
agreement, including all development outside the United States, and for all
other regulatory submissions, filings and approvals relating to products.
Genentech is required to use commercially reasonable efforts to conduct
development, seek regulatory approvals and market and sell the products.
The agreement will be in effect until all patents licensed under the
agreement have expired. If we exercise our option to co-fund the development of
INS37217 Respiratory for the treatment of cystic fibrosis, then the agreement
will remain in effect for those products in the United States until the
products are no longer being marketed in the United States. Either Genentech or
we may terminate the agreement if the other materially breaches the agreement.
In addition, Genentech has the right, by giving us 150 days prior notice, to
terminate the agreement at any time. If Genentech breaches the agreement or
terminates the agreement early other than for our breach, Genentech's license
will terminate. Genentech must provide us with all data and information
relating to our products, and Genentech must assign or permit us to cross-
reference all regulatory filings and approvals.
Kissei Pharmaceutical Co., Ltd.
In September 1998, we entered into a Joint Development, License and Supply
Agreement with Kissei for the development of INS365 Respiratory for all
therapeutic respiratory applications, excluding sinusitis and middle ear
infection, in Japan. We granted Kissei an exclusive license to INS365
Respiratory in the field in Japan and a first right to negotiate a license to
particular P2Y\\2\\ agonists that show utility as inhalation products for
respiratory uses in Japan.
We established a joint development committee with Kissei to oversee the
development program, approve development plans, protocols and studies, and
review and approve all regulatory submissions and filings. In consultation with
Kissei, we are responsible for formulation of the compound and the design of
the delivery system to be used. We are also responsible, through the use of
development and manufacturing liaisons, for coordinating and facilitating
communications among our corporate partners for the worldwide development and
manufacture of INS365 Respiratory. Kissei is responsible for all development of
the compound and all regulatory filings.
We received an up-front payment of $4.5 million, which included the purchase
of our Series C preferred stock. In addition, depending on whether all
milestones are met, we could receive additional payments of up to $13.0
million, as well as royalties on net sales of licensed products. To date, we
have received $2.1 million in milestone payments. We also are receiving funding
for development and manufacturing liaison staff positions.
We are obligated to supply Kissei with its requirements of INS365
Respiratory in bulk drug substance and in an inhalation formulation for all
preclinical trials conducted by Kissei. In addition, we are obligated to supply
Kissei with its requirements of finished product contained in a vial or nebule
and in a delivery system approved by the joint development committee for
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all clinical trials to be conducted by Kissei. Kissei will pay us an agreed-
upon transfer price for all such supplies. We have also agreed to negotiate a
commercial supply arrangement with Kissei at the appropriate time to supply
Kissei's requirements of finished product and the delivery system.
The agreement will terminate when all patents licensed under the agreement
have expired. Either Kissei or we may terminate the agreement if the other
materially breaches the agreement. In addition, Kissei has the right, by giving
us three months prior notice, to terminate the agreement at any time if Kissei
determines that continued development or marketing of the product is
scientifically or economically infeasible. If Kissei breaches the agreement or
terminates the agreement early other than for our breach, Kissei's license will
terminate. Kissei will provide us with all data and information relating to our
products, and Kissei will assign or permit us to cross-reference all regulatory
filings and approvals.
Santen Pharmaceutical Co., Ltd.
In December 1998, we entered into a Development, License and Supply
Agreement with Santen for the development of INS365 Ophthalmic for the
therapeutic treatment of ocular surface diseases, such as dry eye disease, in
Asia. Under the agreement, we granted Santen an exclusive license to market
INS365 Ophthalmic for ocular surface diseases in Japan, China, South Korea, the
Philippines, Thailand, Vietnam, Taiwan, Singapore, Malaysia and Indonesia.
We established a coordinating committee to review and evaluate Santen's
progress in the development and commercialization of products and to provide
input and recommendations regarding the development of the products. Santen is
responsible for all development, regulatory submissions, filings and approvals,
and all marketing of products. 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 terms of the agreement, we received an up-front equity investment
of $1.5 million in our Series D preferred stock. In addition, depending on
whether 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. The
Company has not received any milestone payments to date under the Santen
agreement.
The agreement will terminate when all patents licensed under the agreement
have expired. Either Santen or we may terminate the agreement if the other
materially breaches the agreement. In addition, we have the right to terminate
the agreement at any time if we determine, subject to the coordinating
committee's review and arbitration, that Santen has not made reasonably
sufficient progress in the development or commercialization of products. If
Santen breaches the agreement, or if we terminate the agreement because Santen
has not made sufficient progress, Santen's license will terminate, and Santen
will provide us with all data and information relating to our products, and
will assign or permit us to cross-reference all regulatory filings and
approvals.
Discovery
Our scientists have specific expertise and proprietary knowledge relating to
the design and synthesis of P2Y receptor agonists, and we have invested heavily
in state-of-the-art equipment and laboratory space for performing synthetic
chemistry, determination of compound structure and molecular modeling. We have
acquired, by licenses and/or material transfer agreements, rights to three of
the five unique human P2Y receptors that have been functionally expressed. We
have cloned and expressed the other two receptors in-house.
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Our discovery effort is focused on conducting studies using our proprietary
cell-based MUCOSA(TM) assay system, a cell-based scientific test that measures
biological activities caused by stimulation of P2Y receptors, to identify new
compounds that specifically and selectively bind to members of the P2Y receptor
family. The MUCOSA high-volume assay enables us to identify agonists and
antagonists that act at specific receptor subtypes and have demonstrated a
level of specificity and activity that merits further investigation. We use
data from the assays to design and synthesize compounds specific to each P2Y
receptor subtype which can be advanced to clinical trials.
By screening against several P2Y receptor subtypes, we have been able to
identify agonists and/or antagonists that interact preferentially with a
specific receptor subtype. Several proprietary discovery compounds, including
new chemical entities, with promising stability and metabolic profiles, are
being actively explored. We intend to conduct further preclinical development
studies to advance such proprietary compounds to project status, if
appropriate. These compounds will then be targeted to the treatment of new
disease areas, as identified through our strategic planning process.
We obtain access to chemical libraries through our own proprietary
combinatorial chemistry, commercial sources and corporate agreements. The
chemicals are screened for both agonist and antagonist activity. Our chemistry
department also assists in the development of analytical protocols used by
contract service organizations for analysis of a drug substance, clinical
trials material and drug stability studies which will be incorporated into IND
and new drug application (NDA) filings.
We use sponsored research agreements to investigate specific biological
processes to augment our technology platform. We are currently sponsoring
research at major universities, including The University of North Carolina at
Chapel Hill, Columbia University, the University of Southern California, Duke
University, Schepens Eye Research Institute, Boston University and Brigham and
Women's Hospital.
Patents and Proprietary Rights
We believe that the proprietary protection of our product candidates,
processes and know-how is important to the success of our business. We
aggressively file and prosecute patents covering our proprietary technology,
and, if warranted, will defend our patents and proprietary technology. As of
June 1, 2000, we owned or licensed patent rights consisting of 18 issued United
States patents, none of which expire before 2011, and 17 pending applications
in the United States and numerous corresponding patents and patent applications
in foreign jurisdictions. We seek patent protection for our proprietary
technology and products in the United States and Canada and in key commercial
European and Asia/Pacific countries and other major commercial sectors of the
world, as appropriate. We intend to seek protection in the United States and
foreign countries trademarks from time to time. We also rely upon trade
secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain our competitive position.
In March 1995 and September 1998, we entered into two agreements with The
University of North Carolina at Chapel Hill granting us exclusive worldwide
licenses to develop, make, use and sell products based on UNC patented
technology relating to the use of P2Y\\2\\ receptor agonists for respiratory
therapeutics, such as INS365 Respiratory, and respiratory diagnostics, such as
INS316 Diagnostic. The United States government may have limited rights in some
of this UNC patented technology. We also entered into a third agreement that
granted us a non-exclusive worldwide license to use other UNC patented
technology as a research tool to identify agonists and antagonists for P2Y
receptors. The agreements require us to pay
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licensing fees upon the attainment of development milestones and royalties on
net sales or a share of sublicensing income on products covered by the patents.
We are also required to meet due diligence milestones and UNC may terminate the
licenses if we fail to do so. In connection with the licenses, we issued to UNC
an aggregate of 326,286 shares of our common stock, of which 128,610 shares
have been transferred to the inventors of the licensed UNC patented technology.
We have also entered into consulting agreements with some of the inventors of
these technologies, all of whom are from The University of North Carolina at
Chapel Hill, including Dr. Richard C. Boucher, one of our founders and a member
of our Board of Directors, M. Jackson Stutts, Kendall Harden and Michael
Knowles, in which they agreed to consult with us regarding their respective
fields of knowledge.
Additional patent applications have since been filed on discoveries made in
support of such technologies, from research conducted at The University of
North Carolina at Chapel Hill or in our own laboratories. Our sponsored
research agreements, material transfer agreements, and other collaborations
have the potential to result in license agreements with universities,
institutes and businesses. We believe that our patents and licensed patents
provide a substantial proprietary base that will allow us, and our
collaborative partners, to exclude others from conducting our business as
described in this prospectus and as encompassed by our issued patents and
issued patents licensed to us. We cannot be sure, however, that pending or
future applications will issue, that the claims of any patents which do issue
will provide any significant protection of our technology or that our directed
discovery research will yield compounds and products of therapeutic and
commercial value.
Our competitors or potential competitors may have filed for or have received
U.S. and foreign patents and may obtain additional patents and proprietary
rights relating to compounds or processes which may compete with our product
candidates. Accordingly, there can be no assurance that our patent applications
will result in patents being issued or that, if issued, the claims of the
patents will afford protection against competitors with similar technology, nor
can we be sure that others will not obtain patents that we would need to
license or get around.
Manufacturing and Supply
We do not engage in, and do not expect to engage in, the manufacture of bulk
active pharmaceutical ingredient for preclinical, clinical or commercial
purposes. We rely on a contract manufacturing supply agreement with a single
manufacturer for the development stage production of INS316 and INS365. We have
identified an alternative supplier as a backup. We have already obtained
clinical trial grade material of both products from both the lead and backup
supplier. In addition, we expect the same lead manufacturer will supply
commercial quantities of INS316 and INS365 for both respiratory and ophthalmic
applications. We believe this lead manufacturer is capable of producing
sufficient quantities for commercial purposes within current good manufacturing
practices. In addition, we have obtained preclinical supplies of INS37217 for
both respiratory and ophthalmic applications from the same lead manufacturer,
and we have discussed entering into an agreement for the clinical supply of
INS37217. See "Risk Factors--If we are unable to contract with third parties
for synthesis and manufacturing of our 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 currently obtain all of our bulk active ingredient for INS316, INS365 and
INS37217 from Yamasa Corporation, in Choshi, Japan, but the first two are also
available from other fine chemical manufacturers. In addition to the bulk
active ingredient, our products are made up of sodium chloride, sodium
hydrochloric acid and sterile water, all of which are readily available
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from numerous sources. Our products are packaged in unit-dose vials, which we
obtain from Automatic Liquid Packaging of Woodstock, Illinois, but these vials
are also available from other commercial filling and packing companies.
Competition
Many drug companies engage in research and development to commercialize
products to treat chronic bronchitis, cystic fibrosis, dry eye disease and
other diseases that we are researching. We compete with these companies for
funding, access to licenses, personnel, third-party collaborators and product
development. Almost all of these companies have substantially greater
financial, marketing, sales, distribution and technical resources and more
experience in research and development, clinical trials and regulatory matters,
than we do. We are aware of existing palliative treatments that will compete
with our products.
We believe that several major pharmaceutical companies have initiated
research programs to design P2Y receptor agonists or antagonists; however, we
are not aware of any competing P2Y\\2\\ receptor agonists that have entered
clinical testing. If successfully developed and commercialized, our products
will compete with existing therapeutics and improved versions of these
treatments.
The current therapeutic approaches used in the treatment of chronic
bronchitis are palliative and are aimed at reducing airway inflammation,
respiratory infections and airflow obstruction. These approaches include
corticosteroids and other anti-inflammatory agents, bronchodilators and
antibiotics. We are aware of many anti-inflammatory agents, including
Azmacort(R), Beclovent(R) and antibiotics such as Biaxin(R) and Zithromax(R).
We believe that other anti-inflammatory agents are in development. Numerous
bronchodilators are also on the market, including among others generic
albuterol, Alupent(R), Proventil(R), Ventolin(R), Serevent(R), and Theo-Dur(R).
Outside of the United States, mucolytics, agents that liquefy or reduce the
viscoelastic consistency of mucus, are widely used even though they have shown
minimal efficacy in well-controlled trials.
Although we believe that none of the therapeutic approaches described above
address the underlying problem of excessive retained mucus and impaired
mucociliary clearance, drugs based on other therapeutic mechanisms may be
efficacious in treating respiratory diseases. The development by others of
treatments that are not related to our mucociliary clearance approach could
render our product candidates non-competitive or obsolete.
There are two products approved in the United States specifically for the
treatment of cystic fibrosis: Pulmozyme(R), an agent designed to break up
thickened airway secretions, and TOBI(R), an inhaled antibiotic. Pulmozyme(R)
is marketed by Genentech, which is one of our collaborative partners.
The current prescription and non-prescription treatments for dry eye disease
include artificial tear replacement therapy or lubricant drops. The only
prescription pharmacological agent in late-stage clinical trials for dry eye is
Restasis(R) from Allergan. We are aware of early clinical trials with various
other potential products as possible alternative modes of therapy.
Governmental Regulation
The research, development, testing, manufacture, promotion, marketing and
distribution of human therapeutic and diagnostic products are extensively
regulated by government authorities in the United States and other countries.
In the United States, the FDA regulates
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drugs and diagnostic products and similar regulatory bodies exist in other
countries. The steps ordinarily required before a new drug may be marketed in
the United States, which are similar to steps required in most other countries,
include:
. preclinical laboratory tests, preclinical studies in animals and
formulation studies and the submission to the FDA of an IND for a new
drug;
. adequate and well-controlled clinical trials to establish the safety and
efficacy of the drug for each indication;
. the submission of an NDA to the FDA; and
. FDA review and approval of the NDA before any commercial sale or shipment
of the drug.
Preclinical tests include laboratory evaluation of product toxicity and
formulation, as well as animal studies. The results of preclinical testing are
submitted to the FDA as part of an IND. A 30-day waiting period after the
filing of each IND is required before the commencement of clinical testing in
humans. At any time during this 30-day period or later, the FDA may halt
proposed or ongoing clinical trials until the FDA authorizes trials under
specified terms. The IND process may be extremely costly and substantially
delay development of our products. Moreover, positive results of preclinical
tests will not necessarily indicate positive results in clinical trials.
Clinical trials to support NDAs are typically conducted in three sequential
phases, but the phases may overlap. During Phase I, the initial introduction of
the drug into healthy human subjects or patients, the drug is tested to assess
metabolism, pharmacokinetics and pharmacological actions and safety, including
side effects associated with increasing doses. Phase II usually involves
studies in a limited patient population to:
. assess the efficacy of the drug in specific, targeted indications;
. assess dosage tolerance and optimal dosage; and
. identify possible adverse effects and safety risks.
If a compound is found to be potentially effective and to have an acceptable
safety profile in Phase II evaluations, Phase III trials, also called pivotal
studies, major studies or advanced clinical trials, are undertaken to further
demonstrate clinical efficacy and to further test for safety within an expanded
patient population at geographically dispersed clinical study sites.
After successful completion of the required clinical testing, generally a
NDA is submitted. The FDA may request additional information before accepting a
NDA for filing, in which case the application must be resubmitted with the
additional information. Once the submission has been accepted for filing, the
FDA has 180 days to review the application and respond to the applicant. The
review process is often significantly extended by FDA requests for additional
information or clarification. The FDA may refer the NDA to an appropriate
advisory committee for review, evaluation and recommendation as to whether the
application should be approved, but the FDA is not bound by the recommendation
of an advisory committee.
If FDA evaluations of the NDA and the manufacturing facilities are
favorable, the FDA may give us either an approval letter or an approvable
letter. An approvable letter will usually contain a number of conditions that
must be met in order to secure final approval of the NDA and authorization of
commercial marketing of the drug for particular indications. The FDA may refuse
to approve the NDA or give us a non-approvable letter, outlining the
deficiencies in the submission and often requiring additional testing or
information. If regulatory approval of a product is granted, it will be limited
to particular disease states or conditions.
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We and any of our contract manufacturers are also required to comply with
the applicable FDA current good manufacturing practice regulations. Good
manufacturing practice regulations include requirements relating to quality
control and quality assurance as well as the corresponding maintenance of
records and documentation. Manufacturing facilities are subject to inspection
by the FDA. These facilities must be approved before we can use them in
commercial manufacturing of our products. Our contract manufacturers or we may
not be able to comply with the applicable good manufacturing practice
requirements and other FDA regulatory requirements.
Outside the United States, our ability to market our products will also
depend on our receipt of marketing authorizations from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials and marketing authorization vary widely from country to country. At
present, foreign marketing authorizations are applied for at a national level,
although within Europe procedures are available to companies wishing to market
a product in more than one European Union member state. If the regulatory
authority is satisfied that adequate evidence of safety, quality and efficacy
has been presented, a marketing authorization will be granted. This foreign
regulatory approval process, including those in Europe and Japan, involves all
of the risks associated with FDA clearance discussed above.
Employees
As of the date of this prospectus, we have 36 full-time employees, 16 of
whom are involved in our drug discovery and preclinical programs, 11 of whom
are engaged in development programs, and nine of whom are involved in
administrative activities. Thirteen of our employees hold a Ph.D., Pharm.D. or
M.D. degree. In addition, we utilize part-time employees and outside
contractors and consultants as needed. Employees are required to execute a
confidentiality and assignment of trade secrets agreement. Our employees are
not represented by a labor union and we believe that our relations with
employees are good.
Facilities
We lease facilities that comprise approximately 17,500 square feet in
Durham, North Carolina adjacent to the Research Triangle Park, through several
leases. The leases expire in August 2003, May 2003 and December 2003 and are
renewable. We anticipate having sufficient space to allow for all potential
expansionary needs over the next two years.
Legal Proceedings
We are not a party to any material legal proceedings.
Scientific Advisory Board
We are advised by an international scientific advisory board currently
composed of eight members with expertise in the fields of statistics, molecular
biology, genetic research and medicine. We meet periodically with our
scientific advisory board to review and discuss specific projects with those
members who are experts in the subjects being discussed. In addition, we may
consult individual board members as to matters in their respective areas of
expertise. Our scientific advisory board currently is composed of the following
individuals:
Richard Boucher, M.D. and Benjamin R. Yerxa, Ph.D. are Co-Chairmen of
the Scientific Advisory Board. See "Management--Executive Officers and
Directors."
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Dennis Ausiello, M.D. is Chief of Medicine at Massachusetts General
Hospital and Professor of Medicine at Harvard Medical School. He is an
internationally recognized expert in the cell biology of ATP receptors,
sodium ion channels and water channels.
Carol Basbaum, Ph.D. is Professor of Anatomy at the University of
California at San Francisco and is an expert in lung mucin production. Her
interests focus on both the biology of the mucin secretory cell in the lung
and the regulation of mucin gene expression. A particular interest has been
bacterial pathogen-mucin gene regulatory interactions.
Geoffrey Burnstock, D.Sc. is Director, Autonomic Neuroscience Institute
and Professor, Department of Anatomy and Developmental Biology, Royal Free
Hospital School of Medicine. He originally conceived the idea of purinergic
nerves and receptors for extracellular adenine nucleotides. He is the
leader of the purinergic receptor field. He is the recipient of many
international awards and is a fellow of the Royal Society.
Mark Leppert, Ph.D. is Associate Professor, Eccles Institute of Human
Genetics, University of Utah. He is a geneticist/molecular biologist. He is
a central figure in the internationally recognized University of Utah human
genome effort. His particular interest is mapping human diseases to define
the molecular basis of human disease.
Lee Limbird, Ph.D. is Associate Vice Chancellor for Research, Vanderbilt
University Medical Center, Professor of Pharmacology and Chair, Department
of Pharmacology Vanderbilt University. Her research has focused on the
structure and function of G-protein coupled receptors with particular
emphasis on adrenergic receptors. A current interest is delineation of the
molecular basis of membrane targeting of receptors in polarized cells. She
was awarded the John Jacob Abel Award given to the most outstanding young
pharmacologist in 1987.
David Westfall, Ph.D. is Vice President, Academic Affairs, University of
Nevada-Reno and Professor of Pharmacology, University of Nevada School of
Medicine. He has been a leader in physiological and pharmacological studies
of purinergic receptors for the last two decades. His research includes a
major interest in purinergic receptors in the nervous system and on smooth
muscle of the urinary tract.
Other Advisory Committees
In addition to our scientific advisory board, we have a chronic bronchitis
advisory board, a cystic fibrosis advisory board and a critical care advisory
board. These committees consist of clinical experts in their respective fields.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors as of the date of this prospectus are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Christy L. Shaffer, Ph.D................ 42 President, Chief Executive
Officer and Director
Gregory J. Mossinghoff.................. 39 Chief Business Officer, Secretary
and Treasurer
Donald J. Kellerman, Pharm.D. .......... 45 Senior Vice President,
Development
Benjamin R. Yerxa, Ph.D................. 34 Vice President, Discovery
Richard M. Evans, Ph.D. ................ 40 Vice President, Pharmaceutical
Development
Janet L. Rideout, Ph.D(1)............... 61 Senior Vice President, Discovery
Terrance G. McGuire..................... 44 Chairman of the Board
Richard Boucher, M.D. .................. 55 Director
Andre L. Lamotte, Sc.D. ................ 51 Director
H. Jefferson Leighton, Ph.D. ........... 54 Director
W. Leigh Thompson, M.D., Ph.D., D.Sc. .. 61 Director
Jesse I. Treu, Ph.D. ................... 53 Director
</TABLE>
--------
(1) Dr. Rideout has informed us that she will retire following this offering.
However, Dr. Rideout has agreed to serve as a consultant for a period of
at least a year.
Following are brief descriptions of our current executive officers and
directors:
Christy L. Shaffer, Ph.D. has served as our President, Chief Executive
Officer and as a director since January 1999. Dr. Shaffer joined us in June
1995 as our first full time employee, Director, Clinical Operations, was
promoted to Senior Director, Development in June 1996 and to Vice President,
Development and Chief Operating Officer in January 1998. Dr. Shaffer has over
ten years of experience in drug development within the pharmaceutical industry.
She previously served in a variety of positions in the clinical research
division of Burroughs Wellcome Co. including Associate Director of pulmonary
research in the department of pulmonary/critical care medicine during the
period from February to June 1995. Dr. Shaffer coordinated several IND
submissions and one NDA submission at Burroughs Wellcome. Dr. Shaffer received
a Ph.D. in pharmacology from the University of Tennessee and completed two
years of postdoctoral training in cardiovascular research in the Biochemistry
Department at the Chicago Medical School before her postdoctoral appointment at
UNC.
Gregory J. Mossinghoff has served as our Chief Business Officer since
December 1999. Mr. Mossinghoff joined us in June 1998 as our Senior Director of
Strategic Planning and Operations and was promoted to Vice President, Corporate
Development in January 1999. Mr. Mossinghoff has also served as our Secretary
since October 1998, and as our Treasurer since March 2000. In his current role
he helps us develop and realize strategic objectives, expand our corporate
partnerships in the United States and abroad, and oversee all business-related
activities including operations and finance. Before joining us, from February
1996 to June 1998, Mr. Mossinghoff was worldwide Director of Business Analysis
at Glaxo Wellcome plc, with specific responsibility for the CNS therapeutic
area. Before joining Glaxo Wellcome, Mr. Mossinghoff held various roles with
increasing responsibility at Hoffmann LaRoche Inc., from June 1988 to February
1996, including Manager, Business Development and Strategic Planning
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from 1994 to 1996. Mr. Mossinghoff received a BA degree in Economics from the
University of Virginia, Charlottesville, VA and an MBA in Financial Management
& Analysis from George Mason University, Fairfax, VA.
Donald J. Kellerman, Pharm.D. has served as our Senior Vice President,
Development since May 2000. He is responsible for all of our clinical
development programs and regulatory affairs. Dr. Kellerman joined us in July
1999 as Vice President, Development. Before joining us, Dr. Kellerman spent 11
years with Glaxo Wellcome, from August 1997 to July 1999 and from April 1988 to
August 1996, where he was Director of various groups, including International
OTC, U.S. Infectious Diseases, and the Inhaled Corticosteroid Group. He was
clinical project leader for Flovent(R) from first U.S. clinical studies in 1989
to approval in 1996. From September 1996 to August 1997, he was Vice President
of Clinical Research at Sepracor, where he was project leader for the
Xopenex(R) NDA team. Before Glaxo Wellcome, Dr. Kellerman worked at E.R. Squibb
and Sons and Ciba-Geigy on several cardiovascular products. Dr. Kellerman holds
a Doctor of Pharmacy and Bachelor of Science degree from the University of
Minnesota.
Benjamin R. Yerxa, Ph.D. has served as our Vice President, Discovery since
February 2000 and as a Co-Chairman of our Scientific Advisory Board since June
2000. Dr. Yerxa joined us in August 1995 and previously held several positions,
including Senior Director of Preclinical Programs. He supervises both the
Biology and the Chemistry Discovery teams and all early preclinical drug
development activities. He created a new strategic opportunity for us by
developing the concept of ophthalmic uses for our core P2Y\\2\\ technology.
Before being promoted to the position of Senior Director of Preclinical
Programs in December 1999, Dr. Yerxa was Director of Preclinical Programs and,
before that, Senior Research Chemist. While in chemistry, he served as the
preclinical project leader for INS365. As a Senior Research Chemist his work
focused on designing and synthesizing new P2Y receptor agonists. Before joining
us, from October 1993 to August 1995, Dr. Yerxa was a Research Scientist at
Burroughs Wellcome Co. Dr. Yerxa worked at Biophysica, Inc. for over two years,
synthesizing radiocontrast agents. He developed scale-up procedures for the
industrial production of Oxilan, a marketed imaging product. Dr. Yerxa received
his Ph.D. in Organic Chemistry from UC Irvine in 1993.
Richard M. Evans, Ph.D. has served as our Vice President, Pharmaceutical
Development since June 2000. Dr. Evans joined us in October 1996 and has
previously held several positions. He is responsible for all activities related
to the manufacture, formulation development and testing of our products in
development and for the identification and development of relevant drug
delivery technologies. He also serves as Vice-Chair of the Inhalational
Technology Focus Group for the American Association of Pharmaceutical
Scientists. Prior to joining Inspire, Dr. Evans was Section Manager of
Inhalational Dosage Forms at Rhone-Poulenc Rorer. He has over 10 years
experience in the pharmaceutical industry, including positions at Delphi and
Rhone-Poulenc Rorer. Dr. Evans holds both a Bachelor of Pharmacy degree and a
Doctorate in Pharmaceutical Chemistry, in the field of inhalation drug
delivery, from the Welsh School of Pharmacy, University of Wales College of
Cardiff.
Janet Rideout, Ph.D. has served as our Senior Vice President, Discovery
since February 2000. Dr. Rideout joined us in 1995 as Director of Chemistry and
was promoted to Senior Director, Discovery, in June 1996 and Vice President,
Discovery in January 1998. Before joining us, Dr. Rideout spent more than 26
years at Burroughs Wellcome Co., ultimately serving as associate division
director of organic chemistry. Dr. Rideout holds more than 40 patents, most
notably as co-inventor for AZT (Retrovir(R)). She is a member of three
divisions of the American Chemical Society, the New York Academy of Sciences,
the American Association for the Advancement of Science, and a Life Fellow and
past member of the board of directors of the American Institute of Chemists.
She received the Distinguished Chemist Award from the North
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<PAGE>
Carolina Institute of Chemists in 1994. Dr. Rideout received her Ph.D. in
organic chemistry from the State University of New York at Buffalo.
Terrance G. McGuire has served as our Chairman of the Board and a director
since October 1993, and is one of our four founders. He currently serves as
chairman of the compensation and audit committees of the board and as a member
of the nominating committee of the board. He also served as our Treasurer from
October 1993 to March 2000. Since March 1986, he has been a founding general
partner of Polaris Venture Partners L.P. Since 1992, he has served as a general
partner of Alta V Management Partners L.P., which is the general partner of
Alta V Limited Partnership, a fund associated with Burr, Egan, Deleage & Co. He
is a director of Akamai Technologies, Inc., Aspect Medical Systems, Inc.,
Wrenchead.com, Inc., Paradigm Genetics, Inc. and several other private
healthcare and information technology companies. Mr. McGuire received his B.S.
in Physics and Economics from Hobart College, his M.S. in Engineering from
Dartmouth College and his MBA from the Harvard Business School.
Richard Boucher, M.D. has served as a director since March 1995, and is a
Co-Chairman of our Scientific Advisory Board and a member of our nominating
committee. One of our four founders, Dr. Boucher is the William Rand Kenan
Professor of Medicine, Chief of Pulmonary Medicine and Director of the Cystic
Fibrosis/Pulmonary Research and Treatment Center at The University of North
Carolina at Chapel Hill School of Medicine. Dr. Boucher obtained his M.D.
degree from Columbia University College of Physicians and Surgeons. Following
residency training, he joined the Faculty of Medicine at The University of
North Carolina at Chapel Hill in 1977. Dr. Boucher has authored or co-authored
more than 200 original research articles and more than 100 additional
publications including book chapters. He received the Doris Tulcin and Paul Di
Sant'Agnese CF Research Awards and the Julius Comroe Award from The American
Physiology Society. He is an established principal investigator with the
National Institutes of Health, and is a member of the American College of
Physicians and the Association of American Physicians. In recent years, Dr.
Boucher has pioneered new approaches for the treatment of cystic fibrosis.
Andre L. Lamotte, Sc.D. has served as a director since October 1993 and is
one of our four founders. Dr. Lamotte also currently serves as a member of our
nominating committee. In 1989, Dr. Lamotte founded Medical Science Partners,
which specializes in early stage life sciences investments in affiliation with
Harvard University and has served as the managing general partner since such
time. Before founding Medical Science Partners, Dr. Lamotte served as a general
manager at Pasteur Merieux from April 1983 to April 1988. He also serves as the
managing general partner of Medical Science Partners II, L.P. and Medical
Science II Co-Investment, L.P. Dr. Lamotte is a director of Ascent Pediatrics,
Inc. Dr. Lamotte holds a Ph.D. in chemistry from the Massachusetts Institute of
Technology and an M.B.A. from Harvard University.
H. Jefferson Leighton, Ph.D. has served as a director since October 1993 and
is one of our four founders. He served as our President and Chief Executive
Officer from October 1993 until December 1995. Dr. Leighton also serves as a
member of our audit committee. Dr. Leighton has more than 20 years of
experience in large pharmaceutical companies in various research and
development positions. More recently, he has founded, reorganized, and merged
several small pharmaceutical companies including ICAgen, Exogen, Biodesign,
Sphinx, SemaCo. and AdipoGenix.
W. Leigh Thompson, M.D., Ph.D., D.Sc. has served as a director since April
1996. In December 1994 Dr. Thompson retired from Eli Lilly and Co. where he
served as chief scientific officer and a member of the management committee.
Dr. Thompson has enjoyed a
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<PAGE>
distinguished career in both academic medicine and the pharmaceutical industry
and has published extensively, particularly in the area of critical care
medicine. He is a member of numerous corporate, academic, and civic boards, and
consults in the areas of health informatics, enterprise strategic planning, and
related areas. Since 1995, Dr. Thompson has been the Chief Executive Officer of
Profound Quality Resources, Inc., a worldwide scientific consulting firm. He is
currently a director of Bioanalytical Systems Inc., DepoMed Inc., Orphan
Medical Inc., Guilford Pharmaceuticals, Inc., Medarex Inc. and Ophidian
Pharmaceuticals Inc.
Jesse I. Treu, Ph.D. has served as a director since March 1995 and is a
member of our compensation and audit committees. He is a managing member of
Domain Associates, L.L.C. and has served in this or similar capacities with the
firm since 1986. He has served as a director of over 20 early-stage companies,
eleven of which have so far become public companies. He is currently a director
of Focal, Inc., Geltex Pharmaceuticals, Inc., Trimeris, Inc., OraPharma, Inc.,
and Simione Central Holdings, Inc. Before the formation of Domain, Dr. Treu had
12 years of health care experience at General Electric and Technicon
Corporation in a number of research, marketing management and corporate staff
positions. Dr. Treu received his B.S. from Rensselaer Polytechnic Institute and
his M.A. and Ph.D. degrees in physics from Princeton University.
Director Compensation
Directors do not receive cash compensation for services on the board of
directors or any board committee. In 1996, we granted Dr. Thompson an option to
purchase 27,428 shares of our common stock at an exercise price of $0.12 per
share. In March 2000, we granted each non-employee director an option to
purchase 5,714 shares of our common stock at an exercise price equal to the
price of our common stock sold in this offering. All such options are subject
to conditions relating to vesting and retention for each recipient's
participation on the board of directors. All directors are reimbursed for
expenses incurred in connection with attendance at board of directors and
committee meetings.
Board Committees
Our board of directors has established an audit committee, a compensation
committee and a nominating committee. Our audit committee, which consists of
Mr. McGuire, as chairperson, Dr. Treu and Dr. Leighton, reviews the results and
scope of our annual audit and the services provided by our independent
auditors. Our compensation committee, which consists of Mr. McGuire, as
chairperson, and Dr. Treu, administers our stock plan and reviews and approves
issues and matters concerning the compensation of employees and consultants and
the objectives and policies instituted by the board of directors. Our
nominating committee, which consists of Mr. McGuire, Dr. Boucher and Dr.
Lamotte, reviews the qualifications of and proposes candidates for
consideration for election to the board of directors or any committee of the
board.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1999, Mr. McGuire and Dr. Treu
served as members of our compensation committee. We have never employed any
member of the compensation committee of our board of directors. None of our
executive officers serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving on our
board of directors or our compensation committee of the board of directors. For
information on recent purchases of our capital stock by the members of our
compensation committee or their respective affiliates, please see the
description under the caption "Certain Transactions" included in this
prospectus.
54
<PAGE>
Executive Compensation
The following table provides information concerning the annual and long-term
compensation for the fiscal year ended December 31, 1999 of (i) our chief
executive officer, and (ii) our other executive officers as of December 31,
1999 whose salary and bonus earned during the fiscal year ended December 31,
1999 exceeded $100,000. Following the rules of the Securities and Exchange
Commission, the compensation described in the table does not include medical,
group life insurance or some other benefits which are available generally to
all of our salaried employees. These individuals are referred to as the named
officers in other parts of this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
---------------- ------------
Securities
Underlying
Name and Principal Position Salary Bonus Options
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
Christy L. Shaffer, Ph.D .. $192,800 $40,000 0
President, Chief Executive
Officer and Director
Gregory J. Mossinghoff .... $139,667 $42,600 71,429
Chief Business Officer
Janet L. Rideout, Ph.D .... $138,417 $42,600 102,857
Senior Vice President,
Discovery
</TABLE>
The following table sets forth information concerning grants of stock
options to the named officers during the fiscal year ended December 31, 1999.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Percentage Realizable Value
of Total at Assumed Rates
Number of Options of Stock Price
Securities Granted to Appreciation for
Underlying Employees Exercise or Option Term
Options in Fiscal Base Price Expiration -------------------
Name Granted 1999 per Share Date 5% 10%
---- ---------- ---------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Christy L. Shaffer,
Ph.D................... 0 -- -- -- -- --
Gregory J. Mossinghoff.. 71,429 18.1% $0.84 10/12/09 1,182,119 1,882,327
Janet L. Rideout,
Ph.D................... 102,857 26.0% $0.42 04/06/09 1,772,607 2,822,581
</TABLE>
The figures above represent options granted under our stock plan. We granted
options to purchase 395,000 shares of our common stock in 1999.
The options granted to our employees typically vest as to 25% on the first
anniversary of the date of grant and as to the remaining 75% in 36 generally
equal monthly installments commencing on the first month following the first
anniversary of the date of grant. Mr. Mossinghoff's 1999 options vest as to
17,857 shares on October 31, 2000, vest as to an additional 1,489 on the last
day of each month for 35 months after that date, and vest as to the remaining
1,471 shares on October 31, 2003. Dr. Rideout's 1999 options vest as to 51,429
shares on April 6, 2000 and as to 51,429 shares on April 6, 2001, except that
the options
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<PAGE>
become fully vested upon the closing of this offering. Options granted to the
named officers expire 10 years from the grant date.
The potential realizable value represents amounts, net of exercise price
before taxes, that may be realized upon exercise of the options immediately
before the expiration of their terms assuming appreciation of 5% and 10% over
the option term. The 5% and 10% values are calculated based on rules
promulgated by the Securities and Exchange Commission and are applied to an
assumed initial public offering price of $11.00 per share and do not reflect
our estimate of future stock price growth. The actual value realized may be
greater or less than the potential realizable value shown in the table.
We have never granted stock appreciation rights.
The following table shows information concerning the value and number of
exercisable and unexercisable stock options held by the named officers as of
December 31, 1999. The value of unexercised in-the-money options at December
31, 1999 represents an amount equal to the difference between the assumed
initial public offering price of $11.00 per share and the option exercise
price, multiplied by the number of unexercised options. An option is in-the-
money if the fair market value of the underlying shares exceeds the option's
exercise price.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options of
Options at Fiscal Year-End Fiscal Year-End
------------------------------ -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Christy L. Shaffer,
Ph.D................... 187,946 212,054 $1,972,402 2,327,598
Gregory J. Mossinghoff.. 25,201 117,656 $ 248,697 1,244,732
Janet L. Rideout,
Ph.D................... 71,188 104,297 $1,203,672 1,486,073
</TABLE>
Stock Plan
We established our stock plan, as amended, for the purposes of attracting
and retaining the best available personnel, to provide additional incentive to
our employees, officers, directors and consultants and to promote our success.
The stock plan provides for the grant of incentive stock options to our
employees and the grant of non-qualified stock options and restricted stock to
our employees, directors and consultants on such terms and conditions as may be
determined by our board of directors or a committee of the board which has
general responsibility for the administration of the plan. The powers of our
board of directors or a committee, as the case may be, include the
determination of which employees and consultants are to receive stock option
grants or grants of restricted shares, the exercise price, number of shares,
the vesting schedule of the grants, payment methods, and other terms and
conditions applicable to such grants. The total number of shares of our common
stock authorized for use by the stock plan is 3,428,571. As of May 31, 2000,
options to purchase 2,818,375 shares of our common stock were granted (and not
subsequently forfeited), of which options to purchase 1,976,527 shares of our
common stock were outstanding and options to purchase 841,848 shares had been
exercised. The exercise prices of the outstanding options range from $0.12 to
$11.00 per share.
The exercise price per share for incentive stock options may not be less
than the fair market value of our common stock on the date of grant as
determined in good faith by the board of directors; provided, however, in the
case of an incentive stock option granted to an individual who owns at least
10% of the total combined voting power of all classes of our capital stock, the
exercise price shall be no less than 110% of the fair market value per share
56
<PAGE>
on the date of grant. The aggregate fair market value of shares which may be
purchased for the first time during any calendar year through the exercise of
an incentive stock option granted under the stock plan, or any other incentive
stock option plan of the company, may not exceed $100,000, based on such fair
market value at the time of grant. Under the stock plan, stock options may be
exercisable for up to 11 years, in the case of non-qualified stock options, and
for up to 10 years, in the case of incentive stock options.
If we consolidate or merge with another corporation, sell or exchange
substantially all of our assets, or are reorganized or liquidated, a holder of
an option under the stock plan, upon exercise of the option by the terms of the
option, will receive the same shares, securities or property that the
optionholder would have received had he or she, immediately before the event
described above, held the number of shares of our stock purchasable under the
option. Alternatively, our board of directors can choose to cancel unexercised
options outstanding under the stock plan by providing optionholders with at
least 20 days advance written notice. Our board of directors also may in its
discretion accelerate or waive any deferred exercise period under the option.
The board of directors may amend or terminate the stock plan at any time,
subject to any required stockholder approval.
401(k) Profit Sharing Plan
We adopted a 401(k) profit sharing plan for qualified employees, effective
August 1, 1995. Subject to some maximum contribution limitations, participants
may elect a salary reduction of up to an amount equal to 15% of their
respective work compensation. The plan allows us to match participant salary
reductions of up to 8% of a participant's work compensation or make other
discretionary contributions with respect to participants, neither of which has
been done with respect to any period ending on or before December 31, 1999.
Under the 401(k) plan, a participant's interest in our matching or
discretionary contributions, if any are made, will become 20% vested upon the
participant's completion of two years of service, with such vesting increasing
at the rate of 20% for each additional year of service so that 100% vesting is
achieved when the participant has completed six years of service. All interests
acquired through salary reduction contributions are at all times 100% vested.
Employee Confidentiality, Invention Assignment and Non-Compete Agreements
All of our employees, including each of the named officers, Dr. Evans, Dr.
Kellerman and Dr. Yerxa, have entered into employee confidentiality, invention
assignment and, with respect to our management-level employees, non-compete
agreements which provide, among other things, that the employee will not
disclose any confidential information or trade secrets in any unauthorized
manner. The agreements also provide that all inventions by the employee
relating to our current or anticipated business which occur during the time of
employment will be our property. Finally, the agreements provide that, with
respect to any management-level employee, the employee will not compete with us
during the time of employment and for one additional year.
57
<PAGE>
CERTAIN TRANSACTIONS
We entered into a Consultation and Scientific Advisory Board Agreement with
Dr. Richard Boucher, a member of our board of directors, in March 1995. The
terms of the agreement provide that Dr. Boucher will serve as the Chairman of
our Scientific Advisory Board for an initial term of three years. The agreement
automatically renews itself thereafter for successive one year terms unless
terminated by either party. Under the agreement, Dr. Boucher also agreed to
consult on the field of airway diseases and the development of low molecular
weight molecules for therapeutic or diagnostic purposes. We are currently
paying Dr. Boucher $4,167 a month for his services, and he has received 400,000
shares of our common stock as partial compensation for his service. In December
1998, in recognition of his contributions, we granted Dr. Boucher an option to
purchase 114,286 shares of our common stock at $0.21 per share. Such shares
vest pro rata and will be fully vested on June 30, 2002.
In March 1995, we entered into a Sponsored Research Agreement with The
University of North Carolina at Chapel Hill. Under the agreement, we fund a
research program relating to uses of the P2Y receptor family. Drs. Richard C.
Boucher, M. Jackson Stutts and C. William Davis currently serve as the
principal investigators with respect to the research. We paid approximately
$141,120 in 1999 for the research program under the agreement.
On July 1, 1999 and October 29, 1999 we sold an aggregate of 6,201,985
shares of Series E preferred stock at a purchase price of $2.00 per share. The
following holders of more than 5% of our voting securities purchased Series E
preferred stock in those transactions in the amounts shown below. See
"Principal Stockholders" for more detail on securities held by these
stockholders.
<TABLE>
<CAPTION>
Common Stock
into which
Series E
Series E Preferred Stock
Purchaser Preferred Stock Will Convert
--------- --------------- ---------------
<S> <C> <C>
Alta V Limited Partnership.................. 395,840 226,194
Benefit Capital Management Corporation...... 500,000 285,714
Domain Partners III, L.P.................... 373,832 213,618
InterWest Partners VII, L.P................. 2,857,843 1,633,053
NMT New Medical Technologies................ 1,250,000 714,285
</TABLE>
Andre L. Lamotte, a director, is also a director of NMT New Medical
Technologies. Terrance G. McGuire, a director, is a general partner of Alta V
Management Partners, L.P., which is the general partner of Alta V Limited
Partnership. Jesse I. Treu, Ph.D., a director, is a general partner of One
Palmer Square Associates III, L.P., the general partner of Domain Partners III,
L.P.
In connection with our entering into a Development, License and Supply
Agreement with Genentech, Inc., we sold 1,000,000 shares of Series G preferred
stock at $10.00 per share under the terms of a Series G Preferred Stock and
Warrant Purchase Agreement, dated December 17, 1999. The Series G preferred
stock, including accrued dividends, will automatically convert at the time of
the closing of this offering into 950,160 shares of our common stock. On
December 17, 1999, we also issued Genentech a warrant to purchase 253,968
shares of our common stock, at an exercise price of $7.88 per share. In
addition, upon the occurrence of milestone events, we are obligated to sell,
and Genentech is obligated to purchase: (i) up to $2,000,000 of our common
stock, at a per share price determined using the 20-day trailing average close
price of common stock as quoted on an established stock exchange, and
(ii) warrants for up to 50,793 shares of common stock at an exercise price of
$7.88 per share.
58
<PAGE>
See "Business--Corporate Collaborations" for a description of the terms of our
collaboration with Genentech.
During 1999, we contracted with a contract research organization to perform
research on behalf of Kissei, one of our collaborative partners and the holder
of 375,000 shares of our Series C preferred stock. We were reimbursed by Kissei
for the cost of the study. The total amount reimbursed by Kissei for this study
in 1999 was $813,000.
59
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of June 15, 2000 on a fully diluted basis, and
as of such date, as adjusted to show the effect of this offering, by (i) each
person who is known to own beneficially more than 5% of our common stock and
(ii) each of the named officers and our current directors, and (iii) all of the
directors and executive officers as a group.
Except as indicated by footnote, beneficial ownership includes all options
and warrants which are exercisable within 60 days of June 15, 2000. In addition
to assuming the conversion of all outstanding shares of preferred stock into
shares of common stock upon the closing of this offering, the information in
this table assumes the conversion of all outstanding warrants to purchase
shares of preferred stock into warrants to purchase shares of common stock.
Except as indicated by footnote, and subject to community property laws where
applicable, the persons named in the table have sole voting and investment
power for all shares of common stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
Name and Address of Beneficial Percentage
Owner Number of Shares Beneficially Owned
------------------------------ Beneficially Owned ----------------------
Before This Before This After This
Offering Offering Offering
------------------ ----------- ----------
<S> <C> <C> <C>
Burr, Egan, Deleage Funds(1)....... 2,879,180 15.1% 11.7%
Burr, Egan, Deleage & Co.
One Post Office Square
Suite 3800
Boston, MA 02109
Domain Partners Entities(2)........ 2,594,985 13.6% 10.6%
Domain Associates, L.L.C.
One Palmer Square, Suite 515
Princeton, N.J. 08542
InterWest Partners Entities(3)..... 1,707,142 9.0% 7.0%
InterWest Investors VII, LP
3000 Sand Hill Road
Bldg. 3, Suite 255
Menlo Park, CA 94025
Medical Science Partners
Entities(4)....................... 1,500,935 7.9% 6.1%
c/o Medical Science Partners
161 Worcester Road, Suite 301
Framingham, MA 01701
JAFCO Entities(5).................. 1,428,570 7.5% 5.8%
c/o JAFCO Co., Ltd.
Tekko Building, 1-8-2 Monanouchi
Chiyoda-Ku
Tokyo, 100 Japan
Benefit Capital Management
Corporation(6).................... 1,238,095 6.5% 5.0%
39 Old Ridgebury Road
Danbury, CT 06817
Genentech, Inc.(7)................. 1,208,067 6.3% 4.9%
1 DNA Way
South San Francisco, CA 94080-4990
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Percentage
Name and Address of Beneficial Owner Number of Shares Beneficially Owned
------------------------------------ Beneficially Owned ----------------------
Before This Before This After This
Offering Offering Offering
------------------ ----------- ----------
<S> <C> <C> <C>
Christy L. Shaffer, Ph.D.(8)......... 239,368 1.2% 1.0%
Gregory J. Mossinghoff(9)............ 37,093 * *
Janet L. Rideout, Ph.D.(10).......... 234,285 1.2% *
Richard Boucher, M.D.(11)............ 564,502 3.0% 2.3%
Andre L. Lamotte, Sc.D.(12).......... 2,460,935 12.9% 10.0%
H. Jefferson Leighton, Ph.D.(13)..... 400,000 2.1% 1.6%
Terrance G. McGuire(1)............... 2,879,180 15.1% 11.7%
W. Leigh Thompson, M.D., Ph.D.,
D.Sc.(14)........................... 27,785 * *
Jesse I. Treu, Ph.D.(2).............. 2,594,985 13.6% 10.6%
All directors and executive officers
as a group (12 people)(1), (2), (8),
(9), (10), (11), (12), (13), (14) .. 9,538,213 48.8% 38.1%
</TABLE>
--------
* Less than one percent
(1) Includes 2,849,236 shares held by Alta V Limited Partnership and 29,944
shares held by Customs House Partners. Alta V Management Partners, L.P. is
the general partner of Alta V Limited Partnership. Burr, Egan, Deleage &
Co. directly or indirectly provides investment advisory services to
various venture capital funds, including Alta V Limited Partnership and
Customs House Partners. Mr. McGuire is a general partner of Alta V
Management Partners, L.P. In his capacity as a general partner of the Alta
V Management Partners, L.P., Mr. McGuire may be deemed to share voting and
investment powers with respect to the shares held by Alta V Limited
Partnership. Mr. McGuire disclaims beneficial ownership of all of such
shares held by Alta V Limited Partnership except to the extent of his
proportional pecuniary interest therein. Mr. McGuire also disclaims
beneficial ownership to all of the shares of Customs House Partners. Does
not include 5,714 shares of common stock underlying stock options granted
to Mr. McGuire which will not have vested within sixty days after June 15,
2000.
(2) Includes 2,514,456 shares held by Domain Partners III, L.P. and 80,529
shares held by DP III Associates, L.P. One Palmer Square Associates III,
L.P. is the general partner of Domain Partners III, L.P. and DP III
Associates, L.P. Jesse I. Treu, Ph.D. is a general partner of One Palmer
Square Associates III, L.P. Dr. Treu shares voting and investment power
with respect to these shares and disclaims beneficial ownership of such
shares except to the extent of his proportional interest therein. Does not
include 5,714 shares of common stock underlying stock options granted to
Dr. Treu which will not have vested within sixty days after June 15, 2000.
(3) Includes 1,633,053 shares held by InterWest Partners VII, L.P. and 74,089
shares held by InterWest Investors VII, L.P. InterWest Management Partners
VII, L.L.C. is the general partner of InterWest Partners VII, L.P. and
InterWest Investors VII, L.P. Arnold L. Oronsky, a managing director of
InterWest Management Partners VII, L.L.C., and each of the other managing
directors and members of InterWest Management Partners VII, L.L.C.
disclaim beneficial ownership of the shares except to the extent of their
pro rata interest therein.
(4) Includes 1,339,177 shares held by Medical Science Partners II, L.P. and
161,758 shares held by Medical Science II Co-Investment, L.P. Medical
Science Partners is the general partner of Medical Science Partners II,
L.P. and the co-manager of Medical Science II Co-Investment, L.P. Dr.
Lamotte is a managing general partner of Medical Science Partners. See
footnote 12 below.
(5) Includes 285,714 shares held by Jafco Co., Ltd., 117,142 shares held by
JAFCO-JS-3 Investment Enterprise Partnership, 196,000 shares held by
JAFCO-R-3 Investment Enterprise Partnership, 176,000 shares held by JAFCO-
G-6(A) Investment Enterprise Partnership, 176,000 shares held by JAFCO-G-
6(B) Investment Enterprise Partnership, 238,857 shares held by JAFCO-G-
7(A) Investment Enterprise Partnership, and 238,857 shares held by JAFCO-
G-7(B) Investment Enterprise Partnership. Jafco Co., Ltd. is the Executive
Partner of JAFCO-JS-3 Investment Enterprise Partnership, JAFCO-R-3
Investment Enterprise Partnership, JAFCO-G-6(A) Investment Enterprise
Partnership, JAFCO-G-6(B) Investment Enterprise Partnership, JAFCO-G-7(A)
Investment Enterprise Partnership and JAFCO-G-7(B) Investment Enterprise
Partnership. Mr. Mitsumasa Murase is the President of Jafco Co., Ltd. and
disclaims beneficial ownership of the shares except to the extent of his
pro rata interest therein.
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(6) Includes 1,238,095 shares held by Benefit Capital Management Corporation
("Benefit") as Investment Manager for The Prudential Insurance Company of
America, Separate Account No. VCA-GA-5298. Benefit has voting power and
investment power as to the shares held by it. Benefit is a wholly owned
subsidiary of Union Carbide Corporation, a New York corporation ("UCC").
Benefit manages the assets of UCC's retirement program plan for employees
of UCC and its participating subsidiaries. In connection with the purchase
of certain annuities by the retirement program plan, Prudential has
established a separate insurance account. Prudential disclaims beneficial
ownership of the shares.
(7) Includes 954,099 shares and a warrant for 253,968 shares of common stock.
The number of shares held by Genentech is based on an assumption that
dividends on Series G preferred stock will accrue through June 15, 2000.
(8) Includes 40,000 shares of common stock and 199,368 shares of common stock
underlying stock options granted to Dr. Shaffer which will have vested
within sixty days after June 15, 2000. Does not include 274,917 shares of
common stock underlying stock options granted to Dr. Shaffer which will
not have vested within sixty days after June 15, 2000.
(9) Includes 37,093 shares of common stock underlying stock options granted to
Mr. Mossinghoff which will have vested within sixty days after June 15,
2000. Does not include 191,478 shares of common stock underlying stock
options granted to Mr. Mossinghoff which will not have vested within sixty
days after June 15, 2000.
(10) Includes 58,800 shares of common stock, and 175,485 shares of common stock
underlying stock options granted to Dr. Rideout which will have vested
within sixty days after June 15, 2000, assuming the accelerated vesting of
51,428 shares upon the closing of this offering.
(11) Includes 504,954 shares of common stock and 59,548 shares of common stock
underlying stock options granted to Dr. Boucher which will have vested
within sixty days after June 15, 2000. Does not include 60,451 shares of
common stock underlying stock options granted to Dr. Boucher which will
not have vested within sixty days after June 15, 2000.
(12) Includes 1,339,177 shares held by Medical Science Partners II, L.P.,
161,758 shares held by Medical Science II Co-Investment, L.P. and 960,000
shares held by NMT New Medical Technologies. Medical Science Partners is
the general partner of Medical Science Partners II, L.P. and the co-
manager of Medical Science II Co-Investment, L.P. Dr. Lamotte is a
managing general partner of Medical Science Partners. Dr. Lamotte is a
director of NMT New Medical Technology. Dr. Lamotte disclaims beneficial
ownership of Medical Science II Co-Investment, L.P.'s shares. Dr. Lamotte
disclaims beneficial ownership of NMT New Medical Technology's shares
except to the extent of his proportional pecuniary interest therein. Does
not include 5,714 shares of common stock underlying stock options granted
to Dr. Lamotte which will not have vested within sixty days after June 15,
2000.
(13) Includes 400,000 shares of common stock. Does not include 5,714 shares of
common stock underlying stock options granted to Dr. Leighton which will
not have vested within sixty days after June 15, 2000.
(14) Includes 27,214 shares of common stock and 571 shares of common stock
underlying stock options granted to Dr. Thompson which will have vested
within sixty days after June 15, 2000. Does not include 5,714 shares of
common stock underlying stock options granted to Dr. Thompson which will
not have vested within sixty days after June 15, 2000.
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DESCRIPTION OF CAPITAL STOCK
At the time of the closing of this offering, our authorized capital stock
consists of 62,000,000 shares, of which 60,000,000 shares are common stock,
$0.001 par value, and 2,000,000 shares are preferred stock, which our board of
directors has the power and authority to designate into classes or series.
Immediately following this offering, there will be 24,523,399 shares of common
stock and no shares of preferred stock outstanding. The following is a summary
of various provisions of our common stock and preferred stock.
Common Stock
As of May 31, 2000, there were 2,604,134 shares of our common stock issued
and outstanding and held of record by 48 stockholders. An additional 16,419,264
shares of our common stock will be issued upon the automatic conversion of all
outstanding shares of our preferred stock on the closing of this offering,
assuming an initial public offering price of $11.00. In addition, as of May 31,
2000, 265,397 shares of our common stock were reserved for the exercise of
outstanding warrants, 208,170 shares of our preferred stock were reserved for
the exercise of outstanding warrants for our preferred stock that will convert
into warrants to purchase 118,954 shares of our common stock at the time of the
closing of this offering and 3,428,571 shares of our common stock were reserved
for the exercise of options under our stock plan, of which options to purchase
2,818,375 shares of our common stock were granted (and not subsequently
forfeited). Of these, 1,976,527 shares are reserved for the exercise of
outstanding options and 841,848 shares have been purchased pursuant to the
exercise of such options.
The following summarizes the rights of the holders of our common stock:
. each holder of shares of common stock is entitled to one vote per share
on all matters to be voted on by stockholders generally, including the
election of directors;
. there are no cumulative voting rights;
. the holders of our common stock are entitled to dividends and other
distributions as may be declared from time to time by the board of
directors out of funds legally available for that purpose, if any,
provided that no cash dividend may be declared or paid on our common
stock until paid on various series of outstanding preferred stock along
with its terms;
. upon our liquidation, dissolution or winding up, the holders of shares of
common stock will be entitled to share ratably in the distribution of all
of our assets remaining available for distribution after satisfaction of
all our liabilities and the payment of the liquidation preference of any
outstanding preferred stock; and
. under the terms of our amended and restated certificate of incorporation,
the holders of common stock have no preemptive or other subscription
rights to purchase shares of our stock, nor are they entitled to the
benefits of any redemption or sinking fund provisions.
Preferred Stock
Upon the closing of this offering, there will be no shares of preferred
stock outstanding. Our amended and restated certificate of incorporation
authorizes our board of directors to create and issue one or more series of
preferred stock and determine the rights and preferences of each series within
the limits permitted by our amended and restated certificate of incorporation
and applicable law. Among other rights, the board of directors may decide,
without further vote or action by our stockholders:
. the number of shares constituting the series and the distinctive
designation of the series;
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. the dividend rate on the shares of the series, whether dividends will be
cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of the series;
. whether the series will have voting rights in addition to the voting
rights provided by law, and if so, the terms of the voting rights;
. whether the series will have conversion privileges and, if so, the terms
and conditions of conversion;
. whether or not the shares of the series will be redeemable, and, if so,
the dates, terms and conditions of redemption, as the case may be;
. whether the series will have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of
the sinking fund; and
. the rights of the shares of the series in the event of our voluntary or
involuntary liquidation, dissolution or winding up and the relative
rights or priority, if any, of payment of shares of the series.
Unless our board of directors decides otherwise, the shares of all series of
preferred stock will rank equally regarding the payment of dividends and the
distribution of assets upon liquidation. Although we have no present plans to
issue any shares of preferred stock, any future grant of shares of preferred
stock, or the grant of rights to purchase preferred shares, may have the effect
of delaying, deferring or preventing a change in control in our company or an
unsolicited acquisition proposal. The grant of preferred stock also could
decrease the amount of earnings and assets available for distribution to the
holders of common stock or could negatively affect the rights and powers,
including voting rights, of the holders of the common stock.
Registration Rights
Following the expiration of all applicable lock-up periods, the holders of
at least 50% of the shares of our common stock to be received upon the
automatic conversion of the outstanding shares of Series A preferred stock at
the time of the closing of this offering may request that we file a
registration statement under the Securities Act. At any time after April 8,
2002, the holders of at least 50% of the shares of our common stock to be
received upon the automatic conversion of the outstanding shares of Series A
preferred stock and Series B preferred stock at the time of the closing of this
offering may request that we file a registration statement. At any time after
December 31, 2002, the holders of more than 50% of the shares of our common
stock to be received upon the automatic conversion of the outstanding shares of
any two of the following series of preferred stock may request that we file a
registration statement: Series A preferred stock, Series B preferred stock,
Series E preferred stock or Series G preferred stock. The holders of at least
50% of the outstanding shares of common stock issued upon the conversion of any
of the Series A preferred stock, Series B preferred stock, Series E preferred
stock and Series G preferred stock may also request that we file a registration
statement on Form S-3. Upon such a request and subject to minimum size
conditions, we generally will be required to use our best efforts to register
those shares. In addition, if we propose to register any of our common stock,
either for our own account or for the account of our stockholders, we are
required, with some exceptions, to notify the holders described above and, with
some limitations, to include in that registration all of the shares of our
common stock received upon conversion of the shares of our Series A preferred
stock, Series B preferred stock, Series E preferred stock and Series G
preferred stock requested to be included by stockholders. We are generally
obligated to bear the expenses, other than underwriting discounts and sales
commissions, of these registrations.
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Under agreements with the holders of Series C preferred stock and Series D
preferred stock, we have agreed to notify the holders in the event we propose
to register any of our common stock, either for our own account or for the
account of stockholders and, subject to limitations, to include in the
registration all of the shares of common stock issued upon the conversion of
the Series C preferred stock and Series D preferred stock at the time of
closing of this offering, as requested to be included by such holders. We are
generally obligated to bear the expenses, other than underwriting discounts and
sales commissions, of these registrations.
All such registration rights terminate five years after the closing of this
offering.
Any exercise of registration rights may hinder our efforts to arrange future
financings and may have a negative effect on the market price of our common
stock.
Stockholders' Agreement
The holders of our common stock, our Series A, B and E preferred stock and
we are parties to a stockholders' agreement in which stockholders have agreed
to vote their shares for the election of directors, as follows: one person
designated by stockholders affiliated with Burr, Egan, Deleage & Co., one
designated by stockholders affiliated with Medical Science Partners, one
designated by stockholders affiliated with Domain Associates, one designated by
NMT New Medical Technologies, the Chief Executive Officer and three non-
employees designated by those four persons. In addition, the holders of our
common stock granted us and our Series A, B and E preferred stockholders a
right of first refusal to purchase their stock. This agreement will terminate
upon the conversion of all shares of Series A, B and E preferred stock into
shares of common stock upon the closing of this offering.
Delaware Law and Certain Charter and By-Law Provisions
We are subject to Section 203 of the Delaware General Corporation Law which
is an anti-takeover provision. In general, the statute prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in
financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years
prior, did own) 15% or more of a corporation's voting stock.
Our amended and restated certificate of incorporation authorizes our board
of directors to create and issue one or more series of preferred stock and
determine the rights and preferences of each series within the limits set forth
in our amended and restated certificate of incorporation and applicable law.
Use of our preferred stock could have the effect of delaying, deferring or
preventing a change in control, as removal of our board of directors and
management may be rendered more difficult. Further, use of the preferred stock
may have an negative impact on the ability of our stockholders to participate,
if applicable, in a tender offer or exchange offer for the common stock, which
would diminish the value of the common stock.
Effective simultaneously with the closing of this offering, our amended and
restated certificate of incorporation will provide that the members of the
board will be divided into three classes. The terms of Mr. Lamotte and Dr.
Shaffer will expire in 2001. The term of Dr.
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Treu and Mr. McGuire will expire in 2002. The terms of Drs. Thompson, Leighton
and Boucher will expire in 2003. After this initial term, each class of
directors will have a three year term.
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 will be able to call a special meeting. 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.
The Delaware General Corporation Law authorizes a corporation in its
certificate of incorporation to limit the personal liability of its directors
for violations of their fiduciary duty of care. Our amended and restated
certificate of incorporation states that a director will not be personally
liable to us or to our stockholders for monetary damages resulting from any
fiduciary wrongdoing as a director, except in circumstances involving wrongful
acts, such as the breach of the director's duty of loyalty to us or our
stockholders, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, or a transaction from which the
director derived an improper personal benefit. The Delaware General Corporation
Law also authorizes a corporation to indemnify its directors and officers, and
our amended and restated certificate of incorporation requires that we
indemnify each director and executive officer to the fullest extent allowable
under the Delaware General Corporation Law. We believe that these provisions
will assist us in attracting and retaining individuals to serve as directors.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock will be Computershare
Trust Company, Inc.
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SHARES ELIGIBLE FOR FUTURE SALE
Before this offering there has been no public market for our common stock.
Future sales of substantial amounts of our common stock, or even the
possibility of future sales of our common stock sales, could reduce the
prevailing market price. As described below, only a limited number of shares of
common stock currently held by our stockholders will be available for sale
shortly after this offering because of contractual and legal restrictions on
resale. Sales of substantial amounts of common stock in the public market after
the restrictions lapse could negatively affect the prevailing market price and
our ability to raise equity capital in the future.
Upon the closing of this offering, 24,523,399 shares of our common stock
will be outstanding based on the number of shares of our preferred stock and
common stock outstanding as of May 31, 2000, and assuming no exercise of the
underwriters' over-allotment option. Of these shares, the 5,500,000 shares of
common stock being sold in this offering will be freely tradable (unless
purchased by our "affiliate" as such term is defined in the Securities Act)
without restriction or registration under the Securities Act. All remaining
shares of common stock were issued and sold in private transactions and are
"restricted securities" which are eligible for public sale only if registered
under the Securities Act or sold as required by Rule 144 under that Act. In
addition, following the closing of this offering 2,360,877 shares of common
stock may be delivered upon the exercise of outstanding warrants and options.
All of our officers, directors and holders of at least one percent of our
stock have signed lock-up agreements, in which they agreed that they will not,
directly or indirectly, offer, sell or agree to sell, or otherwise dispose of
any shares of our common stock or other securities in the public market without
the prior written consent of Deutsche Bank Securities Inc. for a period of 180
days after the final prospectus relating to this offering. The agreement of one
of the stockholders excludes 118,264 shares currently held and all shares
acquired in the future.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus a person or persons whose shares are aggregated,
who has beneficially owned restricted securities for at least one year,
including the holding period of any earlier owner except an affiliate, will be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately 245,234 shares immediately after this offering;
or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks before the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
Inspire.
Rule 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the 90 days before a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, including the holding period of any
earlier owner except an affiliate, is entitled to sell
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these shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Registration Rights
As described above, holders of 16,419,237 shares of our common stock which
are restricted securities and 356,823 shares of our common stock reserved for
the exercise of outstanding warrants will be entitled to demand registration of
their shares. Registration of their shares under the Securities Act would
result in these shares becoming freely tradable without restriction under the
Securities Act, except for shares purchased by affiliates, immediately upon the
effectiveness of that registration.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors, other than affiliates, who purchases
or receives shares from us in connection with our stock plan or other written
agreement will be eligible to resell their shares beginning 90 days after the
date of this prospectus, subject only to the manner of sale provisions of Rule
144, and by affiliates under Rule 144 without compliance with its holding
period requirements.
Stock Options
Following this offering, we intend to file a registration statement on Form
S-8 under the Securities Act covering the shares of common stock reserved for
issuance under our stock plan. The registration statement on Form S-8 will
become effective upon filing with the Securities and Exchange Commission.
Accordingly, shares registered under that registration statement will, subject
to limitations applicable to affiliates, be available for sale in the open
market after the filing, except those shares subject to lock-up agreements and
unvested shares.
Warrants
We have issued various warrants to purchase shares of our preferred stock
which shall, upon the closing of this offering, convert into warrants to
purchase an aggregate of 118,954 shares of our common stock. Each of the
preferred stock warrants will expire on the fifth anniversary of the date of
this offering. On January 29, 1999 we issued a ten-year warrant to a consultant
for 11,429 shares of our common stock as partial consideration under a
consulting agreement. On December 17, 1999 we issued a five-year warrant to
Genentech to purchase 253,968 shares of our common stock.
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UNDERWRITING
Subject to the terms and conditions provided in an agreement among the
underwriters and us, the underwriters named below, through their
representatives, Deutsche Bank Securities Inc., Chase Securities Inc. and U.S.
Bancorp Piper Jaffray Inc., have severally agreed to purchase from us the
aggregate number of shares of our common stock indicated opposite their names
below:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Deutsche Bank Securities Inc..........................................
Chase Securities Inc..................................................
U.S. Bancorp Piper Jaffray Inc........................................
-----
Total...............................................................
=====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of various legal matters by their counsel
and to various other conditions, including delivery of legal opinions by our
counsel, the delivery of a letter by our independent auditors and the accuracy
of the representations and warranties made by us in the underwriting agreement.
Under the underwriting agreement, the underwriters are obliged to purchase and
pay for all the above shares of our common stock if any are purchased.
Public Offering Price
The underwriters propose to offer the shares of our common stock directly to
the public at the offering price set forth on the cover page of this prospectus
and at that price less a concession not in excess of $ per share of
common stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and those dealers may
reallow, concessions not in excess of $ per share of common stock to
other underwriters or to other dealers. After this offering, the offering
price, concessions and other selling terms may be changed by the underwriters.
Our common stock is offered subject to receipt and acceptance by the
underwriters and subject to other conditions, including the right to reject
orders in whole or in part. The underwriters have informed us that the
underwriters do not expect to confirm sales of common stock to any accounts
over which they exercise discretionary authority.
The following table summarizes the per share and total public offering price
of the shares of common stock in the offering, the underwriting compensation to
be paid to the underwriters by us and the proceeds of the offering, before
expenses, to us. The information presented assumes either no exercise or full
exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Total
-----------------------
Without With
Per Over- Over-
Share Allotment Allotment
------ ----------- -----------
<S> <C> <C> <C>
Public offering price....................... $11.00 $60,500,000 $69,575,000
Underwriting discounts and commissions
payable by us.............................. .77 4,235,000 4,870,250
Proceeds, before expenses, to us............ 10.23 56,265,000 64,704,750
</TABLE>
The underwriting discount and commission per share is equal to the public
offering price per share of our common stock less the amount paid by the
underwriters to us per share of common stock.
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We estimate total offering expenses payable by us, other than the
underwriting discounts and commissions referred to above, will be approximately
$1.3 million.
Over-Allotment Option to Purchase Additional Shares
We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of 825,000 additional shares of our common stock
exercisable at the offering price less the underwriting discounts and
commissions, each as provided on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of the
underwriters will be obligated to purchase additional shares of common stock in
proportion to their respective purchase commitments as shown in the table
provided above, subject to various conditions.
Indemnification and Contribution
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the
Securities Act, including liabilities arising from material misstatements or
omissions in connection with disclosure, or will contribute to payments that
the underwriters may be required to make regarding those liabilities. The
underwriters have agreed to indemnify us against liabilities specified in the
underwriting agreement under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to the
underwriters, the underwriters have been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Lock-Up Agreements
All of our officers, directors and holders of at least one percent of our
stock have signed lock-up agreements, in which they agreed that they will not,
directly or indirectly, offer, sell or agree to sell, or otherwise dispose of
any shares of our common stock or other securities in the public market without
the prior written consent of Deutsche Bank Securities Inc. for a period of 180
days after the final prospectus relating to this offering. The agreement of one
of the stockholders excludes 118,264 shares currently held and all shares
acquired in the future.
In addition, we have agreed that for a period of 180 days from the date of
this prospectus, we will not, without the prior written consent of Deutsche
Bank Securities Inc., directly or indirectly, offer, sell, grant any option,
warrant or other right to purchase or otherwise sell or dispose of any shares
of common stock, pledge, make any short sale or maintain any short position,
establish or maintain a put position, enter into any swap, derivative
transaction or other arrangement that transfers to another any of the economic
consequences of ownership of our common stock, or otherwise dispose of any
common stock or any interest in our common stock. However, during this period
we may grant options for shares of common stock under our stock plan, and may
issue shares upon the exercise of options outstanding under the plan by persons
other than directors, officers and 1% holders. We may also issue shares during
this period in connection with strategic alliances or joint ventures for INS365
Ophthalmic provided the holder executes a lock-up agreement. In addition, we
may issue shares, or warrants to acquire shares, during this period to
Genentech upon the completion of specified milestones pursuant to our
collaboration agreement and the Series G stock purchase agreement provided that
the shares will be subject to the lock-up agreement.
Nasdaq National Market Quotation
Before this offering, there has been no public market for our common stock.
The initial public offering price for the common stock will be determined by
negotiations between us and the representatives of the underwriters. Among the
factors to be considered in determining
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the initial public offering price will be estimates of our prospects in the
industry in which we compete, an assessment of our management, the general
state of the securities markets at the time of this offering, and various
financial and operating information of companies engaged in similar activities.
We have applied for approval for the quotation of our common stock on the
Nasdaq National Market, under the symbol "ISPH." We cannot assure you, however,
that an active or orderly trading market will develop for the common stock or
that the common stock will trade in the public market after this offering at or
above the initial offering price.
Stabilization, Syndicate Short Position and Penalty Bids
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain, or otherwise affect the
market price of our common stock.
The underwriters may over-allot shares of our common stock in connection
with this offering, thus creating a short position for their own account. Short
sales involve the sale by the underwriters of a greater number of shares than
they are committed to purchase in the offering. A short position may involve
either "covered" short sales or "naked" short sales. Covered short sales are
sales made in an amount not greater than the underwriters' overallotment option
to purchase additional shares in the offering described above. The underwriters
may close out any covered short position by either exercising their
overallotment option or purchasing shares in the open market. In determining
the source of shares to close the covered short position, the underwriters will
consider, among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares through
the overallotment option. Naked short sales are sales in excess of the
overallotment option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there may be downward
pressure on the price of the shares in the open market after pricing that could
adversely affect investors who purchase in the offering.
Accordingly, to cover these short sales positions or to stabilize the market
price of our common stock, the underwriters may bid for, and purchase, shares
of our common stock in the open market. These transactions may be effected on
the Nasdaq National Market or otherwise. Additionally, the representatives, on
behalf of the underwriters, may also reclaim selling concessions allowed to an
underwriter or dealer. Similar to other purchase transactions, the
underwriters' purchases to cover the syndicate short sales or to stabilize the
market price of our common stock may have the effect of raising or maintaining
the market price of our common stock or preventing or mitigating a decline in
the market price of our common stock. As a result, the price of the shares of
our common stock may be higher than the price that might otherwise exist in the
open market. The underwriters are not required to engage in these activities
and, if commenced, may end any of these activities at any time.
Directed Share Program
At our request, the underwriters have reserved for sale at the initial
public offering price up to 302,500 shares of common stock to be sold in this
offering for sale to our directors, officers, employees, business associates,
vendors and related persons. Purchases of reserved shares are to be made
through an account at Deutsche Bank Securities Inc. by following Deutsche Bank
Securities Inc.'s procedures for opening an account and transacting in
securities. The number of shares available for sale to the general public will
be reduced to the extent that any reserved shares are purchased. Any reserved
shares not purchased by our directors, officers, employees, business
associates, vendors and related persons will be offered by the underwriters to
the general public on the same terms as the other shares offered by this
prospectus.
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LEGAL MATTERS
The validity of the common stock offered and some of the legal matters
arising in connection with this offering will be passed upon for us by Smith,
Stratton, Wise, Heher & Brennan, Princeton, New Jersey. Other legal matters in
connection with this offering will be passed upon for the underwriters by
Coudert Brothers, New York, New York.
EXPERTS
The financial statements as of December 31, 1998 and 1999, and for each of
the three years in the period ended December 31, 1999, included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The statements in this prospectus under the captions "Risk Factors--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," "Risk Factors--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," "Risk Factors--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," "Business--Business Strategy--
Protect and Enhance our Technology Leadership Position," and "Business--Patents
and Proprietary Rights" have been reviewed and approved by Howrey Simon Arnold
& White, LLP, our patent counsel, as patent experts, and are included in this
prospectus in reliance upon that review and approval.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
In November 1999, we dismissed KPMG LLP as our independent accountants. The
former independent accountants' report did not contain an adverse opinion, a
disclaimer of opinion or any qualifications or modifications related to
uncertainty, limitation of audit scope or application of accounting principles.
The former independent accountants' report does not cover any of our financial
statements in this registration statement. There were no disagreements with the
former public accountants on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure regarding our
financial statements up through the time of dismissal that, if not resolved to
the former accountants' satisfaction, would have caused them to make reference
to the subject matter of the disagreement in connection with their report. In
November 1999, we retained PricewaterhouseCoopers LLP as our independent public
accountants. The decision to retain PricewaterhouseCoopers LLP was approved by
resolution of the board of directors. Before retaining PricewaterhouseCoopers
LLP, we had not consulted with PricewaterhouseCoopers LLP regarding accounting
principles.
72
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 (together with required schedules and
exhibits) under the Securities Act regarding the shares of common stock
offered. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information provided in the registration
statement, some terms of which are omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. You can find additional
information regarding us and the common stock in the registration statement,
which may be inspected without charge, at the public reference facilities
maintained by the Securities and Exchange Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade Center, 13th
Floor, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of these materials may be obtained from the
public reference section of the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C., 20549, at prescribed rates. The registration
statement is also publicly available through the Securities and Exchange
Commission's web site located at http://www.sec.gov.
73
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Accountants...................................... F-2
Balance Sheets at December 31, 1998 and 1999 and March 31, 2000........ F-3
Statements of Operations for the years ended December 31, 1997, 1998
and 1999 and the period from inception (October 28, 1993) to December
31, 1999 and for the three months ended March 31, 1999 and 2000....... F-4
Statements of Stockholders' Equity (Deficit) for the period from
inception (October 28, 1993) to March 31, 2000........................ F-5
Statements of Cash Flows for the years ended December 31, 1997, 1998
and 1999, the three months ended March 31, 1999 and 2000 and the
period from inception (October 28, 1993) to December 31, 1999......... F-6
Notes to Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Inspire Pharmaceuticals, Inc.
The 1 for 1.75 reverse split discussed in Note 15 to the financial
statements has not been consummated at June 29, 2000. When it has been
consummated, we will be in a position to furnish the following audit report:
"In our opinion, the accompanying balance sheets and the related
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Inspire
Pharmaceuticals, Inc. (a development stage company) at December 31, 1998
and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999 and the period from
inception (October 28, 1993) to December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion
expressed above."
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 21, 2000
F-2
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, Pro Forma
-------------------------- March 31, March 31,
1998 1999 2000 2000
------------ ------------ ----------- -----------
(unaudited) (unaudited)
(Note 2)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents........... $ 4,137,628 $ 22,727,687 $20,858,485
Accounts receivable.... 5,726 19,540 18,611
Prepaid expenses....... 123,372 131,891 462,294
------------ ------------ -----------
Total current assets..... 4,266,726 22,879,118 21,339,390
Property and equipment,
net..................... 1,046,195 789,028 1,020,097
Other, net............... 133,114 1,952,087 1,797,160
------------ ------------ -----------
Total assets............. $ 5,446,035 $ 25,620,233 $24,156,647
============ ============ ===========
Liabilities and
Stockholders' Equity
Current liabilities:
Accounts payable....... $ 290,473 $ 631,497 $ 518,755
Accrued expenses....... 447,835 650,650 912,528
Capital leases, current
portion............... 441,645 210,259 259,407
------------ ------------ -----------
Total current
liabilities............. 1,179,953 1,492,406 1,690,690
Capital leases, excluding
current portion......... 341,382 333,383 420,829
Notes payable............ 20,825 23,714 24,207
Deferred revenue......... 3,240,000 7,736,000 8,081,501
------------ ------------ -----------
Total liabilities.... 4,782,160 9,585,503 10,217,227
Commitments (Note 12).... -- -- --
Stockholders' equity:
Convertible preferred
stock, $0.001 par
value; 52,000,000
shares authorized;
20,857,681, 28,059,666
and 28,059,666 shares
issued and outstanding
at December 31, 1998
and 1999 and March 31,
2000, respectively; 0
shares issued and
outstanding pro
forma................. 24,466,659 45,895,143 45,895,143 --
Common stock, $0.001
par value per share;
56,000,000 shares
authorized; 2,159,082,
2,465,857 and
2,604,134 shares
issued and outstanding
at December 31, 1998
and 1999 and March 31,
2000, respectively;
19,007,959 shares
issued and outstanding
pro forma............. 2,159 2,466 2,604 19,008
Additional paid-in
capital............... 3,085,429 8,348,105 8,771,638 54,932,312
Deficit accumulated
during the development
stage................. (24,290,392) (33,286,481) (35,799,277) (35,799,277)
Deferred compensation.. (2,599,980) (4,924,503) (4,930,688) (4,930,688)
------------ ------------ ----------- -----------
Total stockholders'
equity.................. 663,875 16,034,730 13,939,420 14,221,355
------------ ------------ ----------- -----------
Total liabilities and
stockholders' equity.... $ 5,446,035 $ 25,620,233 $24,156,647
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
from
Inception
(October 28, Three Months Ended
Year Ended December 31, 1993) to March 31,
------------------------------------- December 31, ------------------------
1997 1998 1999 1999 1999 2000
----------- ----------- ----------- ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Collaborative research
agreements........... $ -- $ 360,000 $ 1,104,000 $ 1,464,000 $ 270,000 $ 1,154,500
----------- ----------- ----------- ------------ ----------- -----------
Operating expenses:
Research and
development (excludes
$0, $68,286,
$670,897, $98,556 and
$265,751,
respectively, of
stock based
compensation)........ 6,568,914 5,528,407 7,178,909 25,340,044 801,491 2,316,605
General and
administrative
expenses (excludes
$0, $45,894,
$363,130, $73,188 and
$130,564,
respectively, of
stock based
compensation)........ 1,494,593 1,921,088 1,887,272 7,895,313 594,496 670,904
Stock based
compensation......... -- 114,180 1,034,027 1,148,207 171,744 396,315
----------- ----------- ----------- ------------ ----------- -----------
Total operating
expenses............. 8,063,507 7,563,675 10,100,208 34,383,564 1,567,731 3,383,824
----------- ----------- ----------- ------------ ----------- -----------
Operating loss........ (8,063,507) (7,203,675) (8,996,208) (32,919,564) (1,297,731) (2,229,324)
----------- ----------- ----------- ------------ ----------- -----------
Other income (expense),
net:
Interest income....... 280,402 167,514 237,581 1,108,741 37,331 295,429
Interest expense...... (164,321) (115,295) (110,640) (665,106) (31,994) (186,468)
Loss on disposal of
property and
equipment............ -- (16,587) (4,790) (328,520) -- --
----------- ----------- ----------- ------------ ----------- -----------
Other income
(expense), net....... 116,081 35,632 122,151 115,115 5,337 108,961
----------- ----------- ----------- ------------ ----------- -----------
Loss before provision
for income taxes..... (7,947,426) (7,168,043) (8,874,057) (32,804,449) (1,292,394) (2,120,363)
Provision for income
taxes.................. -- 360,000 60,000 420,000 -- 150,000
----------- ----------- ----------- ------------ ----------- -----------
Net loss.............. (7,947,426) (7,528,043) (8,934,057) (33,224,449) (1,292,394) (2,270,363)
Preferred stock
dividends.............. -- -- (62,032) (62,032) -- (242,433)
----------- ----------- ----------- ------------ ----------- -----------
Net loss available to
common stockholders.. $(7,947,426) $(7,528,043) $(8,996,089) $(33,286,481) $(1,292,394) $(2,512,796)
=========== =========== =========== ============ =========== ===========
Net loss per common
share--basic and
diluted................ $ (4.01) $ (3.65) $ (3.75) (.58) (1.01)
=========== =========== =========== =========== ===========
Weighted average common
shares outstanding
--basic and diluted.... 1,980,699 2,061,398 2,401,029 2,232,187 2,496,504
=========== =========== =========== =========== ===========
Pro forma net loss per
common share--basic and
diluted................ $ (0.57) (0.12)
=========== ===========
Pro forma weighted
average common shares
outstanding--basic and
diluted................ 15,568,934 18,885,627
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from Inception (October 28, 1993) to March 31, 2000
<TABLE>
<CAPTION>
Convertible Class A and B Deficit
Preferred Stock Common Stock Common Stock Accumulated
---------------------- ------------------- ------------------- Additional During the
Number Number Number Paid-In Development Deferred
of Shares Amount of Shares Par Value of shares Par Value Capital Stage Compensation
---------- ----------- --------- --------- --------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(October 28,
1993)........... -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
---------- ----------- --------- ------ ------- -------- ---------- ------------ -----------
Balance at
December 31,
1993............ -- -- -- -- -- -- -- -- --
Issuance of
Class A and B
common stock.... -- -- -- -- 10,000 10,000 -- -- --
Net loss........ -- -- -- -- -- -- -- (329,503) --
---------- ----------- --------- ------ ------- -------- ---------- ------------ -----------
Balance at
December 31,
1994............ -- -- -- -- 10,000 10,000 -- (329,503) --
Issuance of
common stock and
cancellation of
Class A and B
common stock.... -- -- 850,286 850 (10,000) (10,000) 9,150 -- --
Stock issued for
consulting
services........ -- -- 585,714 586 -- -- 71,164 -- --
Stock issued in
exchange for
exclusive
license......... -- -- 297,714 298 -- -- 36,172 -- --
Issuance of
Series A
convertible
preferred
stock........... 9,200,000 9,100,403 -- -- -- -- -- -- --
Issuance of
Series A
warrants........ -- -- -- -- -- -- 91,410 -- --
Net loss........ -- -- -- -- -- -- -- (2,703,917) --
---------- ----------- --------- ------ ------- -------- ---------- ------------ -----------
Balance at
December 31,
1995............ 9,200,000 9,100,403 1,733,714 1,734 -- -- 207,896 (3,033,420) --
Issuance of
common stock.... -- -- 227,340 227 -- -- 13,134 -- --
Net loss........ -- -- -- -- -- -- -- (5,781,503) --
---------- ----------- --------- ------ ------- -------- ---------- ------------ -----------
Balance at
December 31,
1996............ 9,200,000 9,100,403 1,961,054 1,961 -- -- 221,030 (8,814,923) --
Issuance of
Series B
convertible
preferred
stock........... 10,866,014 12,966,256 -- -- -- -- -- -- --
Issuance of
common stock.... -- -- 31,954 32 -- -- 18,370 -- --
Net loss........ -- -- -- -- -- -- -- (7,947,426) --
---------- ----------- --------- ------ ------- -------- ---------- ------------ -----------
Balance at
December 31,
1997............ 20,066,014 22,066,659 1,993,008 1,993 -- -- 239,400 (16,762,349) --
Issuance of
common stock.... -- -- 137,502 137 -- -- 16,861 -- --
Stock issued in
exchange for
exclusive
license......... -- -- 28,572 29 -- -- 107,973 -- --
Issuance of
Series C
convertible
preferred
stock........... 375,000 900,000 -- -- -- -- -- -- --
Issuance of
Series D
convertible
preferred
stock........... 416,667 1,500,000 -- -- -- -- -- -- --
Issuance of
Series B
warrants........ -- -- -- -- -- -- 7,035 -- --
Deferred
compensation.... -- -- -- -- -- -- 2,714,160 -- (2,714,160)
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 114,180
Net loss........ -- -- -- -- -- -- -- (7,528,043) --
---------- ----------- --------- ------ ------- -------- ---------- ------------ -----------
Balance at
December 31,
1998............ 20,857,681 24,466,659 2,159,082 2,159 -- -- 3,085,429 (24,290,392) (2,599,980)
Issuance of
common stock.... -- -- 306,775 307 -- -- 37,755 -- --
Issuance of
Series E
convertible
preferred
stock........... 6,201,985 11,405,952 -- -- -- -- -- -- --
Issuance of
Series G
convertible
preferred
stock........... 1,000,000 10,000,000 -- -- -- -- -- -- --
Issuance of
Series F
warrants........ -- -- -- -- -- -- 53,113 -- --
Issuance of
common stock
warrants........ -- -- -- -- -- -- 1,813,258 -- --
Preferred stock
dividends....... -- 22,532 -- -- -- -- -- (62,032) --
Deferred
compensation.... -- -- -- -- -- -- 3,358,550 -- (3,358,550)
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 1,034,027
Net loss........ -- -- -- -- -- -- -- (8,934,057) --
---------- ----------- --------- ------ ------- -------- ---------- ------------ -----------
Balance at
December 31,
1999............ 28,059,666 45,895,143 2,465,857 2,466 -- -- 8,348,105 (33,286,481) (4,924,503)
Issuance of
common stock.... -- -- 138,277 138 -- -- 21,033 -- --
Preferred stock
dividend........ -- -- -- -- -- -- -- (242,433) --
Deferred
compensation.... -- -- -- -- -- -- 402,500 -- (402,500)
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 396,315
Net loss........ -- -- -- -- -- -- -- (2,270,363) --
---------- ----------- --------- ------ ------- -------- ---------- ------------ -----------
Balance at March
31, 2000
(unaudited)..... 28,059,666 $45,895,143 2,604,134 $2,604 -- -- $8,771,638 $(35,799,277) $(4,930,688)
========== =========== ========= ====== ======= ======== ========== ============ ===========
<CAPTION>
Total
Stockholders'
Equity/(Deficit)
----------------
<S> <C>
Inception
(October 28,
1993)........... $ --
----------------
Balance at
December 31,
1993............ --
Issuance of
Class A and B
common stock.... 10,000
Net loss........ (329,503)
----------------
Balance at
December 31,
1994............ (319,503)
Issuance of
common stock and
cancellation of
Class A and B
common stock.... --
Stock issued for
consulting
services........ 71,750
Stock issued in
exchange for
exclusive
license......... 36,470
Issuance of
Series A
convertible
preferred
stock........... 9,100,403
Issuance of
Series A
warrants........ 91,410
Net loss........ (2,703,917)
----------------
Balance at
December 31,
1995............ 6,276,613
Issuance of
common stock.... 13,361
Net loss........ (5,781,503)
----------------
Balance at
December 31,
1996............ 508,471
Issuance of
Series B
convertible
preferred
stock........... 12,966,256
Issuance of
common stock.... 18,402
Net loss........ (7,947,426)
----------------
Balance at
December 31,
1997............ 5,545,703
Issuance of
common stock.... 16,998
Stock issued in
exchange for
exclusive
license......... 108,002
Issuance of
Series C
convertible
preferred
stock........... 900,000
Issuance of
Series D
convertible
preferred
stock........... 1,500,000
Issuance of
Series B
warrants........ 7,035
Deferred
compensation.... --
Amortization of
deferred
compensation.... 114,180
Net loss........ (7,528,043)
----------------
Balance at
December 31,
1998............ 663,875
Issuance of
common stock.... 38,062
Issuance of
Series E
convertible
preferred
stock........... 11,405,952
Issuance of
Series G
convertible
preferred
stock........... 10,000,000
Issuance of
Series F
warrants........ 53,113
Issuance of
common stock
warrants........ 1,813,258
Preferred stock
dividends....... (39,500)
Deferred
compensation.... --
Amortization of
deferred
compensation.... 1,034,027
Net loss........ (8,934,057)
----------------
Balance at
December 31,
1999............ 16,034,730
Issuance of
common stock.... 21,171
Preferred stock
dividend........ (242,433)
Deferred
compensation.... --
Amortization of
deferred
compensation.... 396,315
Net loss........ (2,270,363)
----------------
Balance at March
31, 2000
(unaudited)..... $13,939,420
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
from
Inception
(October 28, Three Months Ended
Year Ended December 31, 1993) to March 31,
-------------------------------------- December 31, ------------------------
1997 1998 1999 1999 1999 2000
----------- ----------- ------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(7,947,426) $(7,528,043) $ (8,934,057) $(33,224,449) $(1,292,394) $(2,270,363)
Adjustments to
reconcile net loss to
net cash used by
operating activities:
Depreciation and
amortization........ 496,598 541,704 622,806 2,118,726 158,926 144,211
Stock issue for
exclusive licenses.. -- 108,002 -- 144,472 -- --
Stock issued for
consulting
services............ -- -- -- 71,750 -- --
Amortization of
deferred
compensation........ -- 114,180 1,034,027 1,148,207 171,744 396,315
Amortization of debt
issuance costs...... 15,235 16,408 43,423 94,110 9,106 159,927
Loss on disposal of
property and
equipment........... -- 16,587 4,790 328,520 -- --
Deferred revenue..... -- 3,240,000 4,496,000 7,736,000 (270,000) 345,501
Changes in operating
assets and
liabilities:
Accounts
receivable........ 2,084 (5,404) (13,814) (19,540) (16,711) 929
Prepaid expenses... 19,630 18,708 (8,519) (131,891) 23,251 (330,403)
Other assets....... (26,000) (24,599) 1,162 (187,789) (12,018) (5,000)
Accounts payable... 51,837 (208,380) 341,024 655,261 (172,639) (112,742)
Accrued expenses... (32,259) 101,160 166,149 636,607 (311,607) 232,268
----------- ----------- ------------ ------------ ----------- -----------
Net cash used in
operating
activities...... (7,420,301) (3,609,677) (2,247,009) (20,630,016) (1,712,342) (1,439,357)
----------- ----------- ------------ ------------ ----------- -----------
Cash flows from
investing activities:
Purchase of property
and equipment........ (185,597) (169,911) (150,860) (1,432,892) (57,849) (378,971)
Proceeds from sale of
property and
equipment............ -- 127,037 -- 127,037 -- --
Sale of certificate of
deposit.............. -- -- -- (78,000) -- --
----------- ----------- ------------ ------------ ----------- -----------
Net cash used in
investing
activities...... (185,597) (42,874) (150,860) (1,383,855) (57,849) (378,971)
----------- ----------- ------------ ------------ ----------- -----------
Cash flows from
financing activities:
Proceeds from bridge
loans................ -- -- -- 780,000 -- --
Proceeds from issuance
of notes payable..... 10,000 9,000 1,000 408,200 -- --
Payments on notes
payable.............. (158,183) (142,651) -- (400,000) -- --
Issuance of common
stock, net........... 18,402 16,998 38,061 96,822 34,221 21,171
Issuance of
convertible preferred
stock, net........... 12,966,256 2,400,000 21,405,952 45,061,260 -- --
Payments on capital
lease obligations.... (247,916) (319,273) (457,085) (1,204,724) (101,592) (72,045)
----------- ----------- ------------ ------------ ----------- -----------
Net cash provided
by financing
activities...... 12,588,559 1,964,074 20,987,928 44,741,558 (67,371) (50,874)
----------- ----------- ------------ ------------ ----------- -----------
Increase
(decrease) in
cash and cash
equivalents..... 4,982,661 (1,688,477) 18,590,059 22,727,687 (1,837,562) (1,869,202)
Cash and cash
equivalents, beginning
of period............. 843,444 5,826,105 4,137,628 -- 4,137,628 22,727,687
----------- ----------- ------------ ------------ ----------- -----------
Cash and cash
equivalents, end of
period................ $ 5,826,105 $ 4,137,628 $ 22,727,687 $ 22,727,687 $ 2,300,066 $20,858,485
=========== =========== ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
1. Organization
Inspire Pharmaceuticals, Inc. (the "Company") was founded on October 28,
1993 to develop and commercialize novel pharmaceutical products that treat
respiratory and ophthalmic diseases which are characterized by deficiencies in
the body's innate defense mechanisms of mucosal hydration and mucociliary
clearance. The Company's technologies are based in part on exclusive license
agreements with The University of North Carolina at Chapel Hill for rights to
certain developments from the founders' 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.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Statements
The consolidated financial statements as of March 31, 1999 and 2000 and for
the three month period then ended are unaudited and reflect all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of the
Company's management, necessary for a fair presentation of financial position,
results of operations and cash flows. All financial statement disclosures
related to the three month period ended March 31, 1999 and 2000 are unaudited.
Unaudited Pro Forma Balance Sheet
The Board of Directors has authorized the Company to file a Registration
Statement with the Securities and Exchange Commission permitting the Company to
sell shares of common stock in an initial public offering ("IPO"). If the IPO
is consummated as presently anticipated, all shares of the Series A, Series B,
Series D and Series E preferred stock will automatically convert into shares of
common stock at a 1-for-1.75 conversion ratio. The Series C preferred stock
will automatically convert into shares of common stock at a 1 to 1.75
conversion ratio plus an additional 6,438 shares of common stock to be received
by the Series C preferred stockholders as a result of their antidilution
protection (Note 8). The unaudited pro forma balance sheet reflects the
conversion of the Series A, Series B, Series C, Series D and Series E preferred
shares into 15,469,104 shares of our common stock as if such conversion had
occurred as of December 31, 1999.
The Company's Series G preferred stock will automatically convert into
shares of common stock based on the assumed initial pubic offering price of
$11.00 per share (See Note 10) plus an additional 25,630 shares of common stock
to be received by the Series G preferred stockholders in payment of accrued
dividends of $281,933 at March 31, 2000. The unaudited pro forma balance sheet
reflects the conversion of the Series G preferred shares into 934,721 shares of
common stock as if such conversion had occurred on March 31, 2000.
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.
F-7
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Property and Equipment
Property and equipment is primarily comprised of furniture, laboratory and
computer equipment and leasehold improvements which are recorded at cost and
depreciated using the straight-line method over their estimated useful lives
which range from three to five years. Property and equipment includes certain
equipment under capital leases. These items are depreciated over the shorter of
the lease period or the estimated useful life of the equipment.
Other Assets
Other assets are primarily comprised of deferred financing costs which were
incurred when the Company entered into capital lease obligations. These costs
are amortized using the effective interest rate method over the life of the
related lease. Net deferred financing costs were $0, $1,870,000 and $1,700,000
for December 31, 1998, December 31, 1999 and March 31, 2000, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation based on the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), 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 recognized deferred compensation of
$2,714,160 and $3,358,550 related to stock option grants during the years ended
December 31, 1998 and 1999, respectively, and $402,500 during the three months
ended March 31, 2000. Deferred compensation is amortized over the vesting
period of the related stock option, which is generally four years. The Company
recognized $114,180 and $1,034,027 of stock based compensation expense related
to amortization of deferred compensation during the years ended December 31,
1998 and 1999, respectively, and $171,744 and $396,315 during the three months
ended March 31, 1999 and 2000, 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.
F-8
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenue is recognized under collaborative research agreements when services
are performed or when contractual obligations are met. Nonrefundable fees
received at the initiation of 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 our 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.
Research and Development
Research and development costs include all direct costs, including salaries
for Company personnel, outside consultant's 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's 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 recorded in 1998 and 1999 were from a single collaborative
partner. Revenues recognized during the three months ended March 31, 2000 were
from two 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 $149,085, $98,887 and $67,216
for the years ended December 31, 1997, 1998 and 1999, respectively. The Company
made cash payments for foreign withholding taxes of $360,000 and $60,000 during
the years ended December 31, 1998 and 1999, respectively.
The Company acquired property and equipment through the assumption of
capital lease obligations amounting to $418,810 and $218,157 during the years
ended December 31, 1998 and 1999, respectively.
F-9
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Net Income (Loss) Per Common Share
Historical
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)
available to common stockholders 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 net loss per share available to common stockholders
for the years ended December 31, 1997, 1998 and 1999 and the three months ended
March 31, 1999 and 2000 does not include 8,749,562, 12,379,418, 14,486,662,
12,689,819 and 15,705,600, respectively, of potential shares of common stock
equivalents, as their impact would be antidilutive.
Pro Forma (Unaudited)
Pro forma net income (loss) per common share is calculated assuming
conversion of all convertible preferred stock, plus accrued dividends on the
Series G preferred stock, which will convert automatically upon the closing of
the Company's initial public offering into 16,381,786 and 16,403,825 shares of
the Company's common stock, for the year ended December 31, 1999 and the three
months ended March 31, 2000, respectively, (see Note 8), at the beginning of
the applicable period or date of issuance, if later.
Segment Reporting
The Company has determined that it did not have any separately reportable
operating segments as of December 31, 1998 or 1999 or March 31, 2000.
Internal Use Software
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"), which provides guidance regarding when
software developed or obtained for internal use should be capitalized. The
Company adopted SOP 98-1 effective January 1, 1999. The adoption of SOP 98-1
did not have a material impact on the Company's financial position or results
of operations.
Comprehensive Income (Loss)
The Company had no items of other comprehensive income during the years
ended December 31, 1997, 1998 or 1999 or the three months ended March 31, 2000.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain
F-10
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
derivative instruments embedded in other contracts (collectively referred to as
"derivatives"), and for hedging activities. SFAS 133 as amended by SFAS 137, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000, with earlier application encouraged. The Company does not currently nor
does it intend in the future to use derivative instruments and therefore does
not expect that the adoption of SFAS 133 will have any impact on its financial
position or results of operations.
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
------------------------ ---------
1998 1999 2000
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Equipment under capital leases...... $ 1,529,759 $ 1,801,347 $ 1,194,259
Leasehold improvements.............. 666,192 671,539 696,217
Computers and office equipment...... 311,346 392,445 1,348,414
----------- ----------- -----------
2,507,297 2,865,331 3,238,890
Less--accumulated depreciation and
amortization....................... (1,461,102) (2,076,303) (2,218,793)
----------- ----------- -----------
Property and equipment, net......... $ 1,046,195 $ 789,028 $ 1,020,097
=========== =========== ===========
</TABLE>
4. Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable and
accounts payable at December 31, 1998 and 1999 and March 31, 2000 approximated
their fair value due to the short-term nature of these items.
The fair value of the Company's short-term investments, which are included
in cash and cash equivalents at December 31, 1998 and 1999 and March 31, 2000,
approximate their carrying values as these investments were primarily in short-
term interest-bearing investment-grade securities.
The carrying value of the Company's notes payable and capital lease
obligations at December 31, 1998 and 1999 and March 31, 2000 approximate their
fair value as the interest rates on these obligations approximate rates
available in the financial market at such dates.
5. Accrued Expenses
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
December 31,
----------------- March 31,
1998 1999 2000
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Research costs................................. $133,264 $380,807 $230,702
Accrued payroll and benefits................... 49,038 31,848 179,572
Accrued legal and patent costs................. 106,956 40,571 174,000
Accrued preferred stock dividends.............. -- 39,500 281,933
Other.......................................... 158,577 157,924 46,321
-------- -------- --------
$447,835 $650,650 $912,528
======== ======== ========
</TABLE>
F-11
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Income Taxes
The components of the Company's income tax expense consist of the following:
<TABLE>
<CAPTION>
Years Ended December Three Months Ended
31, March 31,
----------------------- -------------------
1997 1998 1999 1999 2000
------ -------- ------- -------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current expense (benefit):
Federal........................... $ -- $ -- $ -- $ -- $ --
Foreign........................... -- 360,000 60,000 -- 150,000
State............................. -- -- -- -- --
------ -------- ------- ------- -----------
Current tax expense (benefit)..... -- 360,000 60,000 -- 150,000
Deferred expense (benefit):
Federal........................... -- -- -- -- --
State............................. -- -- -- -- --
Deferred tax expense (benefit).... -- -- -- -- --
------ -------- ------- ------- -----------
Net tax expense (benefit)......... $ -- $360,000 $60,000 $ -- $150,000
====== ======== ======= ======= ===========
</TABLE>
There was no current or deferred federal and state income tax expense for
the years ended December 31, 1997, 1998 and 1999 or the three months ended
March 31, 1999 and 2000 because the Company generated net operating losses
during such periods. The foreign tax represents foreign withholding tax paid on
amounts received from the Company's foreign collaborative partners.
Significant components of the Company's deferred tax assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------- March 31,
1998 1999 2000
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Domestic net operating loss
carryforwards..................... $ 7,544,057 $ 8,597,519 $ 9,057,635
Deferred revenue................... 1,256,634 3,000,408 3,134,410
Research and development credit.... 759,449 910,890 910,890
Fixed and intangible assets........ 298,983 553,265 565,308
Compensation related items......... 54,692 12,352 69,647
Stock based compensation........... 83,846 484,894 638,604
Stock warrants..................... 25,568 42,410 104,437
Other.............................. 8,862 41,404 41,404
------------ ------------ ------------
Gross deferred tax assets........ 10,032,091 13,643,142 14,522,335
Less valuation allowance......... (10,032,091) (13,643,142) (14,522,335)
------------ ------------ ------------
Net deferred tax assets.......... $ -- $ -- $ --
============ ============ ============
</TABLE>
At December 31, 1998 and 1999 and March 31, 2000, the Company has provided a
full valuation allowance against its net deferred assets since realization of
these benefits could not be reasonably assured. The increase in valuation
allowance of $3,611,050 and $879,193 during the year ended December 31, 1999
and the three months ended March 31, 2000, respectively, resulted primarily
from the generation of net operating loss carryforwards.
F-12
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $22,167,000 and $22,165,000, respectively.
As of March 31, 2000, the Company had federal and state net operating loss
carryforwards of $23,354,000 and $23,352,000. The net operating loss
carryforwards expire in various amounts starting in 2008 and 2000 for federal
and state tax purposes, respectively. The utilization of the federal net
operating loss carryforward may be subject to limitation under the rules
regarding a change in stock ownership as determined by the Internal Revenue
Code. If the Company's utilization of its net operating loss carryforwards is
limited and the Company has taxable income which exceeds the permissible yearly
net operating loss carryforward, the Company would incur a federal income tax
liability even though its net operating loss carryforwards exceed its taxable
income.
Additionally, at December 31, 1999, the Company has net research and
development credit carryforwards of $910,890 which expire beginning in 2010.
Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision for income taxes as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ----------- -----------
<S> <C> <C> <C>
United States federal tax at
statutory federal income tax
rate............................. $ (2,702,125) $(2,437,135) $(3,106,964)
State taxes (net of federal
benefit)......................... (419,846) (366,674) (439,456)
Change in valuation reserve....... 3,472,665 3,195,692 3,713,471
Research and development credit... (353,445) (274,183) (151,441)
Foreign withholding tax, net of
federal benefit.................. -- 237,600 39,600
Other, net........................ 2,751 4,700 4,790
------------ ----------- -----------
Provision for income taxes........ $ -- $ 360,000 $ 60,000
============ =========== ===========
</TABLE>
7. Notes Payable
On October 13, 1995, the Company entered into an unsecured loan agreement
with a lessor whereby the Company borrowed $400,000 from the lessor. The
promissory note bore interest at a rate of 10.75% and was payable in monthly
installments through October 1998. The note was fully repaid during 1998.
On November 13, 1996, the Company entered into a Collaborative Funding
Agreement ("CFA") with the North Carolina Biotechnology Center ("NCBC") and the
Kenan Institute whereby NCBC agreed to loan the Company a total of $20,000.
Loans made to the Company by NCBC under the CFA are to be used for specific
research activities. All such loans are unsecured and bear interest at 8.25%,
with principal and accrued interest payable on November 7, 2001. The Company
had total borrowings from NCBC under the CFA of $19,000, $20,000 and $20,000 as
of December 31, 1998 and 1999 and March 31, 2000, respectively. Accrued
interest on these loans, which is included in notes payable, totaled $1,825,
$3,714 and $4,207 at December 31, 1998 and 1999, and March 31, 2000,
respectively.
F-13
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Stockholders' Equity
At December 31, 1999 and March 31, 2000, the Company was authorized to issue
56,000,000 shares of common stock with a par value of $.001 per share and
52,000,000 shares of preferred stock. Of the 52,000,000 shares of preferred
stock: (i) 9,365,000 shares have been designated as Series A Convertible
Preferred Stock ("Series A Preferred") of which 9,200,000 are issued and
outstanding at December 31, 1998 and 1999 and March 31, 2000; (ii) 10,881,014
shares have been designated as Series B Convertible Preferred Stock ("Series B
Preferred") of which 10,866,014 are issued and outstanding at December 31, 1998
and 1999 and March 31, 2000; (iii) 375,000 shares have been designated as
Series C Convertible Preferred Stock ("Series C Preferred") and are issued and
outstanding at December 31, 1998 and 1999; (iv) 416,667 shares have been
designated as Series D Convertible Preferred Stock ("Series D Preferred") and
are issued and outstanding at December 31, 1998 and 1999 and March 31, 2000;
(v) 8,000,000 shares have been designated as Series E Convertible Preferred
Stock ("Series E Preferred") of which 0, 6,201,985 and 6,201,985 shares are
issued and outstanding at December 31, 1998 and 1999 and March 31, 2000,
respectively; (vi) 1,200,000 shares have been designated as Series G
Convertible Preferred Stock ("Series G Preferred") of which 0, 1,000,000 and
1,000,000 shares are issued and outstanding at December 31, 1998 and 1999 and
March 31, 2000, respectively; (vii) 9,365,000 shares have been designated as
Series AA Convertible Preferred Stock ("Series AA Preferred") none of which are
issued or outstanding at December 31, 1998 and 1999 and March 31, 2000; (viii)
10,881,014 shares have been designated as Series BB Convertible Preferred Stock
("Series BB Preferred") none of which are issued or outstanding at December 31,
1998 and 1999 and March 31, 2000; and (ix) 28,170 shares have been designated
as Series F Convertible Preferred Stock ("Series F Preferred") none of which
are issued or outstanding at December 31, 1998 and 1999 and March 31, 2000.
Common Stock
Dividends
The holders of common stock shall be entitled to receive dividends from time
to time as may be declared by the Board of Directors. No cash dividend may be
declared or paid to common stockholders until paid on each series of
outstanding preferred stock in accordance with its terms.
Voting
The holders of shares of common stock are entitled to one vote for each
share held with respect to all matters voted on by the shareholders of the
Company.
Liquidation
After payment to the preferred stockholders, holders of common stock shall
be entitled, together with holders of preferred stock, to share ratably in all
remaining assets of the Company.
Class A and B Common Stock
During 1994, 10,000 shares of Class A and B common stock were issued to one
of the Company's founders and to the initial group of investors. During 1995,
the outstanding Class A and B common shares were exchanged for the issuance of
850,286 shares of common stock.
F-14
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Convertible Preferred Stock
Outstanding convertible preferred stock is as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999 March 31, 2000
---------------------- ---------------------- ----------------------
Number of Number of Number of
Description Shares Amount Shares Amount Shares Amount
----------- ---------- ----------- ---------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Series A Preferred...... 9,200,000 $ 9,100,403 9,200,000 $ 9,100,403 9,200,000 $ 9,100,403
Series B Preferred ..... 10,866,014 12,966,256 10,866,014 12,966,256 10,866,014 12,966,256
Series C Preferred...... 375,000 900,000 375,000 922,532 375,000 922,532
Series D Preferred...... 416,667 1,500,000 416,667 1,500,000 416,667 1,500,000
Series E Preferred...... -- -- 6,201,985 11,405,952 6,201,985 11,405,952
Series G Preferred...... -- -- 1,000,000 10,000,000 1,000,000 10,000,000
---------- ----------- ---------- ----------- ---------- -----------
20,857,681 $24,466,659 28,059,666 $45,895,143 28,059,666 $45,895,143
========== =========== ========== =========== ========== ===========
</TABLE>
Dividends
The holders of Series A Preferred, Series B Preferred, Series C Preferred
and Series E Preferred shall be entitled to receive dividends equal to any
dividends paid on common stock. If dividends are declared on any series of
preferred stock other than Series G Preferred, dividends shall be declared pari
passu among the holders of the series on which such dividends are declared and
the holders of the Series A Preferred, Series B Preferred, Series C Preferred
and Series E Preferred. The number of preferred shares on which dividends would
be paid would be based on the number of shares of common shares into which a
share of preferred stock is convertible. The holders of Series G Preferred
shall be entitled to cumulative dividends at the prime rate plus 1% of the
Series G Preferred preference amount calculated on a per share basis. The
dividends shall accrue and be payable upon the liquidation, dissolution or
winding up of the Company or upon conversion to common stock. Accrued dividends
on the Series G Preferred totaled $39,500 at December 31, 1999 and $281,933 at
March 31, 2000. No dividends have been declared or paid from the date of
inception (October 28, 1993) through March 31, 2000.
Liquidation
In the event of liquidation, dissolution, or winding up of the Company,
holders of preferred stock shall be entitled, in the following order, before
any distribution is made to holders of common stock, to be paid an amount equal
to (i) $1.00 per share of Series A Preferred or Series AA Preferred, $1.20 per
share of Series B Preferred or Series BB Preferred, and $2.00 per share of
Series E Preferred; (ii) $2.40 per share of Series C Preferred; (iii) $3.60 per
share of Series D Preferred, $2.40 per share of Series F Preferred and $10.00
per share of Series G Preferred; plus, in each case, any declared but unpaid
dividends. In the event that assets of the Company are insufficient to permit
payment of the above mentioned amounts,
F-15
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
holders shall share ratably in any distribution of the remaining assets and
funds of the Company in proportion to the respective amounts which would
otherwise be payable under these circumstances in the order of liquidity
preference.
Conversion
Each share of preferred stock, other than Series G Preferred, shall be
convertible, at the option of the holder at any time after the date of issuance
and without payment of additional consideration, into shares of common stock at
a 1-to-1.75 conversion rate subject to certain adjustments. Each holder
converting shares of preferred stock shall be entitled to all declared but
unpaid dividends up to the date of conversion. In the event that a sale of any
series of preferred stock is made at price per share lower than the per share
price of either the Series A Preferred, Series B Preferred, Series C Preferred
or Series E Preferred then the conversion price of the respective series of
preferred stock will be adjusted to equal the per share sales price of the most
recent series of preferred stock. As a result of the sale of the Series E
Preferred for $2.00 per share in July and October 1999, the number of common
shares that Series C Preferred converts into was increased by 6,438 shares
which resulted in the Company recognizing a preferred stock dividend of
$22,532. Series G Preferred shall be convertible into shares of the Company's
common stock at the option of the holder at any time after the second
anniversary of the date of issuance provided the conversion would not cause a
single shareholder to exceed a 19.5% ownership interest in the Company. In such
event, the conversion price for the Series G Preferred will be determined based
on the facts and circumstances at the time of such conversion.
The conversion price will be reduced in the event the Company would issue
any shares of its common stock without consideration or for consideration per
share of less than the conversion price of any series of preferred stock in
effect immediately prior to the time of such issuance except when such common
stock is issued upon conversion of preferred stock or is issued to officers,
directors, employees, or consultants of the Company pursuant to actions or
stock compensation plans in existence as of the initial issue date of the
respective series of preferred stock or any other stock purchase or option plan
for employees or directors.
Automatic Conversion
Each share of preferred stock, other than Series G Preferred, shall
automatically be convertible into common stock at the conversion price upon (i)
the completion of an underwritten public offering involving the sale of the
Company's common stock at a price of at least $2.00 per share and resulting in
gross proceeds to the Company of not less than $10,000,000 or (ii) the consent
of 80% or more of the preferred shares then outstanding. Each share of Series G
Preferred shall automatically be converted into shares of common stock upon the
completion of an underwritten public offering provided that such conversion
would not cause the holder of the converted shares to exceed 19.5% ownership
interest in the Company.
In the event of an initial public offering of the Company's common stock,
the Series G Preferred shall automatically be convertible into common stock at
an exchange rate determined by dividing the total proceeds from the sale of
Series G Preferred, plus accrued and unpaid dividends, by the initial offering
price of the Company's common stock.
F-16
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Mandatory Conversion
In the event that (i) the Company issues additional shares of common stock
or options or rights to purchase common stock at a price per share less than
the then applicable conversion price of Series A Preferred or Series B
Preferred ("Diluted Stock") and (ii) a holder of Diluted Stock fails to
purchase their pro rata share of such issuance, each such nonparticipating
holder's shares of Diluted Stock shall be automatically converted to an
equivalent number of shares of Series AA Preferred or Series BB Preferred, as
the case may be, which shall have all the rights and preferences of the Diluted
Stock except that the initial conversion price of the Series AA Preferred and
Series BB Preferred shall not take into account any adjustment resulting from
the dilutive issuance triggering such conversion. Thereafter, the conversion
price of the Series AA Preferred and Series BB Preferred shall be subject to
adjustment in the same manner as that of the Diluted Stock. At December 31,
1999, there are no shares of Series AA Preferred or Series BB Preferred
outstanding.
Voting
Each holder of preferred stock, other than Series G Preferred, shall be
entitled to vote upon any matter submitted to a stockholder for a vote, as
though the common stock and preferred stock constituted a single class of
stock, except with respect to those matters on which Delaware General
Corporation Law requires that a vote must be by a separate class or classes or
by separate series, as to which each class or series shall have the right to
vote in accordance with such law. The holder of preferred stock shall have the
number of votes per share equal to the number of shares of common stock into
which the preferred stock is convertible. The holders of Series A Preferred,
Series B Preferred, Series E Preferred and common stock are obligated to vote
to elect the Company's Board of Directors as provided in the Second Amended and
Restated Stockholders' Agreement dated April 8, 1997, as amended, among the
Company and such stockholders. The agreement terminates upon conversion of the
outstanding shares of the Series A Preferred, Series B Preferred and Series E
Preferred.
Restrictions
The Company cannot, without the consent of the holders of a majority of
Series A Preferred, Series B Preferred, Series C Preferred and Series E
Preferred, (i) amend, repeal, or add any provision to the certificate of
incorporation or by-laws if such actions would change the preferences, rights,
privileges, powers of, or restrictions provided for the benefit of, the Series
A Preferred, Series B Preferred, Series C Preferred and Series E Preferred,
(ii) authorize any merger or consolidation of the Company into any other
corporation or entity, or (iii) authorize the sale of all or substantially all
of the assets of the Company.
Sales of Preferred Stock
In March 1995, the Company issued 8,388,679 shares of Series A Preferred to
a group of investors at a price per share of $1.00 which resulted in proceeds
to the Company of $8,289,082, net of offering costs of $99,597. In addition,
bridge loans from the Series A Preferred investors totaling $811,321, including
accrued interest, were converted into 811,321 shares of Series A Preferred,
using a conversion price of $1.00 per share.
In June and September 1997, the Company issued 10,866,014 shares of Series B
Preferred to a group of investors at a price per share of $1.20 which resulted
in proceeds to the Company of $12,966,256, net of offering costs of $72,960.
F-17
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In September 1998, the Company issued 375,000 shares of Series C Preferred
to a strategic partner, Kissei Pharmaceutical Co. Ltd. ("Kissei"), at a price
per share of $2.40 which resulted in proceeds to the Company of $900,000, in
conjunction with entering into a research agreement with Kissei relating to the
development of INS365 Respiratory (see Note 10).
In December 1998, the Company issued 416,667 shares of Series D Preferred to
Santen Pharmaceutical Company Ltd., at a price per share of $3.60 which
resulted in proceeds to the Company of $1,500,000, in conjunction with entering
into a research agreement relating to the development of INS365 Ophthalmic (See
Note 10).
In July and October 1999, the Company issued 6,201,985 shares of Series E
Preferred to a group of venture capital investors at a price per share of $2.00
which resulted in proceeds to the Company of $11,405,952, net of offering costs
of $998,018.
In December 1999, the Company issued 1,000,000 shares of Series G Preferred
to Genentech, Inc. ("Genentech"), at a price per share of $10.00 which resulted
in proceeds to the Company of $10,000,000 in conjunction with entering into a
collaboration agreement (See Note 10). The shares will automatically convert
into shares of the Company's common stock upon an initial public offering at an
exchange rate determined by dividing the total proceeds plus accrued and unpaid
dividends by the initial offering price of the Company's common stock.
9. Stock Options and Warrants
1995 Stock Incentive Plan
During 1995, the Company adopted the 1995 Stock Plan (the "Plan") which
provided for the grant of up to 1,005,714 options to directors, officers,
employees and consultants. In April 1999, the Plan was amended and restated,
and is now the Amended and Restated 1995 Stock Plan. In September 1999, the
option pool was increased to 2,285,714 shares and in January 2000 the option
pool was further increased to 3,428,571 shares. Under the Plan, both incentive
and non-qualified, as well as restricted stock, can be granted. The Board of
Directors shall determine the term and dates of the exercise of all options at
their grant date, provided that for incentive stock options, such price shall
not be less than the fair market value of the Company's stock on the date of
grant. The maximum exercise terms for an option grant is ten years from the
date of the grant. Options granted under the plan generally vest 25% upon
completion of one full year of employment and on a monthly basis over the
following three years. Vesting begins from the date of hire for new employees
and on the date of grant for existing employees.
F-18
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes the stock option activity for the Plan:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Options outstanding, December 31, 1996......... 780,482 $ 0.123
Granted...................................... 43,485 0.137
Exercised.................................... (31,954) (0.123)
Forfeited.................................... (239) (0.123)
--------- -------
Options outstanding, December 31, 1997......... 791,774 0.124
Granted...................................... 927,714 0.250
Exercised.................................... (137,502) (0.124)
Forfeited.................................... (91,884) (0.170)
--------- -------
Options outstanding, December 31, 1998......... 1,490,102 0.200
Granted...................................... 395,000 0.688
Exercised.................................... (306,775) (0.124)
Forfeited.................................... (103,809) (0.212)
--------- -------
Options outstanding, December 31, 1999......... 1,474,518 0.345
Granted...................................... 570,000 10.687
Exercised.................................... 138,277 .155
Forfeited.................................... -- --
--------- -------
Options outstanding, March 31, 2000
(unaudited)................................... 1,906,241 $ 3.452
========= =======
</TABLE>
The following table summarizes information concerning options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Weighted Remaining
Average Contractual
Number of Exercise Life
Shares Price (In Years)
--------- -------- -----------
<S> <C> <C> <C>
Options outstanding--price range
$0.123...................................... 247,715 $0.123 5.97
$0.140...................................... 5,481 0.140 6.42
$0.210...................................... 652,036 0.210 8.58
$0.315...................................... 31,429 0.315 8.79
$0.420...................................... 286,428 0.420 9.14
$0.840...................................... 251,429 0.840 9.70
--------- ------ ----
Options outstanding........................... 1,474,518 $0.345 8.44
========= ====== ====
Options exercisable........................... 581,473 $0.187
========= ======
</TABLE>
Subsequent to March 31, 2000, the Company has made the following stock
option grants (unaudited):
<TABLE>
<CAPTION>
Number of Options Exercise
Date Granted Price
---- ----------------- --------
<S> <C> <C>
4/3/00 38,857 $12.69
4/10/00 31,429 $12.69
</TABLE>
F-19
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company has recorded deferred compensation of approximately $360,000
related to the stock option grants made in January 2000 to reflect the
difference between the estimated fair value of the Company's common stock at
the date of the grant and the exercise price of the related stock options of
$1.75 per share.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123") requires the Company to disclose pro forma
information regarding option grants made and warrants issued to its employees.
SFAS 123 specifies certain valuations techniques that produce estimated
compensation charges that are included in the pro forma results below. These
amounts have not been reflected in the Company's statement of operations,
because the Company has made the election to use the provisions of APB 25 to
account for its stock based compensation.
The fair value of options granted to employees was estimated using the
following assumptions:
<TABLE>
<CAPTION>
Years Ended
December 31,
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Expected dividend yield................................. 0.00% 0.00% 0.00%
Expected stock price volatility......................... 0.00% 0.00% 0.00%
Risk-free interest rate................................. 6.03% 5.02% 5.39%
Expected life of options................................ 5 years 5 years 5 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of equity
instruments is amortized to expense over their respective vesting period. If
the Company had elected to recognize compensation expense based on the fair
value of stock-based instruments at the grant date, as prescribed by SFAS 123,
its pro forma net loss and net loss per common share would have been as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net loss available to common
stockholders--as reported.......... $ (7,947,426) $ (7,528,043) $ (8,996,089)
Net loss available to common
stockholders--
SFAS 123 pro forma................. $ (7,955,969) $ (7,562,142) $ (8,942,752)
Net loss per common share--SFAS 123
pro forma.......................... $94.02) $(3.67) $(3.72)
</TABLE>
Warrants
Preferred Stock Warrants
In connection with the capital lease agreement executed on October 13, 1995,
the Company issued warrants which entitle the holder to purchase 165,000 shares
of Series A Preferred with an exercise price of $1.00 per share. These warrants
had an estimated fair value
F-20
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
of $91,410 at the date of issuance which was deferred and is being amortized as
an increase to interest expense over the term of the related lease agreement
using the effective interest rate method. The warrants shall be exercisable
prior to the earlier of the tenth anniversary of the grant date or the fifth
anniversary date of the Company's initial public offering.
In connection with an amendment on June 18, 1998 to increase the amount of
equipment under the capital lease agreement executed on October 13, 1995, the
Company issued warrants which entitle the holder to purchase 15,000 shares of
Series B Preferred with an exercise price of $1.20 per share. These warrants
had an estimated value of $7,035 at the date of issuance which was calculated
using the Black-Scholes method in accordance with SFAS 123. This amount was
deferred and is being amortized as an increase to interest expense over the
term of the related lease agreement using the effective interest rate method.
The warrants shall be exercisable prior to the earlier of the tenth anniversary
of the grant date or the fifth anniversary date of the Company's initial public
offering.
In connection with additional amendments to increase the amount of equipment
under the Company's capital lease agreement which were executed on February 8,
1999 and April 15, 1999, the Company issued warrants which entitle the holder
to purchase 20,000 and 8,170 shares, respectively, of Series F Preferred with
an exercise price of $2.40 per share. These warrants had an estimated fair
value of $53,113 at their respective dates of issuance which was calculated
using the Black-Scholes method in accordance with SFAS 123. These amounts were
deferred and are being amortized as an increase to interest expense over the
term of the related lease agreement using the effective interest rate method.
The warrants shall be exercisable prior to the earlier of the tenth anniversary
of the grant date or the fifth anniversary date of the Company's initial public
offering.
None of the preferred stock warrants have been exercised as of December 31,
1999 and March 31, 2000.
Common Stock Warrants
In connection with a consulting agreement, the Company issued 11,429
warrants on January 15, 1999 to purchase shares of the Company's common stock
with an exercise price of $4.20 per share. The warrants had an estimated value
of $2.749 at the date of issuance as calculated using the Black-Scholes model
in accordance with SFAS 123. The warrants shall be exercisable prior to the
tenth anniversary of the grant date.
In connection with the sale of the Series G Preferred and the collaboration
agreement entered into with Genentech on December 17, 1999, the Company issued
warrants which entitle the holder to purchase 253,968 shares of common stock
with an exercise price of $7.88 per share. The warrants had an estimated value
of $1,781,840 at the date of issuance as determined using the Black-Scholes
model which was deferred and recorded in other assets and will be amortized to
research and development expense over the period of the Company's research and
development commitment. The warrants shall be exercisable prior to the fifth
anniversary of the grant date.
None of the common stock warrants have been exercised as of December 31,
1999 and March 31, 2000.
F-21
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Outstanding warrants to purchase the Company's common and preferred stock at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000
------------------ ------------------
Number of Exercise Number of Exercise
Type of Warrant Warrants Price Warrants Price
--------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
Series A Preferred........................ 165,000 $1.00 165,000 $1.00
Series B Preferred........................ 15,000 $1.20 15,000 $1.20
Series F Preferred........................ 28,170 $2.40 28,170 $2.40
Common.................................... 11,429 $4.20 11,429 $4.20
Common.................................... 253,968 $7.88 253,968 $7.88
</TABLE>
10. Collaboration Agreements
On September 10, 1998, the Company entered into a Joint Development, License
and Supply Agreement (the "Kissei Agreement") with Kissei related to the
development of INS365 Respiratory for all therapeutic respiratory applications,
excluding sinusitis and middle ear infection, in Japan. INS365 Respiratory for
respiratory therapeutic uses is licensed by the Company from UNC. Under the
terms of the Kissei Agreement, Kissei will develop, commercialize, and market
INS365 Respiratory in Japan. The Company has no ongoing research and
development commitment as it relates to the Kissei Agreement. The Company
maintains the right to manufacture and supply INS365 to Kissei.
The Kissei Agreement provided that Kissei would pay the Company an up front
payment of $4,500,000, which included the purchase of $900,000 in equity in the
form of Series C Preferred.
Upon the signing of the Kissei Agreement, Kissei purchased 375,000 shares of
the Company's Series C Preferred for $900,000 or $2.40 per share. In addition,
the Company received a nonrefundable up front license fee of $3,600,000 which
was initially deferred and is being recognized as license revenue ratably over
the period of the Company's ongoing research and development commitment. In
addition, depending on whether all milestones are met, the Company could
receive milestone payments of up to $13,000,000 over the term of the Kissei
Agreement. The Company is receiving reimbursement for liaison staff positions
which totaled $62,500 and $250,000 during the years ended December 31, 1998 and
1999, respectively. In addition, the Company will receive royalties on net
sales of INS365 Respiratory by Kissei. During 1999, the Company received a
milestone payment under the Kissei Agreement of $600,000 based on achievement
of technical milestones by Inspire. In January 2000, the Company received a
milestone payment of $1,500,000 based on achievement of a technical milestone
by Kissei in its development of INS365 Respiratory.
During 1999, the Company contracted with a contract research organization
("CRO") to perform research and development on behalf of Kissei. The Company is
reimbursed by Kissei for the costs of this study. The total amount paid to the
CRO and reimbursement received from Kissei during 1999 totaled $813,000.
On December 16, 1998, the Company entered into a Development, License and
Supply Agreement (the "Santen Agreement") with Santen Pharmaceutical Company,
Ltd. ("Santen") to complete the development of INS365 Ophthalmic for the
therapeutic treatment of ocular
F-22
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
surface diseases. Santen received an exclusive license to INS365 Ophthalmic in
Japan, China, South Korea, the Philippines, Thailand, Vietnam, Taiwan,
Singapore, Malaysia and Indonesia ("the Territory") in the field. Under the
terms of the Santen Agreement, Santen will develop, commercialize, and market
INS365 Ophthalmic in the Territory. The Company retains the right to
manufacture and supply INS365 Ophthalmic in bulk drug substance to Santen.
Upon the signing of the Santen Agreement, Santen purchased 416,667 shares of
the Company's Series D Preferred for $1,500,000 or $3.60 per share. In
addition, depending on whether all milestones under the Santen Agreement are
met, the Company could receive milestone payments of up to $4,750,000. No
milestone payments were received under the Santen Agreement during 1998 or 1999
or the three months ended March 31, 2000. In addition, the Company will receive
royalties on net sales on INS365 Ophthalmic by Santen.
On December 17, 1999, the Company entered into a Development, License and
Supply Agreement (the "Genentech Agreement") with Genentech to jointly develop
INS365 Respiratory and other related P2Y\\2\\ agonists existing on the date of
the Genentech Agreement for all human therapeutic uses for (a) the treatment of
respiratory tract disorders, including chronic bronchitis and cystic fibrosis,
throughout the world, excluding Japan and (b) the treatment of sinusitis and
middle ear infection worldwide. The Company will maintain the right to
manufacture and supply such compounds in bulk drug substance form to Genentech
during the research and development period and up to the end of Phase II
clinical trials for each indication. The agreement will be in effect until all
patents licensed under the agreement have expired, except that if the Company
exercises its option to co-fund the development of INS37217 Respiratory for the
treatment of cystic fibrosis, then the agreement will remain in effect until
the product is no longer being marketed in the United States.
The Genentech Agreement provided that Genentech would pay the Company a non-
refundable, non-creditable up-front payment of $5,000,000 upon execution of the
Genentech Agreement, which the Company will record as license revenue over the
term of its research and development commitment, which is estimated to be
completed by December 31, 2001. In addition, the Company could receive
milestone payments of up to an additional $63,000,000 over the term of the
Genentech Agreement. No milestone payments were received under the Genentech
Agreement during 1999. In addition, the Company will receive royalties on net
sales by Genentech of INS365 Respiratory and other indications for INS365
represented in the collaborative research agreement.
Upon the signing of the agreement, Genentech purchased 1,000,000 shares of
Series G Preferred for $10.00 a share or an aggregate purchase price of
$10,000,000 and Genentech was issued 253,968 warrants to purchase shares of the
Company's common stock with an exercise price of $7.88 per share. In addition,
upon the occurrence of certain milestone events, the Company is obligated to
sell, and Genentech is obligated to purchase: (i) up to $2,000,000 of the
Company's common stock, at a per share price determined, using the 20-day
trailing average close price of the Company's common stock as quoted on an
established stock exchange, and (ii) Genentech will be issued warrants for up
to 50,793 shares of the Company's common stock at an exercise price of $7.88
per share. In the event these warrants are issued, the Company will be required
to record a charge equal to the difference between the trading price of the
Company's common stock on the date the warrants are issued and the exercise
price of the warrants.
F-23
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. License Agreement
On March 10, 1995, the Company licensed the rights to the patent for a
Method of Treating Lung Disease with Urinide Triphosphates which covers INS316
Diagnostic from the University of North Carolina at Chapel Hill ("UNC"). In
connection with this license agreement, the Company paid $65,000 in license
initiation fees and issued 297,714 shares of common stock with an estimated
value at the date of issuance of $36,470 or $0.12 per share and has agreed to
make milestone payments totaling up to $1,000,000. The Company reached one such
milestone in 1997 and made the milestone payment of $500,000 in the same year.
A $10,000 milestone payment was made during each of 1998 and 1999.
On September 1, 1998, the Company licensed the rights to the patents for a
Method of Treating Cystic Fibrosis with Dinucleotides, a Method of Treating
Bronchitis with Uridine Triphosphates and related compounds, and a Method of
Treating Ciliary Dyskinesia with Uridine Triphosphates and related compounds,
which cover INS365 Respiratory, from UNC. In connection with this license
agreement, the Company paid $15,000 in license initiation fees and issued
28,572 shares of common stock with an estimated value at the date of issuance
of $90,002 or $3.15 per share and has agreed to pay milestone payments totaling
$160,000. The Company reached one such milestone and made milestone payments of
$30,000 in 1999.
In connection with the license agreements with UNC, the Company has agreed
to pay royalties based on net sales of certain Licensed Products (as defined in
the license agreements).
The Company enters into sponsored research and development and clinical
trial agreements with the UNC on an annual basis whereby direct and indirect
costs, as defined, are reimbursed by the Company.
12. Commitments
The Company is obligated under a master capital lease for furniture,
equipment, and computers. Each lease term under the master lease agreement
expires between 30 to 48 months from the date of inception.
The Company also has several non-cancelable operating leases, primarily for
office space and office equipment, that extend through November 2003 and are
subject to certain voluntary renewal options. Rental expense for operating
leases during 1998, 1999 and for the cumulative period from inception
(October 28, 1993) to December 31, 1999 was $163,833 (net of sublease rentals
$24,938), $145,347 (net of sublease rentals of $65,483) and $610,261 (net of
sublease rentals of $96,656), respectively.
F-24
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under non-cancelable operating leases (net of
related sublease rentals) with remaining lease payments as of December 31, 1999
are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
Year ending December 31:
------------------------
2000.................................................. $267,098 $190,429
2001.................................................. 166,829 147,040
2002.................................................. 142,889 144,164
2003.................................................. 36,964 89,576
-------- --------
Total minimum lease payments............................ 613,780 $571,209
========
Less amount representing interest....................... (70,138)
--------
Present value of net minimum capital lease payments..... 543,642
Less current portion capital lease obligations.......... 210,259
--------
Capital lease obligations, excluding current portion.... $333,383
========
</TABLE>
The Company has a purchase commitment as of December 31, 1999 with Summit
Pharmaceuticals Corp. for certain drug compounds in an amount of $375,000 which
is expected to be paid as the drug compound is delivered in March and April
2000.
The Company is subject to various legal matters in the ordinary course of
business. In the opinion of management, the ultimate outcome of such matters
will not have a material adverse effect on the financial condition, results of
operations or cash flows of the Company.
The Company has contractual commitments or purchase arrangements with
various clinical research organizations, manufacturers of drug product and
others. Most of these arrangements are for a period of less than 12 months. The
amount of the Company's financial commitments under these arrangements totals
approximately $4,800,000 at December 31, 1999.
In June 2000, the Company entered into an equipment financing agreement
under which the Company can borrow up to $750,000 to finance the purchase of
scientific equipment.
13. Employee Benefit Plan
The Company has adopted a 401(k) Profit Sharing Plan ("the Plan") covering
all qualified employees. The effective date of the Plan is August 1, 1995.
Participants in the Plan must be 21 years of age or older. Participants may
elect a salary reduction of 1% to 15% as a contribution to the Plan.
Modifications of salary reductions can be made quarterly.
The Plan permits employer matching of up to 8% of a participant's salary,
but the Company has elected not to match participants' contributions at this
time. If employer matching is implemented, participants will begin vesting in
employer contributions after one year of employment at a rate of 20% per year
until fully vested.
14. Related Party Transaction
In 1995, the Company issued 585,714 shares of common stock to four founding
scientists with an estimated value of $71,750 in recognition of prior
consulting services provided to the Company.
F-25
<PAGE>
INSPIRE PHARMACEUTICALS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
15. Subsequent Event
On March 27, 2000, the Board of Directors of the Company approved a 1-for-
1.75 reverse common stock split to be effective upon the effectiveness of the
Company's initial public offering. All common share and per common share
amounts for all periods presented in the accompanying financial statements have
been restated to reflect the effect of this reverse common stock split.
In addition, the Board of Directors approved an amendment to the certificate
of incorporation to take effect as of the effective date of the registration
statement, increasing the authorized capital stock to 60,000,000 shares of
common stock and 2,000,000 shares of preferred stock each with a par value of
$0.001.
F-26
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Forward-Looking Statements .............................................. 19
Special Note Regarding Market Data....................................... 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 33
Management............................................................... 51
Certain Transactions..................................................... 58
Principal Stockholders................................................... 60
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 67
Underwriting............................................................. 69
Legal Matters............................................................ 72
Experts.................................................................. 72
Change in Independent Public Accountants................................. 72
Where You Can Find More Information...................................... 73
Index to Financial Statements............................................ F-1
</TABLE>
Until , 2000, 25 days after the date of this prospectus, all dealers
that effect transactions of these securities, whether or not participating in
this offering, may be required to deliver a prospectus. Dealers are also
obligated to deliver a prospectus when acting as underwriters and regarding
their unsold allotments or subscriptions.
--------------------------------------------------------------------------------
[LOGO OF INSPIRE]
5,500,000 Shares
Common Stock
Deutsche Banc Alex. Brown
Chase H&Q
U.S. Bancorp Piper Jaffray
Prospectus
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table lists the costs and expenses, other than underwriting
discounts and commissions, which we expect to incur in connection with the
issuance and distribution of the securities being registered. Except for the
SEC registration fee, the NASD filing fee and the Nasdaq National Market fees,
the amounts listed below are estimates:
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 25,047
NASD filing fee................................................ 9,988
Nasdaq Listing application fee................................. 95,000
Legal fees and expenses........................................ 400,000
Blue Sky fees and expenses..................................... 15,000
Accounting fees and expenses................................... 350,000
Printing and engraving expenses................................ 215,000
Transfer Agent and Registrar fees.............................. 1,250
Miscellaneous expenses......................................... 188,715
----------
Total........................................................ $1,300,000
==========
</TABLE>
All expenses of registration incurred in connection herewith are being borne
by us.
Item 14. Indemnification of Directors and Officers.
Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") enables a
corporation in its certificate of incorporation to limit the personal liability
of its directors for violations of their fiduciary duty of care. Accordingly,
Article Eighth of our amended and restated certificate of incorporation states
that a director will not be personally liable to the company or to our
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that the elimination or limitation of liability is
prohibited under the DGCL as in effect when such liability is determined.
Subsection (b)(7) of Section 102 of the DGCL states that such provision shall
not eliminate or limit the liability of a director: (i) for any breach of the
director's duty of loyalty to us or to our stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit. If
the DGCL is amended, then the liability of a director will be eliminated or
limited to the fullest extent permitted by the amended DGCL.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with the
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection with the defense or
II-1
<PAGE>
settlement of that action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation. No indemnification will be made, however, in respect to any claim,
issue or matter as to which that person is adjudged to be liable to the
corporation, unless and only to the extent that the Court of Chancery or the
court in which that action or suit was brought will determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, that person is fairly and reasonably entitled to
indemnity for the expenses which the Court of Chancery or such other court
deems proper.
Section 145 further provides that to the extent a present or former director
or officer of a corporation has been successful in the defense of any action,
suit or proceeding referred to in subsections (a) and (b) of Section 145, or in
defense of any claim, issue or matter therein, that person will be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by him; that the indemnification provided by Section 145 will not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the scope of indemnification extends to directors, officers,
employees, or agents of a constituent corporation absorbed in a consolidation
or merger and persons serving in that capacity at the request of the
constituent corporation for another. The determination of whether
indemnification is proper under the circumstances, unless made by a court, is
determined by: (a) a majority of the disinterested members of the board of
directors or board committee; (b) independent legal counsel (if a quorum of the
disinterested members of the board of directors or board committee is not
available or if the disinterested members of the board of directors or a board
committee so direct); or (c) the stockholders.
Section 145 also empowers us to purchase and maintain insurance on behalf of
our directors or officers against any liability asserted against them or
incurred by them in any such capacity or arising out of their status as our
directors or officers whether or not we would have the power to indemnify them
against the liabilities under Section 145. We currently carry liability
insurance for the benefit of our directors and officers, including Scientific
Advisory Board members, that provides coverage for any compensatory damages
(excluding punitive or exemplary damages, taxes, matters uninsurable pursuant
to any applicable law, fines or penalties), settlements, and reasonable and
necessary legal fees and expenses incurred by any of the officers or directors
resulting from any written demand for civil damages, any civil proceeding, or
any formal administrative or regulatory proceeding initiated during the policy
period against any of the officers or directors in which they shall be
subjected to a binding adjudication of liability for damages or other relief,
including any appeal therefrom, for any actual or alleged error, act, omission,
misstatement, misleading statement, neglect, or breach of duty committed or
attempted by any officer or director in their capacity as a director or officer
of the company (or any subsidiary of the company) or with consent of the
company in the position of director, officer or trustee of any non-profit
entity, or any matter claimed against any director or officer solely by reason
of their serving in such capacity or position. Among other exclusions, our
current policy specifically excludes coverage for any claim: involving an
accounting of profits made in fact from the purchase or sale of the securities
of the company by officers or directors; based upon actual or alleged pollution
or any decision to test for or clean up pollutants or nuclear material; for
violations of the Employee Retirement Income Security Act of 1974; by or on
behalf of the company, other officers or directors or any security holder of
the company (in most instances); brought about by any deliberately dishonest,
fraudulent or malicious act or omission or any willful violation of law
established by an adverse final adjudication; based upon any personal profit,
remuneration or advantage gained by any director or officer to which they were
not legally entitled; based upon or arising out of their services as directors,
officers or employees of any entity other than the company (or a subsidiary of
the company) except for service, with consent of the company, by a director or
officer in the position of director, officer or trustee in any non-profit
entity, if such claim is brought and maintained without the participation of
the non-profit entity; for defamation, bodily injury, sickness, disease, death,
false arrest or imprisonment, assault, battery, outrage, humiliation, mental
anguish, emotional distress, abuse of process, malicious prosecution, violation
or invasion of any right of privacy or private occupancy, trespass, nuisance or
wrongful entry or eviction, or for damage to or destruction of any tangible
property including loss of use thereof; based any claim related to allegations
that computer software or hardware failed to function properly because of a
year 2000 problem; for, based upon, a rising from, or in any way related to any
demand, suit, or other
II-2
<PAGE>
proceeding which was pending on or existed prior to January 23, 1998 with
respect to the first $1,000,000 in coverage, and prior to January 23, 1999,
with respect to the remaining coverage; which, in whole or in part, is brought
or maintained by or on behalf of David Drutz, including his estate, any
beneficiary of his estate, or assignee, trustee or receiver thereof. In
addition, the policy excludes all or part of such claim that is, directly or
indirectly, based on, attributable to, arising out of, resulting from or in any
manner relating to the Initial Public Offering of the Company's securities
and/or any registration statement or prospectus related thereto, however, the
Company intends to procure liability insurance for the benefit of its directors
and officers which includes the coverage relating to the Initial Public
Offering which is excluded from its current policy, provided it can obtain
reasonable quotations.
Article Ninth of our amended and restated certificate of incorporation
requires that we indemnify, to the fullest extent permitted by the DGCL, each
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was, or has agreed to become, a director or officer of Inspire, or is or was
serving, or has agreed to serve, at our request, as a director, officer or
trustee of, or in a similar capacity with, another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action,
suit or proceeding and any appeal therefrom.
Any amendment or repeal of Article Ninth of our amended and restated
certificate of incorporation shall not adversely affect any right or protection
of a director or officer with respect to any act or omission of such director
or officer occurring prior to such amendment or repeal.
Further, the Underwriting Agreement, a proposed form of which is filed as
Exhibit 1.1 hereto, contains provisions for indemnification by our underwriters
and their officers, directors and other specified persons, against specified
civil liabilities, including particular liabilities under the Securities Act.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement, we
sold the following securities that were not registered under the Securities
Act.
(1) During the period of April 10, 1995 to May 31, 2000, we granted stock
options to employees, directors and consultants under our stock plan covering
an aggregate of 3,083,026 shares of our common stock. Of these, approximately
264,651 shares have been cancelled without being exercised, approximately
841,848 shares have been exercised and 1,976,527 are currently outstanding. The
weighted average exercise price of the stock options outstanding as of March
24, 2000 was $3.78 per share. During the period of April 10, 1995 to May 31,
2000, we sold 841,848 shares of our common stock to employees, directors and
consultants upon the exercise of outstanding stock options. The outstanding
stock options were issued with exercise prices ranging from $0.12 to $11.00 per
share.
(2) On June 19, 1997, June 30, 1997 and September 10, 1997, we sold an
aggregate of 10,866,014 shares of our Series B convertible preferred stock to
several accredited investors for an aggregate purchase price of $13,039,217.
(3) On June 18, 1998, we issued Comdisco, Inc. a 10-year warrant to purchase
15,000 shares of our Series B convertible preferred stock at $1.20 per share.
(4) On September 1, 1998, we issued 28,571 shares of our common stock to The
University of North Carolina at Chapel Hill as partial consideration for
technology licensed pursuant to an Exclusive License Agreement dated September
1, 1998.
(5) On September 10, 1998, we sold 375,000 shares of our Series C
convertible preferred stock to Kissei Pharmaceutical Co., Ltd. for an aggregate
purchase price of $900,000.
II-3
<PAGE>
(6) On December 16, 1998, we sold 416,667 shares of our Series D convertible
preferred stock to Santen Pharmaceuticals Co., Ltd. for an aggregate purchase
price of $1,500,000.
(7) On January 29, 1999, we issued PharmaLogic Development, Inc. a 10-year
warrant to purchase 11,429 shares of our common stock at $4.20 per share;
(8) On February 8, 1999, we issued Comdisco, Inc. a 10-year warrant to
purchase 20,000 shares of our Series F convertible preferred stock at $2.40 per
share;
(9) On April 15, 1999, we issued Comdisco, Inc. a 10-year warrant to
purchase 8,170 shares of our Series F convertible preferred stock at $2.40 per
share;
(10) On July 1, 1999 and October 29, 1999, we sold an aggregate of 6,201,985
shares of our Series E convertible preferred stock to several accredited
investors for an aggregate purchase price of $12,403,970. In connection with
these sales, we paid Pacific Growth Equities placement fees of $744,238.
(11) On December 17, 1999, we sold 1,000,000 shares of Series G convertible
preferred stock to Genentech, Inc. for an aggregate purchase price of
$10,000,000 and a five-year warrant to purchase 253,968 shares of common stock
at $7.88 per share.
The sale and issuances of securities in the transactions described in
paragraph (1) above were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 (promulgated thereunder in that they were
offered and sold either pursuant to a written compensatory benefit plan or
pursuant to a written contract relating to compensation, as evidenced by Rule
701, or were deemed to be exempt from registration under the Securities Act by
virtue of Section 4(2) as transactions not involving any public offering.
The sale and issuance of securities in the transactions described in
paragraphs (2) through (11) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) and/or Regulation D as
transactions not involving any public offering, or Regulation S as offers and
sales that occurred outside the United States. Where appropriate, the
purchasers represented their intention to acquire the securities for investment
only and not with a view to the distribution thereof, or that they were non-
U.S. persons. Appropriate legends are affixed to the stock certificates issued
in those transactions. All recipients either received adequate information
about us or had access, through employment or other relationships, to adequate
information.
Item 16. Exhibits and Financial Statement Schedules.
Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation
3.2+ Amended and Restated Bylaws
4.1+ Specimen Common Stock Certificate
5.1 Opinion of Smith, Stratton, Wise, Heher & Brennan
10.1+ Amended and Restated 1995 Stock Plan, as amended
10.2+ Form of Incentive Stock Option
10.3 Form of Non-statutory Stock Option
10.4+ Consultation and Scientific Advisory Board Agreement between Inspire
Pharmaceuticals, Inc. and Dr. Richard Boucher, dated March 10, 1995
10.5+** Sponsored Research Agreement between Inspire Pharmaceuticals, Inc. and
The University of North Carolina at Chapel Hill, effective March 10,
1995, as amended
10.6+** Clinical Trial Agreement between Inspire Pharmaceuticals, Inc. and The
University of North Carolina at Chapel Hill, effective March 10, 1995,
as amended
10.7+** Exclusive License Agreement between Inspire Pharmaceuticals, Inc. and
The University of North Carolina at Chapel Hill, dated as of March 10,
1995
10.8+ Lease between Inspire Pharmaceuticals, Inc. and Imperial Center,
Limited Partnership regarding Royal Center I, Durham, North Carolina,
dated as of May 17, 1995, as amended
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.9+ Master Lease Agreement between Inspire Pharmaceuticals, Inc. and
Comdisco, Inc., dated October 13, 1995
10.10+ Lease Agreement between Inspire Pharmaceuticals, Inc. and Petula
Associates Ltd. regarding Royal Center II, Durham, North Carolina,
dated as of December 30, 1997
10.11+ Sublease Agreement between ICAgen, Inc. and Inspire Pharmaceuticals,
Inc. regarding premises located at 4222 Emperor Boulevard, Suite 500,
Durham, North Carolina, dated September 22, 1997 and extension of
Sublease Agreement dated February 14, 2000
10.12+** Exclusive License Agreement between Inspire Pharmaceuticals, Inc. and
The University of North Carolina at Chapel Hill, dated September 1,
1998
10.13+** Joint Development, License and Supply Agreement between Inspire
Pharmaceuticals, Inc. and Kissei Pharmaceutical Co., Ltd., dated as
of September 10, 1998
10.14+ Registration Rights Agreement between Inspire Pharmaceuticals, Inc.
and Kissei Pharmaceutical Co., Ltd., dated as of September 10, 1998
10.15+** Development, License and Supply Agreement between Inspire
Pharmaceuticals, Inc. and Santen Pharmaceutical Co., Ltd., dated as
of December 16, 1998
10.16+ Registration Rights Agreement between Inspire Pharmaceuticals, Inc.
and Santen Pharmaceutical Co., Ltd., dated as of December 16, 1998
10.17+** Clinical Research Agreement between Inspire Pharmaceuticals Inc. and
Simbec Research Limited, dated August 30, 1999
10.18+** Services Agreement between Inspire Pharmaceuticals, Inc. and
Pharmaceutical Development Associates, Inc. (ClinSites/PDA) dated
November 1, 1999
10.19+** Quotation between Inspire Pharmaceuticals, Inc. and Simbec Research
Limited regarding research study, dated December 17, 1999
10.20+** Development, License and Supply Agreement between Inspire
Pharmaceuticals, Inc. and Genentech, Inc., dated as of December 17,
1999
10.21+** Series G Preferred Stock and Warrant Purchase Agreement between
Inspire Pharmaceuticals, Inc. and Genentech, Inc., dated as of
December 17, 1999
10.22+ Warrant Agreement between Inspire Pharmaceuticals, Inc. and
Genentech, Inc., dated as of December 17, 1999
10.23+ Amended and Restated Investors' Rights Agreement among Inspire
Pharmaceuticals, Inc. and the holders of Series A, B, E and G
Preferred Stock of the Company dated as of December 17, 1999
10.24+ Employee Confidentiality, Invention Assignment and Non-Compete
Agreement between Inspire Pharmaceuticals, Inc. and Donald J.
Kellerman dated February 3, 2000
10.25+ Employee Confidentiality, Invention Assignment and Non-Compete
Agreement between Inspire Pharmaceuticals, Inc. and Gregory J.
Mossinghoff dated February 4, 2000
10.26+ Employee Confidentiality, Invention Assignment and Non-Compete
Agreement between Inspire Pharmaceuticals, Inc. and Benjamin R. Yerxa
dated February 4, 2000
10.27+ Employee Confidentiality, Invention Assignment and Non-Compete
Agreement between Inspire Pharmaceuticals, Inc. and Janet L. Rideout
dated February 4, 2000
10.28+ Employee Confidentiality, Invention Assignment and Non-Compete
Agreement between Inspire Pharmaceuticals, Inc. and Christy L.
Shaffer dated February 10, 2000
10.29+ Master Agreement between Inspire Pharmaceuticals, Inc. and ClinTrials
BioResearch Ltd. dated as of December 23, 1999
10.30+ Employee Confidentiality, Invention Assignment and Non-Compete
Agreement between Inspire Pharmaceuticals, Inc. and Richard M. Evans
dated February 10, 2000
16.1+ Letter of KPMG LLP dated February 25, 2000
23.1 Consent of PricewaterhouseCoopers LLP, independent public accountants
23.2 Consent of Smith, Stratton, Wise, Heher & Brennan (contained in
Exhibit 5.1)
24.1+ Power of Attorney
27.1+ Financial Data Schedule
27.2+ Financial Data Schedule (cont.)
</TABLE>
--------
** Confidential treatment has been requested with respect to a portion of this
Exhibit.
+ Previously filed.
II-5
<PAGE>
Financial Statement Schedules
No schedules are required because the information is either not applicable
or is presented elsewhere herein.
Item 17. Undertakings.
We hereby undertake to provide to the underwriter at the closing specified
in the underwriting agreements, certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Inspire
pursuant to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person of Inspire in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act will be deemed to be part of this registration statement
as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus will
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time will be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 4 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Durham, State of North Carolina on July 24, 2000.
Inspire Pharmaceuticals, Inc.
/s/ Christy L. Shaffer
By: _________________________________
Christy L. Shaffer,
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the registration statement has been signed by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Christy L. Shaffer President, Chief Executive July 24, 2000
______________________________________ Officer (principal
Christy L. Shaffer executive officer) and
Director
/s/ Gregory J. Mossinghoff Chief Business Officer, July 24, 2000
______________________________________ Secretary and Treasurer
Gregory J. Mossinghoff (principal financial
officer and principal
accounting officer)
* Chairman of the Board July 24, 2000
______________________________________
Terrance G. McGuire
* Director July 24, 2000
______________________________________
Richard Boucher, M.D.
* Director July 24, 2000
______________________________________
Andre L. Lamotte, Sc.D.
* Director July 24, 2000
______________________________________
H. Jefferson Leighton
* Director July 24, 2000
______________________________________
W. Leigh Thompson
* Director July 24, 2000
______________________________________
Jesse I. Treu
</TABLE>
--------
* By her signature set forth below, the undersigned, pursuant to duly
authorized powers of attorney filed with the Securities and Exchange
Commission, has signed this Amendment No. 4 to the registration statement on
behalf of the persons indicated.
/s/ Christy L. Shaffer,
By: _________________________________
Christy L. Shaffer,
Attorney-In-Fact
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation
3.2+ Amended and Restated Bylaws
4.1+ Specimen Common Stock Certificate
5.1 Opinion of Smith, Stratton, Wise, Heher & Brennan
10.1+ Amended and Restated 1995 Stock Plan, as amended
10.2+ Form of Incentive Stock Option
10.3 Form of Non-statutory Stock Option
10.4+ Consultation and Scientific Advisory Board Agreement between Inspire
Pharmaceuticals, Inc. and Dr. Richard Boucher, dated March 10, 1995
10.5+** Sponsored Research Agreement between Inspire Pharmaceuticals, Inc.
and The University of North Carolina at Chapel Hill, effective March
10, 1995, as amended
10.6+** Clinical Trial Agreement between Inspire Pharmaceuticals, Inc. and
The University of North Carolina at Chapel Hill, effective March 10,
1995, as amended
10.7+** Exclusive License Agreement between Inspire Pharmaceuticals, Inc. and
The University of North Carolina at Chapel Hill, dated as of March
10, 1995
10.8+ Lease between Inspire Pharmaceuticals, Inc. and Imperial Center,
Limited Partnership regarding Royal Center I, Durham, North Carolina,
dated as of May 17, 1995, as amended
10.9+ Master Lease Agreement between Inspire Pharmaceuticals, Inc. and
Comdisco, Inc., dated October 13, 1995, as amended
10.10+ Lease Agreement between Inspire Pharmaceuticals, Inc. and Petula
Associates Ltd. regarding Royal Center II, Durham, North Carolina,
dated as of December 30, 1997
10.11+ Sublease Agreement between ICAgen, Inc. and Inspire Pharmaceuticals,
Inc. regarding premises located at 4222 Emperor Boulevard, Suite 500,
Durham, North Carolina, dated September 22, 1997 and extension of
Sublease Agreement dated February 14, 2000
10.12+** Exclusive License Agreement between Inspire Pharmaceuticals, Inc. and
The University of North Carolina at Chapel Hill, dated September 1,
1998
10.13+** Joint Development, License and Supply Agreement between Inspire
Pharmaceuticals, Inc. and Kissei Pharmaceutical Co., Ltd., dated as
of September 10, 1998
10.14+ Registration Rights Agreement between Inspire Pharmaceuticals, Inc.
and Kissei Pharmaceutical Co., Ltd., dated as of September 10, 1998
10.15+** Development, License and Supply Agreement between Inspire
Pharmaceuticals, Inc. and Santen Pharmaceutical Co., Ltd., dated as
of December 16, 1998
10.16+ Registration Rights Agreement between Inspire Pharmaceuticals, Inc.
and Santen Pharmaceutical Co., Ltd., dated as of December 16, 1998
10.17+** Clinical Research Agreement between Inspire Pharmaceuticals Inc. and
Simbec Research Limited, dated August 30, 1999
10.18+** Services Agreement between Inspire Pharmaceuticals, Inc. and
Pharmaceutical Development Associates, Inc. (ClinSites/PDA) dated
November 1, 1999
10.19+** Quotation between Inspire Pharmaceuticals, Inc. and Simbec Research
Limited regarding research study, dated December 17, 1999
10.20+** Development, License and Supply Agreement between Inspire
Pharmaceuticals, Inc. and Genentech, Inc., dated as of December 17,
1999
10.21+** Series G Preferred Stock and Warrant Purchase Agreement between
Inspire Pharmaceuticals, Inc. and Genentech, Inc., dated as of
December 17, 1999
10.22+ Warrant Agreement between Inspire Pharmaceuticals, Inc. and
Genentech, Inc., dated as of December 17, 1999
10.23+ Amended and Restated Investors' Rights Agreement among Inspire
Pharmaceuticals, Inc. and the holders of Series A, B, E and G
Preferred Stock of the Company dated as of December 17, 1999
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.24+ Employee Confidentiality, Invention Assignment and Non-Compete
Agreement between Inspire Pharmaceuticals, Inc. and Donald J.
Kellerman dated February 3, 2000
10.25+ Employee Confidentiality, Invention Assignment and Non-Compete
Agreement between Inspire Pharmaceuticals, Inc. and Gregory J.
Mossinghoff dated February 4, 2000
10.26+ Employee Confidentiality, Invention Assignment and Non-Compete
Agreement between Inspire Pharmaceuticals, Inc. and Benjamin R. Yerxa
dated February 4, 2000
10.27+ Employee Confidentiality, Invention Assignment and Non-Compete
Agreement between Inspire Pharmaceuticals, Inc. and Janet L. Rideout
dated February 4, 2000
10.28+ Employee Confidentiality, Invention Assignment and Non-Compete
Agreement between Inspire Pharmaceuticals, Inc. and Christy L. Shaffer
dated February 10, 2000
10.29+ Master Agreement between Inspire Pharmaceuticals, Inc. and ClinTrials
BioResearch Ltd. dated as of December 23, 1999
10.30+ Employee Confidentiality, Invention Assignment and Non-Compete
Agreement between Inspire Pharmaceuticals, Inc. and Richard M. Evans
dated February 10, 2000
16.1+ Letter of KPMG LLP dated February 25, 2000
23.1 Consent of PricewaterhouseCoopers LLP, independent public accountants
23.2 Consent of Smith, Stratton, Wise, Heher & Brennan (contained in
Exhibit 5.1)
24.1+ Power of Attorney
27.1+ Financial Data Schedule
27.2+ Financial Data Schedule (cont.)
</TABLE>
--------
** Confidential treatment has been requested with respect to a portion of this
Exhibit.
+ Previously filed.
